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Singapore Airlines 2017 outlook: further pressure on yields as premium position is reinforced

Singapore Airlines (SIA) faces challenging market conditions in 2017 as fierce competition and overcapacity continue to pressure yields. The parent airline’s capacity, which is now below 2008 levels, will again be relatively flat.

SIA has responded to structural changes in the industry by growing its budget airline subsidiaries while reinforcing the premium position of its parent airline through a series of investments. In 2017 these investments will continue as premium economy is incorporated on more aircraft and new long haul business and first products are introduced. 

SIA’s position in the long haul market has been significantly impacted by ambitious expansion and aggressive pricing from Gulf and North Asian airlines. The short-term outlook is relatively bleak, with further yield declines impacting profitability.

SIA responds to structural changes – gradually

SIA has repeatedly highlighted over the last few years how structural changes have significantly altered its competitive landscape. Rapid LCC expansion in Southeast Asia has permanently changed the short haul market, while rapid expansion in Southeast Asia by the Gulf airlines has significantly impacted the Southeast Asia-Europe market. More recently, the Southeast Asia-North America market also has come under pressure due to expansion and aggressive pricing from both Gulf and North Asian airlines.

SIA recognises all these changes are permanent or structural in nature. SIA has responded by drafting and implementing a new long-term strategy, including a much bigger role in the faster-growing budget end of the market, to prepare the group better for the new reality.

However adapting to change is not a quick process, and it will be few a few more years before SIA is able to fully implement its new strategy. In the meantime, competition continues to intensify.

SIA yields and load factor have been under pressure

SIA’s yields, which have been on a steady decline for several years, dropped further in 2016. Passenger yields are now approximately 10% below levels two year ago, and have fallen approximately 15% compared to four years ago.

Singapore Airlines passenger yields (including fuel surcharge): Apr-2014 to Sep-2016

The pressure on yields particularly intensified in the second half of 2016. At the same time load factors started to fall, another indication of overcapacity in the market place. SIA reported a 1.9ppt drop in load factor in 3QCY2016, to 78.1%, and had similar declines in Oct-2016 and Nov-2016. 

Singapore Airlines monthly load factors: 2016 vs 2015

Yields are expected to continue declining in 2017, resulting in a relatively bleak outlook for SIA and other Southeast Asian airline groups. The profitability of the Southeast Asian airline sector, including the SIA Group, improved in 2016 for the second consecutive year but a reduction in profits is expected in 2017.

SIA the parent airline recorded six consecutive quarters of higher year-over-year operating profits from the quarter ending Mar-2015 (4QFY2015) to the quarter ending Jun-2016 (1QFY2017). However, that streak was broken in the quarter ending Sep-2016 (2QFY2017) as SIA the parent airline generated an operating profit of SGD78 million (USD58 million), compared to an operating profit of SGD98 million (USD71 million) in 2QFY2016.

Lower profits for the parent airline and the group are likely for the remainder of FY2017 as well as calendar 2017. In its most recent outlook statement SIA warned of excess capacity and aggressive pricing by competitors continuing to pressure yields.

SIA capacity again declines in 2016

SIA the parent airline has not grown capacity for several years, and significant mainline capacity growth is not part of its strategy going forward. While SIA is keen to pursue opportunities for network expansion and add capacity in selected markets, overall ASK levels at the parent airline are likely to remain relatively flat while the group focuses on growth at its other subsidiaries. 

ASKs at the parent airline shrank slightly – by approximately 1% – in 2016. ASKs have now declined at SIA for three consecutive years – albeit modestly – after reaching a peak of 120 billion in CY2013.

SIA’s capacity in 2016 was approximately 2% below 2013 levels and approximately 1% below pre-global financial crisis levels in 2008. SIA therefore has had eight years of no growth.

 Singapore Airlines annual ASKs and year-over-year growth: 2007 to 2016*

SIA now operates more flights to more destinations, despite ASK reduction

The slight reduction in capacity for 2016 was driven primarily by the introduction of premium economy. The number of frequencies operated by SIA increased by approximately 1% in CY2016, according to OAG data.

SIA added frequencies to several existing destinations (mainly regional) in 2016 and grew its network by two destinations. Duesseldorf, Canberra and Wellington were added, while São Paulo was suspended. Duesseldorf, Canberra and Wellington represented SIA’s first new destinations outside Asia since 2011. 

However, overall seat capacity and ASKs declined slightly as SIA’s average seat count dropped. SIA has reduced the seat count on all 19 of its A380s by 6% to 7% (depending on the configuration) following a premium economy retrofit. SIA is now slightly less than halfway through the process of reducing the seat count on all 27 of its Boeing 777-300ERs by 5%. In both fleets the new premium economy cabins have been added at the expense of regular economy seats, rather than business seats. 

SIA also had some of its A380s and 777-300ERs out of service during 2016 for the retrofits, further impacting its overall capacity. The last of the 19 A380 retrofits were completed in mid-2016, whereas SIA is not planning to complete the 777-300ER retrofits until late 2017. Both retrofit projects began in 2015.

Delays in A350 deliveries have also impacted capacity somewhat. SIA took only one fewer A350 in CY2016 than initially planned but all or nearly all the 10 A350s that were delivered in 2016 arrived later than initially planned.

SIA’s fleet expanded five aircraft in 4Q2016

SIA ended 2016 with a fleet of 109 aircraft compared to 104 aircraft at the beginning of the year. However, all the growth occurred in 4Q2016 as Airbus caught up with A350 deliveries.

SIA began 4Q2016 with 104 aircraft. In the final quarter of the calendar year it added five A350s. SIA took its first five A350s in the first three quarters of 2016 but these deliveries were offset by the phase out of four A330-300s and one 777.

Singapore Airlines fleet summary: as of 3-Jan-2017

Aircraft

In Service

On Order

Airbus A330-300E

26

0

Airbus A350-900ULR

0

7

Airbus A350-900XWB

10

50

Airbus A380-800

19

5

Boeing 777-200ER

21

0

Boeing 777-300

6

0

Boeing 777-300ER

27

0

Boeing 787-10

0

30

TOTAL

109

92

SIA plans to take three more A350s in 1QCY2017 – which is the fourth quarter of its fiscal year – and end its fiscal year with 13 A350s. Two more A330 phase-outs are also planned by the end of the fiscal year. 

ASKs again unlikely to grow in 2017 

SIA capacity will likely again remain relatively flat for CY2017 and the new fiscal year starting Apr-2017. SIA has not yet disclosed its fleet plan for FY2018, but generally the airline is intending to phase out A330s and older model 777s as more A350s are delivered.

SIA is also planning a one-for-one replacement of its oldest five A380s as five new A380s are delivered. The first of these swaps is expected in 3QCY2017.

The introduction of premium economy on the rest of its 777-300ER fleet will also once again impact capacity levels in 2017. SIA has so far retrofitted 12 of its 777-300ER with premium economy and plans to complete retrofits on the remaining 15 aircraft in 2017. As was the case in 2016, the impact on capacity is two-fold as aircraft need to be removed from service for the retrofit and the new configuration results in a 5% decline in total seat capacity. 

... but SIA network expansion continues

While capacity will be roughly flat in 2017, SIA will continue to expand its network and bolster its schedule with more frequencies – continuing the trend from 2016. SIA has already announced Stockholm as a new destination commencing in May-2017.

Stockholm will initially be served with five weekly A350 flights via Moscow. The new Stockholm-Moscow leg is aimed at improving its Moscow performance, which has been impacted by Russia’s economic problems, and strengthening its position in Scandinavia by further leveraging its partnership with Scandinavian Airlines.

SIA tagged Moscow with Houston until Oct-2016, when it shifted the stopover of its Houston service to Manchester. The new Houston service has also allowed SIA to improve its product in the Manchester market, which was previously served one-stop via Munich.

SIA plans to deploy the A350 on the Singapore-Manchester-Houston route from mid-Jan-2017, replacing the larger 777-300ER. The A350 has been a key driver of the recent network growth as it enables new thinner long haul destinations that weren’t previously viable. The addition of Duesseldorf and soon Stockholm, which were only possible with the A350, extends the SIA European network to 15 destinations - more than any other Southeast Asian airline.

Singapore Airlines network summary: as of 03-Jan-2017

Total passenger destinations

62

   Africa

2

 

South Africa

2

   Asia Pacific

41

 

Australia

6

 

India

6

 

New Zealand

3

 

Indonesia

3

 

Brunei

1

 

Thailand

1

 

China

3

 

Sri Lanka

1

 

Bangladesh

1

 

Japan

6

 

Vietnam

2

 

Hong Kong

1

 

Malaysia

1

 

Maldives

1

 

Philippines

1

 

South Korea

1

 

Taiwan

1

 

Myanmar

1

 

Singapore 

1

   Schengen Europe

9

 

Netherlands

1

 

Spain

1

 

Denmark

1

 

Germany

3

 

Italy

2

 

France

1

   Non-Schengen Europe

5

 

Turkey

1

 

United Kingdom

2

 

Russian Federation

1

 

Switzerland

1

   Latin America

0

   Middle East

1

 

United Arab Emirates

1

   North America

4

 

United States of America

4

The A350 also enables SIA to improve the performance in existing long haul destinations which were oversupplied with the 777-300ER (such as Houston). The A350 was also used to launch new nonstop flights to San Francisco in Oct-2016.

At the same time SIA shifted its Singapore-Seoul-San Francisco route to Singapore-Seoul-Los Angeles, enabling it to grow its presence in Los Angeles. San Francisco continues to be served with two daily flights as SIA has maintained its one-stop service via Hong Kong. 

Regional growth continues 

SIA also has been growing its regional operation within Asia Pacific by bolstering frequencies on high demand routes. For the northern summer 2017 schedule SIA is planning another round of frequency increases on several routes including:

  • Ahmedabad (one additional weekly flight for a total of four);
  • Bangkok (one additional daily flight for a total of six);
  • Brisbane (four additional flights for a total of 28);
  • Dhaka (three additional flights for a total of 10);
  • Ho Chi Minh (two additional weekly flights for a total of 19);
  • Melbourne (three additional weekly flights for a total of 31);
  • Rome (two additional flights for a total of four);
  • and Sydney (two additional flights for a total of 33 with 35 flights during peak periods).

Australia, a key strategic market, has particularly been a focus for SIA. The parent airline will operate 133 weekly passenger flights from Singapore to Australia in the last week of Aug-2017, compared to 118 for the same period of 2016.

However, some of the regional expansion has been offset by transferring and downgauging flights to the regional subsidiary SilkAir, which operates narrowbody aircraft while the parent airline has an all-widebody fleet. Regional ASK growth within Asia Pacific (including Australia) at the parent airline has also been offset by reductions in long haul ASKs. Long haul routes to Europe and North America account for over 50% of SIA’s ASKs – although only approximately 15% of seats – and therefore any reductions to these regions have a disproportionate impact on overall ASKs.

While SIA has expanded its European network, the gains are more than offset by the reduction in average seat count caused by premium economy and the downgauging of some existing long haul routes to smaller widebody aircraft. As Duesseldorf is only served with three weekly flights, and Stockholm will be served only as a tag to Moscow, the impact of these new routes on ASKs is relatively modest. The suspension of São Paulo has had a bigger impact on overall ASKs.

Long haul strategy is focused on improving profitability in a difficult environment

The general objective at SIA is not to grow its long haul operation but to improve profitability by changing the passenger mix and using more efficient new generation aircraft. With the passenger mix the idea is to try to carry fewer lower-yielding economy passengers while reinforcing its premium position with premium economy and new business class and first class products.

SIA is essentially responding to the structural changes in the industry by trying to reduce its exposure to aggressive airlines in long haul markets. SIA cannot assume there will be a recovery in economy fares or yields as the changes that have taken place in its markets are structural and permanent in nature, rather than temporary. Given the huge order books of some of its aggressive competitors, the expectation is that yield pressures will intensify rather than abate.

SIA had been forced to respond to the aggressive competition by offering new lower fares in several of its key long haul markets. Base fares (before fuel surcharges and taxes) from Europe and the US are now often below USD200. Promotional all-in US-Southeast Asia fares have been as low as USD600 while everyday fares in this market now start below USD800 for dozens of city pairs (valid on travel through Oct-2017).

For now, such low fares are necessary for SIA to compete. However, SIA should have an opportunity to reduce the number of passengers it carries at these extremely low yields as it focuses more on premium economy.

SIA to roll out new long haul premium product in 2017

2017 will be a key year in SIA’s new long haul strategy as the airline will complete the introduction of premium economy across its long haul network while unveiling a new business and first class long haul product. The new business and first class products will debut on the first of the five new A380s the airline is receiving to replace its five oldest (leased) A380s.

SIA also plans to retrofit its 14 younger (mostly owned) A380s with the new premium product. The 777-300ER fleet could also eventually be retrofitted with the new premium product, but this is less pressing as most of this fleet has the latest business and first class product, which was introduced in 2013. The entire A380 fleet still currently has the business and first class product that was initially introduced at the end of 2006.

See related report: Singapore Airlines new cabin products represent baby steps but are important to premium strategy

SIA has been working on the new long haul products for several years but, as is always the case with SIA, has kept all the details closely guarded. At the group's 1HFY2017 results briefing in Nov-2016 SIA promised the new products would be innovative, leveraging new technology, and enable SIA to continue being at the forefront of the industry in terms of service and product. 

Premium economy expansion continues

As outlined earlier in this report, SIA is also planning to retrofit the remaining 15 three-class 777-300ERs with premium economy in 2017. Once the last of these aircraft are retrofitted in late 2017, SIA will have finally completed the roll-out of the premium economy product across its long haul network.

SIA’s 777-200ER fleet still does not have premium economy, but this type will be phased out over the next few years and has already been replaced by A350s on several long haul routes. The 777-200ER currently only operates three long haul routes – Copenhagen, Istanbul and Rome – as the A350 has already replaced the 777-200ER in 2016 on Amsterdam, Cape Town and Johannesburg. The long haul A350 variant has also been used on some long haul routes to downgauge from the 777-300ER.

SIA is not planning any more premium economy retrofits once the 777-300ER project is completed, but all the A350s it takes in 2017 as well as the new batch of A380s will be delivered with premium economy. SIA has 57 more A350s on order, including 50 A350-900s and seven A350-900ULRs.

SIA has so far committed to a premium economy cabin on the next 10 of its A350-900s – or 20 A350-900s in total when the 10 aircraft that have already been delivered are included. This initial batch of 20 A350s are being used mainly on long haul routes, partially as replacements for 777-200ERs.

SIA should not offer regular economy on new US nonstop flights

SIA plans eventually to have three configurations for its 67 A350s, although it has not specified a configuration beyond the initial 20 long haul aircraft (which are being delivered in three-class configuration with 42 business, 24 premium economy and 187 economy class seats). SIA plans to use a portion of the 40 unspecified A350-900s for regional services, while the seven A350-900ULRs are set aside for ultra-long haul nonstop flights to Los Angeles, New York and one yet to be determined US destination.

The A350-900ULRs, which are slated for delivery in 2018, are likely to feature the same new premium business class product that debuts on the A380 in 2H2017. SIA has stated that the A350-900ULR will have just two classes; although it has not specified the two classes, this almost certainly will include business class and premium economy seats.

Not offering regular economy would be a sensible move, given the intensely competitive environment in the US market. Strategically it should focus on the premium market for the nonstop flights while continuing to offer some low economy class fares on its one-stop flights.

San Francisco, where return fares have been as low as USD600 for the nonstop product with the three class A350-900, could transition to the two-class A350-900ULR after the ULR enters service on the New York and Los Angeles routes. SIA has the option of using the ULR fleet to launch a fourth US nonstop service, but transitioning San Francisco from the non-ULR to ULR is the most likely scenario. 

SIA plans new regional premium product

The portion of the A350-900 fleet used for regional operations will not likely have premium economy but will feature a new regional business class product that SIA also plans to outfit in its 787-10s. SIA is the launch customer for the 787-10s, with 30 aircraft on order for delivery from 2018.

SIA is working on a new regional business class product and is expected to unveil this product in 2018 – ahead of the first 787-10 delivery and approximately one year after it unveils its new long haul product.

The new premium products for both its regional (short/medium haul) and long haul flights are a key component of its strategy to reinforce its premium position and maintain its leading status in the premium space as competitors also invest in improving their premium products. For SIA the reinforced premium position is not just about the seat but also about improvements to catering and IFE, as well as new lounges.

2017 could be a critical year for SIA and its new long-term strategy 

Network improvements through additional flights in key business markets, new destinations and expanded partnerships are also aimed at the premium market. SIA is also working on improving its product and network for economy passengers, but the bigger focus understandably is on maintaining its share of the critically important business and corporate passenger market, while – if necessary – reducing its share of lower-yielding economy passengers to more aggressive competitors.

2017 will be a critical year in the implementation of this part of the new SIA strategy. In addition to the unveiling of the new premium products for the long haul sector and completion of the premium economy retrofits, there are changes in SIA’s commercial approach in the pipeline that better position the parent airline to the new competitive environment.

SIA could adopt a new more centralised revenue management and pricing structure in 2017, replacing an unusually decentralised system in which too much focus has been placed on local overseas offices. A more centralised system could lead to improved revenue management while ensuring SIA fully reaps the benefits of its new long-term strategy.

A change in SIA’s fuel surcharge policy should also be considered as SIA adapts to the changing marketplace. The current fuel surcharges, which are generally the highest in the global industry, make it challenging to compete effectively as in many cases competitors are now offering all-in fares that are less than the SIA’s surcharges and taxes. Offering a negative base fare, which occasionally SIA has had to resort to, is not a sustainable solution.

SIA is facing an extremely challenging environment in 2017. The short-term outlook is relatively bleak, as yields and profitability will likely decline due to overcapacity and aggressive competition. However SIA is striving to improve its long-term outlook through several initiatives, with milestones coming up in 2017 that that will be key in determining the airline’s future success.

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