Crashing profits push Singapore Airlines hard into the low-cost sector

Singapore Airlines has a reputation for great service at reasonable prices but increasing competition is forcing them to make difficult business choices. Something will have to give.

by Francesca Ross

“With [SilkAir, Tigerair, Scoot and Singapore Airlines] we basically cover the full spectrum of travel whether it’s full or budget service, regional, medium or long-haul, and we will be able to provide the right [carrier and aircraft] for anyone wanting to travel on any sort of budget to any destination,” said the airline group CEO, Goh Choon Phong.

His premium carrier, Singapore Airlines (SIA), is about to celebrate its 70th year of operations, now reaching 64 countries with over 100 aircraft. The company has an excellent reputation – it took the top spot in the Changi Airline Awards 2017 for all the categories considering passenger carriage and cargo carriage. It also won Forbes’ best international airline in 2016 and six separate accolades in the DestinAsia specialist travel and lifestyle awards in the same year.

SIA is well-known for its culture of service and investment

CEO Goh is discussing new strategies and the need for his business to expand, but SIA has many set ways which have underpinned this reputation. The secret to the company’s success has been a dual strategy of high-quality customer service and low costs.

Its advertising promotes the enduring image of the Singapore Girl in their helpful, attentive and graceful cabin crew. Management follows a 4-3-3 rule of spending: 40% on training, 30% on updating business processes, and 30% on better services and products each year.

This continual reinvestment shows in the fact SIA’s fleet is young (it has an average age of just 7.8 years.) Newer aircraft mean fewer mechanical failures, fewer cancellations and less spend on maintenance. Putting the money back in means better service, more returning customers and, ultimately, higher revenues. At least, it used to.

From the middle of 2016 onwards, SIA has seen its yields and revenues crash. A warning was issued in September 2016 that profits had dropped by 70%. This was despite operating cost falling to around 8% thanks to poor fuel deals expiring and a good performance from the group’s cargo operations.

In the last full set of figures available (2015/2016) overall total revenue for the entire company (not just SIA) fell 5.9% from the year before, although a drop in expenditure of 7.3% cushioned this blow. Operating profit overall was up but the all-important yield from transporting customers was down 5.4 points.

Competition from China and the Middle East is affecting demand

State carriers from the Middle East and China are the problem. They are eating into SIA’s historical long-haul routes and local operations like Air Asia are cutting off the viability of many shorter, local routes. SIA has had to drop its prices drastically to compete and this has drastically driven down the amount the company makes from each passenger.

Chairman, Stephen Lee explained “Low-cost carriers (LCCs) now have more than 50% market share in terms of the number of seats flying within Southeast Asia, for example. This makes it by far the most competitive LCC market in the world.”

Singapore Airlines 18.71 million 18.28 million 2% 56%
Tigerair Singapore 5.27 million 4.57 million 15% 16%
Jetstar Asia/Valuair 3.98 million 3.64 million 9% 12%
Silk Air 3.42 million 3.33 million 6% 10%
Scoot* 1.8 million 1 million

Source: CAPA – Centre for Aviation and company reports

SIA’s strategy is to leverage its affordable regional brands, Silkair and Scoot, to increase the number of people flying into, and out of, Singapore. The plan is to push Scoot into long-haul routes that support SIA as it grows its reach into new countries and flightpaths.

Shukor Yusof of Endau Analytics said he thought “the business will never be as profitable as it was before, perhaps even a lot less. That said, full service will still continue to be SIA’s bread and butter 10 years from now – easily 60 to 65% of annual turnover.”

The company will need to go heavily into debt for the first time in years

The group’s traditional business model shapes their response to LCC challenge; investment. An order has already been made for US$54 billion-worth of new aircraft. “Our capital expenditure will be rising as we take advantage of new growth opportunities to better position the SIA Group for the future,” Nick Ionides, a spokesman, said in an email.

“These investments will be financed by cash flows generated from operations, as well as by proactively taking on more debt in the coming years.” Capital expenditure of $2.6 billion annually is planned for the five years through March 2022.

Experts suggest the debt burden may be good for the company as more efficient capital structures will push up return on equity. This may have been subdued in recent years by the current preference for large cash reserves.