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Singapore Airlines CEO Admits Emirates Moves Will Make Things Tough

Jul 27, 2013 1:38 am

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Singapore Airlines will face intense competition from low cost carriers and the Qantas-Emirates alliance. Singapore Airlines finds itself in the right place at the wrong time.

— Dennis Schaal

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Arnd Wiegmann  / Reuters

An Airbus A380 jet of Singapore Airlines takes off from the airport in Zurich March 21, 2012. Arnd Wiegmann / Reuters


Singapore Airlines Ltd., Southeast Asia’s biggest carrier, boosted first-quarter profit 56 percent, helped by gains from the sale of its stake in Virgin Atlantic Airways Ltd. to Delta Air Lines Inc.

Net income rose to S$121.8 million ($96 million) in the three months ended in June, from S$78 million a year earlier, Singapore Air said in a statement yesterday. Operating profit rose 14 percent to S$82 million while revenue increased 1.7 percent to S$3.84 billion.

Chief Executive Officer Goh Choon Phong ordered aircraft worth $17 billion from Airbus SAS and Boeing Co. in May as discount carriers and Middle East airlines expand in the region. Singapore Air, which revamped its first- and business-class offerings and started a budget unit to lure travelers, faces increasing competition as more low-cost operators enter the market, said Andrew Orchard, a CIMB Group Holdings Bhd. analyst.

“It’s going to be a lot more challenging,” Orchard said before the earnings announcement. “It doesn’t look like the Middle East airlines are going to slow their growth.”

Singapore Air fell 0.3 percent to close at S$10.22 in Singapore. The stock has dropped 4.9 percent this year, compared with a 2.2 percent gain for the benchmark Straits Times Index.

The carrier said it had a net gain of S$336 million from the sale of its 49 percent stake in Virgin Atlantic. The deal, announced in December, was completed last month. Part of that gain was eroded by an impairment cost of S$293 million the carrier booked for removing four freighters from its fleet. The planes are marked for sale.

Forward Bookings

While the reduced exposure to the freight market is a strategic win, the lack of exceptional profits makes it less likely that Singapore Air could pay a special dividend at the half year, Timothy Ross, head of Asia-Pacific transport research at Credit Suisse AG, said in a note today.

“Forward passenger bookings for the next few months are expected to be higher against the same period last year,” Singapore Air said. “However, yields are expected to be weaker as a result of the intense competitive environment.”

Passenger yield, the average price a traveler pays to fly one kilometer, fell to 11.1 Singapore cents in the quarter from 11.4 cents a year earlier, Singapore Air said. The yield from carrying cargo dropped to 32.7 cents from 34.6 cents.

The airline carried 4.57 million passengers during the quarter, compared with 4.5 million a year earlier. Singapore Air filled an average 78 percent of its seats in the period, compared with 79.5 percent a year ago.

Plane Orders

The airline in May ordered 30 Boeing 787-10X variant planes and 30 Airbus A350-900s to replace less fuel-efficient models. The contract also included an option for 20 more A350-900s which may be converted by the carrier for purchasing the larger A350-1000 variant.

That was on top of the of the 25 Airbus aircraft worth $7.5 billion, including the superjumbo A380, ordered in October. The carrier also would stop this year the world’s longest non-stop flights, from Singapore to Newark, New Jersey, and Los Angeles.

Singapore Air faces increased competition as the alliance between Qantas Airways Ltd., Australia’s biggest, and Emirates started flights March 31. The agreement with the Dubai-based airline cuts average journey times by more than two hours from Melbourne and Sydney to the top 10 destinations in Europe.

To compete, Singapore Air said in April it will increase its stake in Virgin Australia Holdings Ltd. to 19.9 percent for A$122.6 million ($112 million). It raised its stake from 10 percent after Virgin Australia received regulatory approval to buy 60 percent of the local unit of Tiger Airways Holdings Ltd.

Tiger, Lion

Singapore Air is the largest investor in Tiger, a short-haul low-fare airline that competes with AirAsia Bhd., Lion Mentari Airlines PT and more than 10 other budget carriers that fly in the Southeast Asian region.

Last year, Scoot, a medium-haul budget airline fully owned by Singapore Air, started flying with Boeing 777 aircraft. Singapore Air transferred its orders for the Boeing 787 Dreamliners to Scoot.

Airlines are likely to generate a net income of $12.7 billion this year, 20 percent more than a March forecast, the International Air Transport Association said in June. Carriers in all regions should post a profit this year, led by airlines in Asia with projected earnings of $4.6 billion and North America with $4.4 billion, the group said.

“The group’s operating environment continues to be impacted by the uncertain global economic climate and high fuel prices,” Singapore Air said in the statement. The carrier will “make appropriate adjustments to flight schedules and capacity, alongside a continued focus on cost discipline.”

Editors: Vipin V. Nair, Garry Smith. To contact the reporter on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net. To contact the editor responsible for this story: Vipin V. Nair at vnair12@bloomberg.net. 

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