Leading Asia-Pacific carrier Singapore Airlines (SIA) is caught between a rock and a hard place, much like any other airline in this prolonged global recession. Positioned as a premium global brand, SIA is struggling in 2009 to offset a decline in demand in the commercial sector. This, coupled with losses from hedging fuel, higher unit costs, and taking delivery of five Airbus 380s by January 2010 or risk paying heavy penalties for delay, the airline, which flies to about 35 countries, must rely on its historically strong performance to weather out this down cycle.
Singapore Airlines posted its first loss since the SARS health crisis in 2003. Loss for the first quarter of 2009 to 2010 year amounted to SDR $271 million, versus a profit of $265 million previously. Meanwhile regional carrier SilkAir (a subsidiary) incurred a loss of $3 million over a profit of $10 million. SIA Cargo was in the red at $104 million, down from a profit of $5 million during the prior period. The airline in a press release dated July 30, 2009, attributed the losses to the global economic downturn, the outbreak of influenza A (H1N1), and fuel hedging losses of $287 million, compared to gains of $349 million during the corresponding period the previous year. The company plans to cut back on non-fuel costs through reducing staff expenses by $60 million and negotiating with vendors to reduce costs.
Traffic and Capacity
Passenger and air cargo traffic in September 2009 continued to nosedive from the same period last year, in line with the airline’s planned 12 percent reduction in capacity, the termination of flights to three destinations in the U.S., India and Canada, and the transfer of its operations in Hyderabad, India, to SilkAir. Passenger carriage (measured in revenue per passenger mile) fell 7.9 percent year on year, resulting in a 4 percentage point increase to 80.9 percent in passenger load factor (PLF). The number of passengers carried dropped by 10 percent over the same month last year to 1.4 million. Cargo traffic (measured in freight tonne per mile) dropped by 14.5 percent while cargo capacity shrunk by 17.3 percent. Cargo load factor shored up marginally by 2.1 percentage points on the heels of tight capacity and inventory re-stocking by manufacturers.
Singapore Airlines’ leading competitor Cathay Pacific Airways (along with Dragonair) posted a decline of 2 percent in passenger traffic in September 2009 over the corresponding period last year, while capacity dropped by 9.7 percent. Though spurred by seasonal travel in the September quarter, both airlines—like their Asian counterparts—will continue to battle stiff competition and weak front-end traffic until economic recovery is underway in 2010, as projected.
Fleet and Route Development
Singapore Airlines is in the process of offloading 13 surplus aircraft—nine Boeing 777-200s and four 747-400s. In an earnings call (for fiscal year ended March 2009) on May 15, 2009, Chan Hon Chew, senior vice president of finance for Singapore Airlines responded in the negative to an analyst’s question on whether the airline would defer taking delivery of new aircraft. He said: “We are a long term player here, our strategies are long term.” In line with its plans, the airline will increase its fleet size with the addition of five Airbus 380s by January of next year. As of 30 June 2009, the fleet consisted of 107 passenger aircraft.
During the earnings call on May 15 earlier this year, analyst Damien Horth of UBS raised concerns over the airline’s strategic focus and aircraft deployment toward premium traffic at a time when the commercial/luxury travel market is pummeled with decreasing demand.
According to the Center for Asia Pacific Aviation, Singapore Airlines faces significant turbulence as it struggles to weather the decline in demand from premium travelers, while trying to increase traffic through fare promotions in the economy segment. The airline has tightened its seat belt on the cost front, and it has announced the continuation of its current branding and market strategy. However, its ability to bear sustained losses in its premium mainstay segment will be sorely tested if the economic recovery is a prolonged one.