Summary
The industry bellwether airline underscores perfectly why Asia is key to global recovery and also highlights just why yield attrition will stay in the headlines for many months to come.
Analysis
In many ways, Singapore Airlines’ second quarter results echo’s the poor performance of British Airways, which last week also reported an atrocious set of earnings (link).
The not-so-precocious dependency on high yield customers is now haunting a slew of carriers like Singapore Airlines who are struggling to cope with competition from regional low cost carriers while trying to balance capacity reductions to improve load factors, while eroding passenger revenue.
Singapore Airlines figures make for depressing reading:
· Revenue per passenger down
· Fuel costs in Q2 higher than Q1
· Fuel hedging loss of S$400m
· Revenue down YoY
· Yield down YoY
· Load factor down YoY
· Operating loss of S$182m
· Q2FY09 loss of S$159m
In stark contrast John Leahy’s assertion that premium traffic would rebound late next year, Singapore Airlines warned that it did not see signs of any improvement for at least another half year or more. Compounding Singapore Airlines misery was their equally poor fuel costs (ex-hedging) that were up by over S$200m for the quarter.
In stark contrast John Leahy’s assertion that premium traffic would rebound late next year, Singapore Airlines warned that it did not see signs of any improvement for at least another half year or more. Compounding Singapore Airlines misery was their equally poor fuel costs (ex-hedging) that were up by over S$200m for the quarter.
Much of the recent spike in oil prices has been driven by market sentiment, not fundamentals, Singapore Airlines has hedged 20% of its fuel requirements for H2 at “an average of $100 per barrel”.
A correction in Brent crude is certainly overdue, and the omens for the second half of their fiscal year already looks to be pressurised if a fifth of Singapore Airlines’ fuel costs has already been inflated thanks to a misguided hedging strategy.
Cutting flights to match demand has helped, but with customers opting for cheaper methods of travel, the situation is unlikely to improve any time soon – and Singapore Airlines accepts this as reflected by its lower passenger revenue.
British Airways has continually suffered double-digit passenger drops in the Asia-Pacific region, so it comes as little surprise to see Singapore Airlines struggling curb losses while it too focuses on volume-chasing ahead of yield erosion, a point I noted some months back - (click).
This isn’t the first time Singapore Airlines has sported some bad numbers – the challenge is whether the current CEO, Chew Choon Seng has what it takes to steer the city-state flag carrier away from further losses and back into the black.
Replacing a CEO amidst a difficult economic environment may not be a shrewd move, but in order to grasp new direction, new leadership is required and the same rings true at other carriers, such as British Airways.
With Airbus and Boeing agreeing that Asia will be the region that provides the catalyst for recovery on the world stage, the emphasis of moving away from a tired business model of yield dependency needs to be expedited quicker than some CEO’s would like to accept – lowering costs, stripping capacity and deferring new airplane orders do not qualify for a march to profitability.
The very core of the airline operation requires an overhaul from the ground up to better prepare and cope with exposure to structural shifts in passenger spending habits.
The very core of the airline operation requires an overhaul from the ground up to better prepare and cope with exposure to structural shifts in passenger spending habits.
If Ryanair can still grow profitably while taking a 15% hit on revenue per passenger, you have to ask yourself just why full service carriers continue to operate on a path to financial oblivion.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
