Economic Report on Singapore International Airlines

Impact of Economic and Geopolitical Factors on Singapore Airlines in 2016

In October 2016, Singapore Airlines suffered poor performance compared to 2014, largely impacted by global economic conditions and geopolitical uncertainties. It seems that cargo and passenger yields, which are factors of its profitability, were under strain. During this period, Singapore Airlines stocks fell by 9.7%, compared to a previous decline of only 2.8%. The airline faced challenges in the operating environment, causing profits to plummet rapidly to S$64.9 million from S$213.6 million. In that quarter of 2016, earnings per share also dropped to 5.5 cents in Singapore currency, compared to 18.3 cents in 2015 (Business Times, 2016). Passenger revenues declined by 6.4%, or S$320 million, although Scoot managed to mitigate this fall with rapid growth in its own passenger revenues, amounting to S$88 million. According to their financial performance results, the expansion of capacity by Scoot and Silkair led to ex-fuel costs rising to S$287 million, a 5.9% increase compared to 2015.

Recovery and Strategic Adjustments in 2017

During the nine months leading up to December 2017, Singapore Airlines improved their group operating profit from $67 million to $595 million, an increase of 12.7%. They managed to surpass a revenue reduction of 3.2% due to a decline in passenger flown revenue, while expenditure shrank by 4%, or $437 million, by the end of March 2017. SIA Engineering revealed that high expenditure levels contributed to a lower operating profit, compounded by a decrease in revenue. The divestment of HAESL, Hong Kong Aero Engine Services Ltd, led to increased expenditure due to a provision for its profit-sharing bonus, offset by smaller production overheads. Income decreased partly due to its fleet program revenue, moderated by an expansion in maintenance revenue. Changes in operating profits were counterbalanced by lower profits from long-term ventures, $108 million losses from related organizations compared to $60 million in profit shares a year ago, and costs from discarding aeroplanes and spare parts. These were covered by a $142 million gain from SIA Engineering's divestment of HAESL and $36 million in profits from HAESL following the sale of its 20% stake in Singapore Aero Engine Service Ltd.

Strategic Developments and Market Challenges in Late 2017

On 27 October 2017, SIA Engineering Company announced an agreement with joint partners and MB Aerospace Newton Abbot Limited for the sale of 100% of shares in Asian Compressor Technology Services Company Limited, valued at $14.3 million. In the second last quarter, Singapore Airlines took delivery of five A350-900s, four of which entered service by December 2017. SIA increased flight services and expanded its route system to meet demand. Singapore Airlines continuously reviews and adjusts its fuel policies to manage fuel price volatility. For the final quarter of the financial year, SIA hedged 37.4% of its fuel in Singapore Jet Kerosene (MOPS) at a weighted average cost of USD67 per barrel. An expanding, eco-friendly A350-900 fleet enabled SIA to extend longer routes.

In November 2017, Singapore Airline flights from Bali were affected and canceled due to volcanic eruptions, resulting in the closure of Gusti Ngurah Rai airport and impacting 445 flights, including 196 international routes. Analysts already expected 2017 to be challenging due to economic conditions and geopolitical concerns, alongside other market headwinds such as competitors' pricing strategies. Loads and yields for both passenger and freight organizations were anticipated to be strained in 2017. Fuel costs trended upwards since the last quarter of 2017 and were expected to remain volatile due to uncertainties in global oil production yield. Share prices for SIA from July 2017 to November 2017 dropped significantly by 7.25%. By the end of March 2016, Singapore Airlines reported a net loss of S$138.3 million over three months, including a substantial drop in operating profits and provisions for SIA cargo worth S$132 million due to an EU air cargo competition case. The Singapore Airline group announced plans to reintegrate SIA cargo into the SIA group to enhance efficiency through improved communication and assistance across the group. Due to declining yields, the group decided to review the company’s business for better long-term positioning. Several analysts cut their target prices following the poor income statement from SIA, although aspects of the load received a boost, it came at the expense of yields.

Profitability and Strategic Moves in Early 2018

Despite a loss of $138.3 million in the previous year, SIA overcame this in the last quarter of 2017, achieving a profit of $181.8 million, and continued to make profits until March 2018 (Singapore Business Review, 2018). In response to fluctuating oil prices in recent years, The SIA Group aims to deliver modern and eco-friendly aircraft, further growing its system with full-service market segments and low costs. A key focus is on the new innovation of this airship and the ongoing launch of new cabin products. The successful merger between Scoot and Tigerair under the Scoot brand strengthened the company’s low-cost operations.

Fluctuating oil prices also impact SIA’s non-stop flights, potentially affecting the viability of these services. In February 2018, fuel costs trended higher (Singapore Business Review, 2018), with jet fuel priced at US$65/bbl and Brent at US$45/bbl. Despite high fuel prices, analyst UOB Kay Hian suggested this could advantage SIA by offering a pricing edge over competitors. He noted that, for instance, Chinese airlines typically do not hedge jet fuel, and high fuel prices would likely prevent them from lowering ticket prices, affecting profitability.

Financial Challenges and Forward Strategy in Mid-2018

Despite Kay Hian's assertion of a competitive advantage due to high fuel prices, on 26 July 2018, SIA's net profit dropped by 59%, undermining the company’s recovery plan from 2017 losses. High jet fuel prices caused Singapore Airlines' net profit to fall to S$139.6 million, compared to S$337.9 million in 2017. Despite the loss, the company planned to resume the world's longest flights to New York in October 2018, with Singapore-Newark services using the new A350-900ULR. Initially, flights operated three times a week, increasing to daily operations in mid-October 2018 to compete with rivals like Cathay Pacific Airways.

Passenger market traffic is expected to rise in the coming months, despite market competition. On 27 July 2018, SIA shares dropped sharply by 5.5%, with 5.1 million shares changing hands. Singapore Airlines reported a net profit decrease of 58.9% in June 2018, valued at S$139.6 million, largely due to jet fuel prices comprising 40% of its weightage. However, OCBC Investment Research decided to maintain a hold on the stock at $11.01, considering expected increases in passenger traffic despite competitive pricing and cost pressures. While Singapore Airlines does not plan to raise ticket prices, Scoot intends to increase prices due to rising fuel costs. Scoot and Singapore Airlines passenger yields decreased in June 2018, disappointing investors expecting fare price increases. However, a Singapore Airlines representative reassured that SIA's ticket prices depend on supply and demand.

Conclusion

In conclusion, Singapore Airlines will continue to be impacted by economic concerns and geopolitical uncertainties, challenging the company to adapt and maintain pressure on yields and loads, particularly amidst vigorous market pricing strategies. The company's ability to navigate these challenges will be crucial for its long-term success and competitiveness in the aviation industry.

References:

• Business Times. (2016). Singapore Airlines' financial performance.
• Singapore Business Review. (2018). SIA's financial analysis and strategic moves.