Surprise Q4 loss sends SIA shares diving 7.25%

Singapore

SHARES in Singapore Airlines (SIA) plunged 7.25 per cent, or 78 cents, to close at S$9.98 on Friday, after having posted a surprised loss the day before.

Nearly 4.8 million shares changed hands following the airline group's first fourth-quarter loss in three years, with the counter hitting a low of S$9.97 during the day's trading.

SIA chalked up a net loss of S$138.3 million for the three months ended March 31, vis-a-vis a net profit of S$224.7 million a year ago. The bottom line was hit by a sharp drop in operating profit, and a S$132 million provision for SIA Cargo related to an EU air cargo competition case.

SIA Cargo is being re-integrated as a division back into the SIA group, in a bid to boost efficiency through greater synergies across the broader group, the group announced on Friday morning. Buffeted by deteriorating yields, cost pressures as well as keen competition in both the full-service and budget sectors, the group has embarked on a wide-ranging review of its business to position itself better for long-term growth. SIA's dismal earnings report card prompted a number of analysts to cut their target prices on Friday. They noted that although load factors received a lift, this had come at the expense of yields.

UOB Kay Hian analysts, K Ajith and Sophie Leong, who trimmed their price target for SIA from S$10.40 to S$10.10, wrote: "At current yield levels, very few full-service carriers will be profitable. "Airlines will have to cut capacity or (defer aircraft) delivery until the yield environment improves. There are already signs of capacity cuts by the Chinese and Middle Eastern airlines."

CIMB analyst Raymond Yap downgraded the counter to "reduce" and cut his target price from S$10.50 to S$10; OCBC Investment Research analyst Eugene Chua maintained his "hold" recommendation on the stock, but is reviewing the S$10.36 fair-value price after the "disappointing" results.

Meanwhile, Daiwa Capital Markets' analyst Royston Tan raised his target price from S$8.62 to S$9.06. But he added: "While management has set in place several initiatives that have yielded positive results, as evident by the group's improving passenger load factor, we remain cautious over the industry overcapacity situation, that will likely continue to have a negative impact on the group's yield and profitability." Under its review efforts, SIA has set up a transformation office which will take a hard look at areas such as revenue generation, organisation structure, business processes and cost structure.

In an interview with The Business Times last month, SIA chief Goh Choon Phong said the review would cover all aspects of the business, from its network to fleet to product and service. For instance, to boost revenue on the commercial side, a specialised pricing department has been formed to price airfares optimally on a global basis; a new revenue management system will leverage on algorithms to forecast demand.

While there will be no job cuts, some jobs could end up being redesigned as part of the restructuring, he said at a results briefing on Friday, in response to queries from the media.

"One can expect that, with looking at doing things differently, some of the current jobs would have to be redesigned because they may not be relevant anymore.

"But what the company will do is to ensure that we provide opportunities for retraining and redeployment."

Touching on the outlook for yields, SIA's executive vice-president (Commercial) Mak Swee Wah suggested that a pickup in oil prices could help stabilise the situation. The sharp drop in oil prices in recent years has given carriers the wiggle room to price airfares more aggressively. "When you look at the situation ahead, (with) oil prices potentially coming back again and some major players in the market reporting a bit of stress in financials and making adjustments to their plan, all these factors may lead to a bit more stability in the yield environment," he said.

Meanwhile, the re-integration of its cargo unit is slated for completion in the first half of next year, SIA said. The group stressed that there will be no change to the operations in SIA Cargo, which will continue to run a fleet of seven B747-400 freighters.

The majority of SIA Cargo's nearly 900 employees will be retained in the new Cargo division; some will be transferred to other SIA divisions, said SIA. "For a group of staff for whom alternative job positions have yet to be confirmed, placement opportunities will be facilitated elsewhere in the SIA Group," it said.

SIA Cargo was a division of SIA until July 1, 2001, when it was carved out as a separate company, at a point when it was expanding its fleet to 17 freighters.

In recent years, the cargo market has been struggling with overcapacity as new passenger aircraft injected sizeable bellyhold capacity into the market. This has forced SIA Cargo to right-size its fleet.

READ MORE: SATS Q4 net profit up 31.4% to S$66.6m