Is SIA getting back on track and what is going on at Air France-KLM??

Dino D'Amore
By Dino D'Amore February 9, 2015 22:09

Is SIA getting back on track and what is going on at Air France-KLM??

Singapore Airlines (SIA) said late last week that its third-quarter net profit more than quadrupled. Net profit in the three months to December 31, 2014 shot-up to S$202.6m ($151m) from S$50.1m for the same period last year.

But the bottom line is that the improvement was primarily attributable to Tiger Airways polluting the figures both last year and this year. This year SIA booked a S$56m exceptional gain compared and in the same period last year SIA took an exceptional loss of S$80m. SIA maintains an ownership stake of 55.8% in Tiger Airways and in the third quarter of this year Tiger Airways boosted profits by S$120m. So If Tiger has contributed so very much to SIA this past quarter, where has it all gone wrong for SIA proper? The answer is obvious to most – A massive S$216m fuel hedging loss was recorded for the period as SIA fuel costs rose 5.9% to S$1.49 billion for the quarter, despite crude prices falling by half over the same period.

But we need to look a little deeper at SIA to gain a handle on actual performance: The fact is that 3Q 2013 figures were crushed by US legal costs and Tiger Airways losses, a year later and Tiger Airways is assisting to mitigate a very large fuel hedging loss.

Moreover SIA’s revenue for the October-December 2014 quarter rose to S$4.10 billion from S$3.88 billion in the same period in 2013. The airline attributes this rise not to an increase in passenger numbers but to increases in fares. It is also a known fact that SIA forward bookings are looking very strong over this Chinese New Year period. SIA’s huge SIA Cargo division is also seeing improved margins of late. So, as we all consider the mounting pressure on yield in the APAC region as competition mounts, SIA is showing that it can increase prices and stimulate demand at the same time. In many ways this model is much like those of Etihad and Emirates and much of this is due to the popularity of Singapore as a connecting business and leisure hub – again much the same as Dubai and Abu Dhabi. So are SIA shares under valued at this time? Many state that the jury remains out until it is very clear that Tiger Airways has turned a corner and is able to start feeding SIA as it should have from the beginning.

Meanwhile, investors in the US majors are looking on with increasing levels of unease at the huge increase in Chinese/Asia Pacific and Middle East connectivity into major cities within the USA. This massive ramp-up in connectivity for the USA is wonderful news for airlines connecting passengers from major international hubs such as Washington Dulles (IAD) to other domestic airports, there is no question that traffic is already increasing and this trend will continue to gather pace over the course of this decade, but beware those carriers with a significant reliance on international routes as yield on the same is coming under mounting pressure.

North America carriers reported 2014’s highest regional passenger load factors at 83.6%. North American passenger volumes grew 2.7% year on year as capacity increased by 2.4% year on year. North America, China and Russia have driven domestic passenger numbers up in 2014 at a higher rate than any year previously although Russian domestic demand was due to sanctions affecting international travel and 2015 is likely to show a huge decrease in Russian domestic demand for air travel.
Worldwide air passenger traffic grew 5.9% year-over-year in 2014, exceeding the 10-year average growth rate (5.6%) and besting 2013’s performance (5.2%), capacity grew 5.6% year-on-year in 2014, resulting in a total passenger market load factor of 79.7%, up 0.2 point from 2013. A record 3.3 billion passengers boarded aircraft in 2014 – Up 170m on 2013. The pace of growth was gathering as of December 2014 when total air passenger volume growth of 6.1% was recorded from 1.4% in November 2014. Once again fleet managers were performing very well as in December capacity increased 6.2% (just .1% above recorded passenger growth), this helped push up monthly load factors to 78.7%.

The Middle East carriers showed the largest rise in RPKs in 2014, up 12.6% year-on-year, as capacity grew 11.5% year on year, which left load figures up at 78.4%. APAC carriers saw a 7.1% increase in passenger volume year on year for 2014 on the back of 7.5% capacity growth, increasing load factors for the region to77.2% for 2014.

So in all this air passenger and fleet growth we have to wonder if there are any airlines losing ground to competitors on a broad front. Air France-KLM is the primary worry at this time. The French/Dutch flag carrier is being hit hard by low costs on one hand and by French government policy and unions on the other. This week Air France-KLM will unveil further cost cutting measures with more ground staff and flight attendants going as it tries to get back into the black for the long term, but the reality is that Air France-KLM is shrinking, its traffic growth is now lagging the European average and far behind competitors Lufthansa, IAG, easyJet and Ryanair to a point where Air France-KLM is shrinking fast and losing premium traffic faster than any other European major.

So what does Air France-KLM do? It has tried to create a low cost arm but that was destroyed by the unions and it has suffered highly damaging rounds of strikes. The answer might be to follow Willie Walsh’s IAG hybrid low cost template, but has Air France-KLM simply missed the flight on this one and now will its current path shrink the airline faster and further than anyone envisaged just 24 months ago?

Air France-KLM needs to start posting good profits before it can expand again and maybe try to purchase a competitor to catch-up with rivals quickly– that means a good few more years of austerity yet at Air France-KLM. Many are arguing now that Air France-KLM management need to get tough in the here and now and take a sword to labour costs.

This week will tell us if the Franco-Dutch airline group is going to get lean and mean fast of it is going to continue to fall behind at least until the end of the decade. In this regard Air France-KLM management might wish to look hard at how Willie Walsh tamed the unions in the UK by taking them on and sticking to his guns. There is no middle ground in all of this and it will indeed be sad to see Air France-KLM market share contract further. Oh how KLM executives of the past must be rolling their eyes in disappointment at how things are turning out.

Air France-KLM currently has one singular diamond in the rough at this time in the form of low-cost arm Transavia and this is where expansion should take place at speed. Replacing Air France-KLM services on short-haul European routes under an integrated ticketing system for the entire group thus cutting the cost on a swath of Air France-KLM routes and getting the group back into the black, while taking the fight to the low-cost giants. The airline group even has a host of paint shops and MRO facilities under its belt to carry out the work at speed but none of this is taking place at the moment. Transavia is growing but it is not taking aircraft and routes from the main parent group and it is not expanding anywhere near fast enough to be meaningful in the here and now.

So have the management of Air France-KLM lost their aggressiveness in the face of union and government interference or are they just playing it cool to avoid further strike action – hoping that they can gradually expand Transavia on the quiet? Either way things at Air France-KLM are very far from ideal.

Dino D'Amore
By Dino D'Amore February 9, 2015 22:09