Singapore Airlines: loved by customers, but not investors!

Customer award-winning…
Singapore Airlines, along with arch-rival Cathay Pacific in Hong Kong, is consistently voted by customers as one of the best airlines in the world. The average age of a Singapore Airlines aircraft is just over 7 years, which puts it in the top 10 youngest fleets globally when LCCs are excluded. Passengers get to fly in the most modern aircraft available, which are generally not only safer, but also a lot more comfortable.

The airline has ranked in the global top 5 for many years, and scores particularly well on customer service in business class. Among the prestigious awards that the airline has won are the Business Traveller (Asia-Pacific) Best Airline for 23 consecutive years, and the Conde Nast Traveler (USA) Readers’ Choice Award for 26 out of the last 27 years.

…But share price struggling
However, when it comes to the share price, Singapore Airlines’ performance has not been nearly as exemplary! Over the recent 5-year period, the shares are down more than 20%, and even when dividends are included, the shares have fallen 5%.

There are a number of reasons for this. First and foremost is that the group has been facing intense competition. This is not just from other national flagship carriers, but from emerging low cost carriers (LCC) operating in the region. While the falling price of crude has helped the airline lower fuel costs, all of its competitors have benefitted too, especially the LCC. Fuel will usually account for a greater portion of overall costs at LCCs. In turn, this has boosted investment in capacity by many airlines, leading to an increase in fleet supply. And Singapore Airlines has a cargo business which has been particularly adversely affected. The division was loss-making last year.

While overall revenue was more or less flat in the last business year, passenger yields fell by 5%. Even with the fuel surcharge, this was a meaningful drop. Overall profits recovered, but coming off a low base of previous years. Given that group capital expenditure, including on fleet expansion, is planned to accelerate over the next 2 years, profits could come under pressure again.

Focused on even better customer service
Unlike US airlines, which have the huge advantage of an oligopoly in their local market, the rest of the world’s major airlines seem locked in a battle for market share – with little or no respite in site. Improved fuel costs are clearly helping margins, but the long term outlook does not suggest the competitive environment will get any easier. LCCs at least have the chance to sell more tickets on short haul routes, and cut costs wherever and whenever possible.

In addition to the planned expenditure on the fleet, Singapore Airlines will re-vamp its seats, its menu and its in-flight entertainment. Customers will certainly enjoy the enhancements, but this will unlikely be enough to impact the share price and get investors excited. Maybe company management also needs to consider spending less time devoted to certain activities, such as perfecting the appearance of the so-called Singapore (Airline) girls, which do not seem to bring especially obvious benefits to stakeholders, nor indeed the bottom line. At least for the moment, therefore, it might be better to simply sit back and enjoy the plane ride, rather than to constantly fasten safety belts for the less-than-smooth stock ride.

(By Celia Kawakami)

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