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Singapore Airlines profit decline looks OK from here

If an Australian carrier had just posted a quarterly operating profit of $131 million (even in Singapore dollars) to the end of last December there would be dancing in the streets, or in the forecourt of the ASX at the very least.

But the latest such result from Singapore Airlines is actually the subject of some rather tartly worded analyst notes that come sandwiched between proprietary warnings about unauthorised reproduction, which are also a reminder of the intense pressure the main Singaporean carrier has come under from its investment establishment and retail investors and government voices for just about all of this century.

Singapore Airlines quarterly is down by 17% compared to the three months to 31 December 2011, a major no-no in its home territory, where the equation for many people is not what this means for the airline, but for Temasek Holdings, the superannuation arm of the state of Singapore, which holds around a 56% stake in SIA,  and whose investment decisions determine how comfortable most Singaporeans will be in their retirement.

In short, Singapore Airlines is connected intimately to the hip pocket of ordinary people in Singapore in a manner that would be unimaginable when it comes to Qantas and ordinary Australians.  It has nothing to do with ‘I still call Australia home’ waffle. It’s about $$$, whether you directly own shares in SIA or not.

Which is why Singapore Airlines isn’t a sacred cow anymore in SE Asia, unlike, in some quarters, Qantas in this country. If Temasek were hypothetically to decide that it would sell out of Singapore Airlines for three times the current share price, the ensuing debate would be about whether it shouldn’t have settled for anything less than four times the current price. It would be a very dry eyed debate.

This is part of the SIA announcement:

The SIA Group recorded an operating profit of $131 million in the third quarter of the 2012-13 financial year, $26 million (-17%) lower than a year ago.

Group revenue fell marginally by $15 million (-0.4%), mainly from lower cargo revenue due to depressed yields (-3.5%) and poorer loads (-10.0%). On the other hand, passenger revenue improved as promotional activities boosted Group passenger carriage by 7.8%, partially offset by lower yields (-5.7%). Group expenditure rose by $11 million (+0.3%) to $3,729 million, largely owing to higher staff and variable costs, partly mitigated by a higher fuel hedging gain.

Group net profit for the third quarter was $143 million, $8 million (+6%) higher year-on-year despite recording lower operating profit. This is due to an increase in non-operating items from surplus on the sale of aircraft, spares and spare engines, and higher net interest income, partially offset by a $20 million provision by SIA Cargo in relation to air cargo civil penalty proceedings in respect of competition law matters in Australia and New Zealand.

April to December 2012: For the nine months to December 2012, Group operating profit fell $18 million (-6%) to $273 million.        

Group revenue improved $279 million (+3%) to $11,431 million, driven by stronger passenger carriage (+8.4%), partly offset by weaker yields (-4.2%). Group expenditure increased more, by $297 million (+3%) to $11,158 million, principally on account of higher fuel, staff and variable costs.

The Group posted a net profit of $311 million for the April-December 2012 period, a decline of $63 million (-17%) from the corresponding period in the previous year. Apart from the weaker operating performance, the decrease in net profit was due to lower surplus on sale of aircraft, spares and spare engines, an absence of a return of capital from the redemption of preference shares by an associated company and the provision by SIA Cargo for air cargo civil penalty proceedings, partially offset by higher net interest income.

Contrary to the usual end-of-the-roadism oversimplifications that get peddled in Australia about how Qantas is a victim of geography more than inferior management, Singapore is in its own geoeconomic crisis of relevance when it comes to aviation.

It is no longer a crossroads or gateway to China for the major generators of business travel in North America or Europe, since China has now negotiated non-stop flights between a multitude of its cities and those of the northern world that make it unnecessary to fly to Singapore, unless you live in Australia, or rely on Qantas, which has been notably unsuccessful with China routes compared to peer airlines in the US, or UK, or just about anywhere.

Hong Kong, which may not be technically in China, has nevertheless risen to become the major capital raising and business nexus for China according to some claimants, or at least way more important than Singapore used to be, according to others.

The wealth and economic power advantage Singapore had leveraged and astutely developed with such success in the latter part of the last century is now being diminished by the rise of its neighbors, with their own major if less developed hub airports, and airline brands that are growing faster than Singapore Airlines ever can with only a limited national population to support it.

Everyone wants to be the next Singapore, and it looks like success will be widespread in the coming decades. Being in top management at Singapore Airlines could be argued to be much more challenging than running Qantas, especially as Asia experiences a rise in economically empowered new air travellers and a concurrent shift in consumer sentiment to price rather than quality.

This means that it is not just a matter of fewer international business travellers needing to transit Singapore, but a more rapid rise in numbers through Changi by low cost entities lead by AirAsia, Jetstar Asia, and Singapore Airlines’ own rather sad investment in Tiger Airways, and its new and it no doubt hopes, not so sad investment in Scoot, where it carries all the risk.

Under these circumstances Singapore Airlines can be argued as doing very well to make any money at all.

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  • 1
    patrick kilby
    Posted February 8, 2013 at 6:08 pm | Permalink

    An interesting quote “SIA’s overall load factor for passenger and cargo has improved for two months in a row, rising to 71.4 percent in December from 69.1 percent in October. But it has repeatedly said its passenger seat occupancy was boosted by promotional activity, and passenger yields would remain under pressure.” QF is 81% load factor so is SQ’s low load factor sustainable and it may explain throwing capacity at the Oz market. While QF will do it domestically it won’t do it internationally which may be a good thing, despite the wishes of many bloggers here.

  • 2
    ltfisher
    Posted February 8, 2013 at 6:23 pm | Permalink

    I am impressed with the quoted load factor for QF but shouldn’t yield also be considered?

  • 3
    Ben Sandilands
    Posted February 8, 2013 at 6:23 pm | Permalink

    I missed any merging of passenger + cargo to get the load factors you quote, maybe because something in what’s left of my head would want to know how they weighted an average of passengers and cargo to come up with a meaningful figure.

    The figures that did exercise me was a quarterly 75.3% passenger load and 64.8% cargo capacity load factor. SIA seems to be remarkably good at promotional fares to grow or help fill aircraft without ending up in loss over all. Which is something they did in their first half as well.

    If you go to the SGX announcement and break out what they say about Silk Air several things stand out. It is making a pile of money, it is growing capacity faster than it is growing passenger counts, yet still ending up ahead, and it gives higher yield passengers a value added experience all the way from here to secondary cities throughout Asia in a way that would make the Tiger and Jetstar Asia experiences something no one is likely to do twice.

    As I recall AJ said Red Q (or whatever) would not replicate the Silk Air experience, but it exceed it. It has done neither of course, but should have aimed to do the former.

  • 4
    The Doc
    Posted February 9, 2013 at 6:43 am | Permalink

    I doubt Temasek will be selling out of SIA anytime soon. Are there enough Singapore-owned funds who will hold a minimum of 50% + 1 share of SIA to qualify the airline as a Singapore-owned carrier? That’s $6 billion that Singaporeans will need to absorb.

    I’m sure Temasek can feel the lack of dividends SIA is now paying – they paid an average of $1 per share over the past decade but in the last 2 years it has been 20-40 cents. This year they’d be lucky to give a 20 cent dividend.

    It’s not the fault of the current management though, in 2003 the management of the day was gifted the best run airline in the world, and Emirates was a minnow. Unfortunately for SIA they squandered all their advantages, but next to Qantas they look like the best run airline on earth.

    I don’t think that Singapore was ever a major transit point between Europe and China, even 10-20 years ago, Singapore was too far south to effectively serve as a transit hub for Europe-China. Further, Singapore is a financial centre serving South East Asia while Hong Kong is serving China, so the two cities serve two distinct markets.

    In the last decade, the number of visitors to Singapore rose from 5 million to is it over 14 million now? Whereas SIA passenger numbers barely moved. The Singapore of today is no longer the sterile Singapore of 2001, and there is healthy O&D traffic (plus, the population grew from 4 mil from 2001 to 5.3 million today with the govt hell bent on increasing the population to 6 million and beyond) which would naturally boost demand for air travel.

    I think Changi Airport said that the transfer traffic proportion in Changi Airport is now only 20% or so, which means 80% of people actually want to get out in Singapore.

  • 5
    ltfisher
    Posted February 9, 2013 at 10:12 am | Permalink

    I’m not up on the latest stats. However, I’m sure The Doc would agree that “10-20 years ago” the China-Europe route was just getting into its stride with SQ being quite keen to siphon China trade through SIN [naturally]. In this they were aided by Chinese travellers, especially officials, who, no surprise, strongly favoured SQ over a Chinese carrier: they didn’t seem to worry about SIN being “too far south”, just enjoyed the service for an extra hour or three.

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