SIA's transformation plan bearing fruit despite fuel-related cost pressures

Singapore

EVEN as Singapore Airlines (SIA) contends with high fuel prices - albeit mitigated by a policy to hedge its fuel prices - that are chipping away at its margins, the national carrier's three-year transformation plan is beginning to bear fruit.

For one, the national carrier's passenger load factor of 83.6 per cent for the six months ended September 2018 is a 2.7 percentage-point jump from a year ago. This is a record high for the parent airline company, said SIA's chief executive Goh Choon Phong at a briefing on Wednesday to discuss the group's recently-released second quarter and first-half year results.

There are other encouraging signposts to suggest that the group's aim to sweeten customer experience, lift revenue and raise operational efficiency is on rising trajectory.

Operations wise, the airline has seen a 50 per cent improvement in inflight waste reduction, some 5 per cent productivity gain from better crew planning efficiency and 20 per cent improvement in call handling time, according to Mr Goh.

Customer experience has also improved; for example, their wait time has shortened drastically in terms of the refunds process from 9-10 days to one day.

"These are some of the concrete results from the transformation initiative so far," said Mr Goh.

SIA's media and analyst briefing followed a day after the airline group reported a 69 per cent drop in net profit to S$196 million for the first half of FY2019.

Other factors included recognition of non-cash losses at partly-owned Virgin Australia and a one-time gain relating to its Krisflyer programme booked in the previous period that was absent this time round.

With higher fuel cost negating revenue growth, operating profit over the six-month period for the parent airline company fell 39 per cent to S$418 million while the group's regional arm SilkAir and budget airline Scoot posted losses of S$3 million and S$10 million, respectively compared to profits of S$22 million and S$5 million, respectively a year ago.

SIA shares, which have for months been weighed down by concerns over the impact of rising fuel cost, reacted predictably on Wednesday post-results release. (Fuel represents the largest cost component, making up some 31 per cent of total cost)

The counter tumbled 2 per cent to an intra-day low of S$9.23 within the first half hour of trading but regained some poise to end the day one Singapore cent or 0.1 per cent lower at S$9.41.

"With fuel prices at a substantially higher level currently, passenger yields need to improve for SIA to post returns equal or better than its cost of capital," remarked DBS Group Research, which downgraded the stock to a `hold' from `buy' to reflect lower passenger yield assumptions and one-off losses at Virgin Australia.

Passenger yields for the group's airlines over the first half period and second quarter declined 2.2 per cent from the corresponding periods a year ago.

UOB Kay Hian's K. Ajith pointed out that while the second quarter results reflected a period of rising fuel costs, jet fuel and Brent crude prices have weakened since, which could improve the group's margins in the third quarter.

Going forward, the outlook for air cargo demand is "encouraging", according to SIA's executive vice-president (commercial) Mak Swee Wah. This is despite rising concerns over the ongoing US-China trade spat.

"There is uncertainty but right now, we are not seeing any immediate impact (from trade tensions) yet...so, we are keeping our fingers crossed," said Mr Mak, who was also present at the briefing.

As for the airline's recently-launched ultra-long, non-stop flights to the United States, Mr Mak said there were signs that demand is building up in the coming months "beyond Thanksgiving and Christmas".

"We are fairly confident demand is there and we will be able to achieve our desired results in terms of loads."

SIA commenced the world's longest non-stop flight from Singapore to New York in October and launched the non-stop Singapore-Los Angeles service earlier this month. It will soon increase frequency on the existing non-stop Singapore-San Francisco route.

READ MORE: SIA finding premium economy a tougher sell on new non-stop US flights