Singapore Airlines Ltd - Is Scoot performing to expectations?

27/2/2014 – Singapore Airlines (SIA) says the competition in air transportation remains unabated.

Other airlines have been cutting fares aggressively in spite of fuel prices which are at historical high levels.

SIA notes that advance passenger bookings for the fourth quarter are slightly below its planned capacity increase because of a shift in Easter travel demand from March of last year to April this year.

While SIA says it will boost passenger take-up, it notes costs will weigh on yields.

Air cargo demand is projected to be flattish and cargo yields will face pressure as this business continues to face overcapacity.

It will maintain cost discipline while strong finances ensure a good position to meet coming challenges.

No further details have been released on its planned appeal to a cargo price fixing penalty from Switzerland's COMCO, since its January 10 announcement.

The company just announced earnings for Q3FY13:

Revenue: +0.4% to S$3.86 bln
Profit: -58.8% to S$65 mln
One-off gains/losses: (S$79.9) mln vs (S$19.9) mln
Cash flow from operations: S$433.4 mln vs S$529.8 mln
Dividend: None

Revenue inched up marginally.

Despite higher passenger numbers, yields are weaker as more was spent to compete for sales.

Unfavourable exchange rates affected major revenue-generating currencies.

Profit plunged 65% because of exceptional items of S$80 mln, and its shares of losses and one-off items from Tiger Airways Holdings Limited.

Excluding the exceptional items and impairment losses from Tiger Airways, profit would have climbed 23.1%.

The one-off items from Tiger Airways arose from impairment in Tigerair Mandala, and losses related to assets of Tigerair Philippines – together S$46 mln.

Profit broken down for the Group for Q3FY13 is:

Parent Airline Company – S$130 mln vs S$87 mln
SIA Engineering – S$25 mln vs S$31 mln
SilkAir – S$6 mln vs S$34 mln
SIA Cargo – S$1 mln vs (S$29 mln)

Parent Company profit increase was due to 1.2% reduction in expenditure where strict cost management helped passenger unit cost decreased 2.2%.

SilkAir's profit decline was due to capacity expanding faster than passenger numbers especially on emerging travel destinations in the region.

Singapore Airlines Cargo's (SIA Cargo) profit came about from a seasonal peak in this third quarter, which is supported by ongoing efforts to match capacity demand.

Exceptional items comprise the completed sale of its 49% stake in Virgin Atlantic Limited for US$36.1 mln (S$455.3 mln).

Under the equity accounting method, the Group's S$116.6 mln reserves offset against net sales proceeds (after post-closing adjustments) of S$465.5 mln, resulted in a gain of S$339.9 mln for this divestment.

SIA Cargo recorded an impairment loss of S$293.4 mln for four surplus freighters which have been removed from its operating fleet and marked for sale.

A further US$62.8 mln (S$78.3 mln) went to plaintiffs in the US air cargo class action suit in December 2013, without the admission of wrongdoing or liability.

A 1.69 mln Swiss francs (S$2.37 mln) charge is also anticipated as SIA Cargo considers its appeal in the Swiss air cargo competition case still under review.

Following investigations in Australia and New Zealand starting in 2008, SIA Cargo will pay A$12.2 mln (S$15.5 mln) to the Australian Competition and Consumer Commission, and NZ$4.4 mln (S$4.4 mln) to the New Zealand Commerce Commission, in penalties and costs, bringing this case to a close.

In total, exceptional items accounting for provisions for penalties to SIA Cargo, totalled S$80.6 mln, up from S$19.9 mln.

Cash flow went down to S$433.4 mln from S$529.8 mln.

Pre-tax profit was affected by the following:

Depreciation of tangible assets lowered from S$420.4 mln to S$394.8 mln.

Provisions went down to S$51.4 mln from S$55.7 mln.

Currency exchange rate losses incurred escalated drastically from S$0.3 mln to S$8.8 mln.

Interest expense improved by falling from S$23.7 mln to S$17.5 mln.

Surplus on disposal of aircraft, spares and spare engines increased from ($6.2 mln) to (S$13 mln).

Share of losses or profits of associates doubled to S$40.8 mln.

Cash reserves were at S$4.91 bln, slightly up from S$4.85 bln in the corresponding financial period.

Debt as at December 31, 2013, was S$983.8 mln, of which S$69.3 mln is repayable within a year.

Total secured borrowings of S$166 mln are for the leases of aircraft.

Interested Persons Transactions for Q3FY13 recorded the acquisition of 49,034,009 Tiger Airways Holdings Ltd shares by Dahlia Investments Pte Ltd and Aranda Investments Pte Ltd, both associates of Temasek Holdings (Private) Limited.

SIA December 2013 operating figures were:

A 1.4% increase in SIA's passenger carriage against capacity growth of 0.9%.

This brought the passenger load factor (PLF) up 0.3% to 82.5%.

PLF improved across all routes except for those in East Asia and South West Pacific, where growth in passenger carriage did not keep pace with capacity growth.

The number of passengers carried in December increased 2.5% to 1.7 mln.

A 9.4% increase in SilkAir's passenger numbers against a 13.5% increase in capacity resulted in a decline in PLF of 2.8% to 74.3%.

Overall cargo traffic fell 5.1% while cargo capacity also decreased by 3.1%, which resulted in the cargo load factor (CLF) falling 1.4%.

CLF was higher for all route regions except the Americas and South West Pacific route regions, as capacity was better matched to demand.

CLF for South West Pacific region was 10.6% lower due to seasonal demand changes after the festive period.

Besides competition and operational pressures, SIA is also again facing legal action with the most recent being the COMCO penalty on 11 companies, one of which is SIA Cargo.

COMCO, the competition commission of Switzerland (also known as WEKO by its German name), had found 11 companies guilty of fixing freight pricing between 2000 and 2005.

It is now penalising the 11 carriers for a total of 11 mln Swiss francs, with SIA Cargo having to pay 1.69 mln Swiss francs (S$2.37 mln).

SIA published an announcement on January 10, establishing that it plans to appeal against the COMCO penalty after it finds out exactly what grounds COMCO has taken for its position.

Previous investigations into Singapore Airlines Cargo (see pages 170-172 of 2013 annual report) include notices served by competition authorities in the United States, Australia, New Zealand, Canada, South Africa, South Korea and Switzerland.

Just after Christmas last year, SIA announced its new joint venture company, Tata SIA Airlines Limited.

This joint venture with Tata Sons Ltd was first announced on September 19, 2013 where the principal terms are a total outlay of US$100 mln.

SIA has received 24,500,000 shares of the JV amounting to IDR245 mln at a par value of IDR10 per share, and this represents the 49% stake it is meant to take in Tata SIA Airlines under the JV agreement.

With this transaction, Tata SIA Airlines is now an associate in the SIA group of companies.

SIA says the Indian aviation industry is projected to experience future high growth rates, and with the Indian government's decision to allow foreign airlines to invest up to 49% in Indian carriers provides this opportunity to participate directly in a large and fast-growing market.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Is Scoot performing to expectations?

There’s no doubt SIA is in a tough industry.

Anyone who has ever compared Emirates and Qatar Airways fares with those of Singapore Airlines will know that they frequently offer cheaper fares.

But both Middle Eastern carriers also offer full service.

Qatar Airways’ CEO recently commented that Qatar Airways is better than SIA [although the Singapore Girl still has a nicer smile, ed].

Under these circumstances, it’s no surprise SIA prefers to launch new brands, such as Scoot, rather than cheapen its premium brand.

But this begs the question whether Scoot is performing to expectations?

Question

2. Are the problems at SIA Cargo structural or cyclical?

There might still be overcapacity in the cargo market, but will this change as the US economy gathers steam?

Or is this downturn in air cargo a structural issue?

Question

3. Can it win back customer confidence in Switzerland?

What are its plans for overcoming the issues it faces there?

(Total number of questions in the full story: 8)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).

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