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SIA profits drop in contest from Gulf carriers

Singapore, May 16, 2013

Singapore Airlines (SIA) reported weaker-than-expected full-year results and warned of a deteriorating environment as it struggles to cope with the rapid emergence of Gulf carriers and low cost Asian rivals.

SIA is attempting a big strategy overhaul, pushing into the budget airlines segment and expanding its regional network.

State-backed Emirates Airline, Etihad Airways and Qatar Airways are stitching deals, while Gulf states race to become regional hubs linking the Asia-Pacific region and Europe.

Asia's second-biggest airline, which has a market value of $11 billion, said on Thursday net income rose nearly 13 percent to S$379 million ($304 million) for the year to March 31, below an average forecast of S$409.6 million, according to Thomson Reuters StarMine SmartEstimates.

The fourth-quarter profit of S$68.3 million was also below market estimates. Full-year operating profit fell nearly 20 percent, with the airline blaming persistently high fuel prices and the global economic slowdown.

"Yields are likely to remain under pressure amid weak economic sentiment, and revenues will be further diluted if key revenue-generating currencies continue to depreciate against the Singapore dollar," SIA said in a statement.

SIA said the parent airline company and SilkAir were cutting capacity between April and June due to weak markets.

SIA's promotional fares on its mainstay long-haul routes have helped it boost traffic, but premium class travel, which makes up about 40 percent of revenue, has been hit by businesses cutting spending on travel.

"They have competitors who have strong financial backing and are also forming alliances, so it's getting to be a much tougher space," said Kristy Fong, investment manager at Aberdeen Asset Management, which holds about a 4 percent stake in SIA.

"So the question is whether they can really keep that premium, which is sliding. I don't think it's an easy one," Fong said before SIA announced its results.

Under Chief Executive Goh Choon Phong, who took charge in January 2011, SIA is relying on a multi-brand strategy and stepping up its exposure to the budget airlines segment.

It desperately needs growth: profit fell nearly 70 percent in its previous financial year and margins slumped.

Emirates and Qatar are fiercely challenging the company, controlled by Singaporean state investor Temasek, for the title of top luxury carrier as they invest millions in upgrading lounges and enhancing services.

Singapore's best known brand also faces stiffer competition from Southeast Asian rivals such as Malaysian Airline System Bhd and Garuda Indonesia (Persero) Tbk PT, which are introducing newer aircraft and adding more connections in an attempt to win back some of their nationals who have previously flown via SIA and Singapore.

FEWER PILOTS

SIA has been cutting costs and said in January it would release all 76 pilots who were employed on fixed-term contracts. These foreign pilots would be let go by the end of June. SIA employs around 2,300 pilots. It did not provide financial details of the cuts.

"SQ is giving its competition a very easy way to get experienced pilots," said one SIA pilot whose contract was cancelled this year, speaking on condition of anonymity because his contract was confidential.

SIA's shares, trading at their highest level in 1-1/2 years, have gained more than 6 percent so far this year as analysts upgrade earnings estimates due to lower fuel costs.

The company said forward passenger bookings for the next few months were almost flat compared to the same period last year and the cargo business faced overcapacity.

Over the past year, SIA agreed to sell a 49 percent stake in Virgin Atlantic Airways Ltd, started a new budget airline Scoot, expanded capacity at its regional carrier SilkAir, and is potentially increasing its stake in affiliate Tiger Airways Holdings Ltd.

"Singapore Airlines' portfolio approach has more to do with its strategic position and the rise of its competitors," said Hong Kong-based research analyst Qiu Tian from Templeton Global Equity Group, before the results were announced.

Singapore Airlines relies heavily on connecting traffic, rather than purely point-to-point travel, in a market which features many competing hubs.

"This leaves Singapore Airlines more susceptible to the threat from new entrances - the Gulf carriers," Qiu said.

SIA is doubling its stake in Virgin Australia Holdings Ltd to 19.9 percent. This comes months after struggling Qantas Airways Ltd and Emirates struck a five-year alliance, which includes switching the Qantas' hub to Dubai from Singapore for European flights.

SIA's rivals have also made deals in India. Last month, Etihad agreed to buy a 24 percent stake in Jet Airways Ltd , India's largest carrier, while AirAsia has joined forces with the Tata group to start a local airline. – Reuters




Tags: Etihad | Emirates | profit | Singapore Airlines | Gulf carrier |

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