The trouble with SIA
Shares in Singapore Airlines fell 4.54% on the Singapore Stock Exchange following on from falls on Friday after its fourth quarter operating losses widened and the company issued a warning for its current financial year to 31 March 2014. SIA operating losses widened to S$44.2 million ($35 million) in the three months ending March 31 from S$5.2 million for the same period last year. Net income was S$68.3 million for Q4, compared with a S$38.2 million loss a year earlier on the back of aircraft and engine sales.
The fact is that SIA is in the same situation that the European majors found themselves in some years ago with the Middle Eastern airlines attacking long haul routes while LCCs attacked the short-haul market. Therefore we are able to argue that the mighty SIA has no real excuse not to have got itself into good shape by now. The European majors had all of this fall upon them at breakneck speed while governments propped up smaller national airlines to ensure overcapacity reigned. The EU majors have been racing to catch-up ever since, but SIA has seen the very same situation develop in slow motion on its core routes. So at risk of being deleted from the party invite lists at SIA we have to ask – What have management been doing all these years? The answer is they have been distracted from the main brand by the development of an LCC-feeder network through Scoot and Tiger. SIA has a surplus of crews and a surplus parts inventory – it is carrying more than it should be and claims that all this is “temporary” over the past two years have worn all too thin. The worry for many is that SIA has no room to cut costs by any great margin – this is wrong, there is a great deal of fat that can, and should have been, shed by now.
SIA shares falling by 4.5% means that for the year it is showing a gain of 1.7% to date against an 8.9% gain for the Straits Times Index. You can write that up as terrible or you can state the truth which is that the stock is correcting. SIA has been riding high on reputation alone for some time now and all the while passenger demand has been flat at best. At the same time SIA has been increasing capacity while fares have been falling
Falling prices, increasing competition, increasing capacity and flat demand – the confluence is toxic, but SIA has the strength. SIA is holding on in core markets well with 78.6% load factor from 77.6% last year. The problem is with passenger yield falling to 11.2 Singapore cents from 11.7 cents and cargo yield falling to 33 cents from 35.2 cents.
I would argue that the full effect of recent market moves in the APAC region are yet to be seen by SIA and the increased Qantas/Emirates competition will be interesting to watch out for. The fact that Chinese airline combined profit fell 30% year on year to ¥1.4 billion ($227.92 million, $1 = ¥6.14) in April is another good gauge that an economic slowdown and the new strain of bird flu has cut demand for air travel in the region. In fact Chinese airlines made a combined gain of ¥1.6 billion on FX fluctuations – take that out of the mix and you get the real picture within China and that will filter through the APAC region over the coming months.
SIA must reduce costs across the board at the main brand to remain a regional market leader.
SIA has 57% of its fuel hedged at $119 a barrel for the current year and also has 19.9% of Virgin Australia which in turn holds 60% of Tiger.
Meanwhile look out for Sri Lankan Airlines. It has sought regulatory permission from local government to purchase aviation fuel from Singapore. If this is granted it will cut their overall cost base by a double-digit margin.
Victoria Tozer-Pennington victoria@aviationnews-online.com
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Airline News
Ryanair reports a 13% rise in full year profits
Ryanair has announced record annual profits of €569m, up 13% on last year despite higher oil costs. Revenues rose 13% to €4.88bn as traffic grew 5% to 79.3m passengers. Unit costs rose 8% mainly due to an 18% (€292m) increase in fuel. Excluding fuel unit costs rose by 3%, while avg. fares improved by 6%.
“Announcing these profits Ryanair’s, Michael O’Leary, said: “Delivering a 13% increase in profits and 5% traffic growth despite high oil prices during a European recession is testimony to the strength of Ryanair’s ultra-low cost model. Fuel costs rose by over €290m, and now represent 45% of total costs. Excluding fuel, unit costs were up 3% due to excessive and unjustified increases in Italian ATC, Eurocontrol and Spanish airport fees. Ancillary revenues outpaced traffic growth, rising 20% to €1,064m or 22% of total revenue.”
This summer Ryanair opened seven new bases, and more than 200 new routes. Nevertheless, O’Leary warned that despite having 9 additional aircraft and longer sectors “traffic growth this summer will be very modest at approx. 2%”. The airline intends to ground fewer aircraft next winter to deliver slightly faster H2 monthly growth it hopes will result in overall traffic growth for the full year rising by more than 2m to 81.5m passengers.
The airline reports forward bookings on new routes and bases this summer to be “ahead of expectations (albeit at modest yields) as competitor airlines continue to restructure and cut short-haul capacity”.
Looking ahead, Ryanair is considering new route opportunities in Germany, Scandinavia and central Europe.
O’Leary took the opportunity of the results announcement to again voice his disappointment with the EU’s decision to block its purchase of a stake in Aer Lingus. “We were disappointed that the European Commission in February 2013 decided to prohibit Ryanair’s third offer for Aer Lingus. It is bizarre that the EU can wave through BA’s offer for British Midland in Phase 1 with few remedies, yet months later reject Ryanair’s offer for Aer Lingus which was accompanied by a revolutionary remedies package delivering two upfront buyers to open competing bases in Dublin and Cork airports. We have no doubt that this was yet another politically motivated decision by Europe’s competition authority and it is inexplicable in the context of its stated policy of promoting European airline consolidation.”
He added that the UK’s Competition Commission review into its 6½ year old minority stake in Aer Lingus was “ bizarre” give that “it may have “lessened competition” between Ryanair and Aer Lingus”.
“Given that the UK Competition Commission has a legal duty of sincere co-operation with the EU, we believe they cannot make a contrary finding, and so this spurious and time wasting inquiry into a 6½ year old minority stake between two Irish airlines, one of whom (Aer Lingus) has a tiny presence in the UK market should now be abandoned in the light of the EU Commission’s finding that competition between Ryanair and Aer Lingus has intensified,” he said.
Ryanair is 90% hedged for FY’14 at $980 per tonne (approx. $98 p.bl) and has extended its hedges into FY’15 with 25% of H1 hedged at $930 per tonne (approx. $93 p.bl).
BAA – only solution a third runway
The only realistic solution to the UK’s shortage of hub capacity involves a third runway at Heathrow, owner BAA has confirmed at it delivered a seven-point plan to the UK government’s Airports Commission on Friday to mitigate noise and pollution at the London hub.
“Although the measures proposed are valuable, by themselves they are no substitute for providing an additional runway which is ultimately required to deliver long-haul connectivity for the UK,” BAA told the commission. In the report BAA rules out mixed runway modes for Heathrow. “The only real solution to a lack of runway capacity at our hub airport is to build another runway.
THY management win out as staff support the airline not the union
Turkish Airlines employees largely chose not to participate in the strike that was initiated by Hava-Is Union Labor on May 15 and operations continued without interruption. THY has now extended an invitation to the Hava-Is Union to sign the 24th Collective Bargaining Agreement by May 22, 2013. If it is not signed by that date, THY has decided to grant a pay increase to all employees, whether they are members of the Union or not. This will be done without any changes to the working conditions or social and employee rights
Ryanair pilots under warning
Ryanair pilots have been warned by management not to sign to a letter to the IAA expressing concern that the airline’s employment practices could jeopardise passenger safety – if they do, then they will be charged with gross misconduct and dismissal could follow. The letter was drawn up by the Ryanair Pilot Group (RPG), which represents captains and co-pilots working for the airline but is not recognised by the airline. The RPG is taking action amid concerns that the airline is making the majority of its pilots self-employed as pilots are currently signing contracts binding them to fly exclusively for Ryanair, but not as employees leaving pilots to pay for their own uniform, ID cards etc.
Environment News
ICAO deal on emissions unlikely – trade war threats more likely
It is likely that 2013 will end as it began, with the EU pushing its ETS on all airlines and the ICAO unable to agree a global deal of any sort. Threats of a trade war seem imminent once again as regulators fail to reach agreement. All reports point to indecision, lack of understanding, and a complete lack of will on the part of some nations to engage on the issue of aviation emissions. The EU is now engaging with the US directly to sort something out.
Technology News
LOT 787 delivered
LOT Polish Airlines received its third 787 on Friday as deliveries of the type try to get back on schedule after the recent groundings.
People News
Flybe announce board changes
Flybe Group has announced that Anita Lovell, a non-executive director, has stepped down from the Board with immediate effect. Lovell was appointed in July 2010 and her term of office was due to expire in July 2013.
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Airline News
Etihad still purchasing
Etihad Airways has finalised an agreement to acquire three airport services companies which will accelerate and consolidate the development of in-flight catering services, ground handling and cargo operations at Abu Dhabi International Airport.
Technology News
777 delivery to Saudi
Boeing has delivered a 777-300ER to Saudi Arabian Airlines (Saudia). The airplane, the first-of-its-type to be fitted with a three-class cabin configuration, was delivered to the airline at a ceremony in Washington. The airline currently has a backlog of 21 Boeing airplanes on order, including 13 777s and eight 787s.
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Airline News
US in emergency landing
A Piedmont Airlines De Havilland Dash 8, operating for US Airways as flight 4560, was flying from Philadelphia with 34 passengers and three crew members aboard when it was forced to make an emergency landing on its belly at Newark’s Liberty Airport early on Saturday morning after the plane’s landing gear failed to deploy.
The airport was closed for more than an hour, with the runway closed for more than eight hours following the incident. The NTSB is investigating.
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Airline News
Air India 787 claims making local news reports as details leaked
Air India has sought compensation from Boeing for 787s ordered that do not meet the 20% fuel efficiency claims previously advertised, stating that they were in fact just above 17% at best.
“We have already sent a demand notice to Boeing seeking compensation for under-delivery of fuel efficiency as our six 787s on an average gave us only a little over 17% on the fuel efficiency front,” reports one source.
Air India is looking for price reductions on the remaining 21 787s to be delivered by 2016 year end. This is seen by many as being an announcement to compound already noted demands for compensation over the delivery delays on the 787s. Air India is seeking $700m in reparations for delivery delays. Maybe this latest leak/demand is aimed at gaining more traction from Boeing on the issue of 787 reparations, this in turn points to difficult negotiations on the issue at best between the two companies.
Qingdao Airlines gains preliminary approval
Qingdao Airlines the proposed JV between Qingdao Municipal Transport Development Group Co (25%), Nanshan Group Co (55%) and Shandong Airlines (20%) on Friday received preliminary approval from CAAC Southeast Regional Administration. They are going to operate 737 and A320 aircraft.
People News
Crompton becomes COO at Virgin Australia
Virgin Australia has appointed top sales executive Judith Crompton to the newly-created role of chief commercial officer, with responsibility for alliances, network, revenue management and sales over both its domestic and international networks.
Previously the head of global corporate sales at Etihad, Crompton joined Virgin last year and has three decades of experience in the aviation and travel industries with management experience at Qantas, Flight Centre and TQ3 Navigant.
Her responsibilities at Etihad included the airline’s overall strategic direction and commercial sales.
The new role is part of changes at Virgin stemming from the acquisition of regional and charter carrier Skywest Airlines, now headed by Merren McArthur, former group executive alliances, network and yield.
“Virgin Australia has made significant progress with our Game Change Program strategy and the creation of the chief commercial officer role is a key part of the next phase of this strategy,’’ chief executive John Borghetti said.
“Judith has extensive executive management experience across a range of different commercial functions in the aviation and travel industry. I am very confident she has the right skills and expertise to deliver on the commercial objectives of the group.’’
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