The trouble with SIA

Victoria
By Victoria May 20, 2013 13:48

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
By Victoria May 20, 2013 13:48
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