Investor Central: Singapore Airlines Ltd — What are its targets for Premium ...

KUALA LUMPUR, May 22 — Singapore Airlines Limited continues to struggle with competition, overcapacity and economic uncertainty, after a fourth quarter performance that was disappointing.

In its outlook it said it will keep up cost discipline, adjust capacity to match market demand, and pursue more strategic initiatives.

CEO Goh Choon Phong reinforces this in an on-camera CNBC interview on May 9, 2014 where he also adds that one way forward is to find more partners to achieve targets.

Though the Singapore carrier expects passenger bookings this current quarter to match its capacity expansion plans, competitors are wresting for revenue as they too expand passenger capacity, and aggressively compete on fares.

On balance, this keeps yields from passenger carriage flattish, as a result of higher costs from increased promotional efforts.

SIA has various initiatives planned to capture demand, such as offering Premium Economy class.

In the freight business, yield from cargo carriage is expected to remain flattish also as overcapacity continues to be a problem.

Operational expenses on the whole will stay high because of sustained high fuel prices.

But a new business chapter in India and New Zealand might soon be realised, even as the venture in property gets streamlined, and new aspirations set in to lead the Asia Pacific region in pilot training.

It has agreed to pay S$6 million (RM15.4 million) in amicable resolution without admission to wrongdoing for the Australian suit started in 2007.

No verdict has yet been reached over the Korean Fair Trade Commission’s 2010 claim against airlines for introducing fuel surcharges and violating Korea’s Monopoly Regulation Fair Trade Act.

The company just announced earnings for Q4FY13:

Revenue: -1.1 per cent to S$3.63 billion

Profit: -48.7 per cent to S$43.3 million before S$124.3 million loss from cash flow hedges and other non-cash items

One-off gains/losses: S$19.8 million vs nil

Cash flow from operations: S$2.1 billion vs S$1.85 billion

Dividend: 36 cents per share vs 17 cents per share, bringing total FY13 dividend to 46 cents vs 23 cents

Revenue dipped slightly to S$3.63 billion because of lower passenger carriage from SIA and lower cargo carriage from SIA Cargo, and weaker yields on the whole.

While staff costs declined by 4.3 per cent (S$576.2 million from S$602.9 million), aircraft maintenance and overhaul costs increased by 12.7 per cent (S$163.6 million from S$145.6 million).

Depreciation decreased by 6.6 per cent (S$377.1 million from S$403.6 million) but advertising and sales costs increased by S$18.9 million (S$79 million from S$60.1 million).

While page 1 of the earnings announcement showed SIA posting a profit, Other Comprehensive Income on page 3 shows a loss of S$72.2 million down from S$102.2 million, mostly because of a S$124.3 million loss on its cash flow hedge.

Exceptional losses were from an impairment of S$293.4 million incurred by SIA Cargo on four surplus freighters; impairment of S$29.4 million incurred by Singapore Flying College on its assets; provision for penalties and legal costs of S$87 million for settlements over class actions in the US, Australia and Switzerland.

Debt as at March 31, 2014 was S$965 million, of which S$60.7 million is repayable within one year or less.

Analysts generally agree on a HOLD call for the stock but issued varying price targets ranging between S$10.12 to S$9.50.

CIMB Research says investors are unlikely to be satisfied by the dividend distributed because it pales in comparison to the ones issued in the past.

But even here, views vary. An analyst from Citigroup asked at the media and analyst briefing why the dividend was so generous, in the context of SIA’s capital expenditure plans.

OCBC Research says Tata SIA Airlines could hold rewards provided regulations become a non-issue.

This will be the third time since 1995 and 2000 that SIA is trying to get a foothold in India (Aviation Week has this useful backgrounder).

DBS Equity Research has its eye on yield if it should decline further than expected.

Investor Central. We keep your investments honest.

1. What are its targets for Premium Economy?

At the earnings announcement, CEO Goh Choon Phong said the airline had received queries about a premium economy offering for some time.

Reuters reports that SIA had resisted the move for years because of the fear that it would cannibalise its business class.

Mak Swee Wah, EVP Commercial SIA, said the company thinks it is the right time to explore this service, now that the market appears to have matured for this class of travel.

Premium economy travel will be a mix of leisure and business travellers with more leg room than economy class seating.

SIA has been faced with competition from Middle Eastern carriers and lower demand by companies for its business class seats.

Is this what tilted the scale in favour of Premium Economy in the end?

It will roll out this class of seating on its medium- and long-haul routes as a tester.

The Australian reports that Qantas could face even more pressure now with SIA entering the premium economy sector.

2. How will it keep business class competitive, now that it is introducing premium economy travel?

So, what is it doing to differentiate between business class and premium economy class?

3. Could business class travel be phased out in the end?

This sounds radical, but it’s not that long ago that low cost air travel also sounded radical.

Why should companies not jump at the new premium economy class offering, especially when costs must be cut?

SIA stopped its all-premium non-stop service to Los Angeles and Newark in 2013 (Centre For Aviation provides a backgrounder to SIA’s US performance).

Does this suggest the end of business class travel?

SIA is sure to have run the numbers to see how much Premium Economy will cost to implement, and what the returns will be.

Management reply: We have studied a premium economy offering several times over the years. Following our most recent review, it was determined that the time is right for SIA to introduce premium economy as a new cabin class. As mentioned by our CEO in the recent media and analyst briefing, we are still in the process of finalising the details, and can only share more at a later time.

We believe there will always be demand for travel in premium classes and we continue to invest heavily in enhancing our products and services. For example we launched our next generation of cabin products last year, which includes an all-new Business Class offering, and this is being progressively rolled out to more aircraft in our fleet.

4. What are the biggest hurdles to the September launch in India?

Reuters reports Tata SIA Airlines, the India joint venture between SIA and Tata Group, aims to start flights from September 1, 2014, as according to its application to India’s Civil Aviation Department.

This is the third time SIA has tried to establish in India.

What is it doing to manage all identified risks?

Management reply: The establishment of the airline is subject to various approvals, some of which have already been received. There is a regulatory process to be followed and it would not be appropriate to comment on potential hurdles. We are grateful to the various government ministries and agencies for the support provided to date.

5. What can it do to improve associate performance and contribution?

Share of losses/profits of associated companies moved to a loss of S$33.7 million compared to a profit of S$14.4 million in the previous corresponding quarter.

Leading losses was Tiger Airways Holdings Limited which now has a new CEO effective May 12, to possibly fix performance.

SIA Engineering achieved S$116 million in full year profit, down from S$128 million because of higher expenses on staff costs, subcontracting and materials.

SilkAir achieved S$35 million in full year profit, down from S$97 million because passenger carriage growth did not keep pace with carriage capacity injection intended to develop new markets.

SIA Cargo is still incurring losses but this has been reduced to S$100 million for the full year from S$167 million because of efforts to improve match of capacity with demand.

Management reply: Please refer to the transcript from the recent media and analyst briefing.

6. What are the immediate plans to remedy Tiger Airways operations?

What has the new CEO identified for immediate mending?

How long will it take to get Tiger Airways where it should be?

7. Which routes is it planning for Scoot?

SIA announced on May 8, 2014 that it will subscribe to 400 million Scoot share at S$1 per share to support the budget carrier’s investment in its new fleet of 787 aircraft.

SIA CEO said Scoot is doing well with its fleet currently comprising six aircraft and plans to have more fuel efficient ones by the end of 2014.

Scoot flies medium-haul with long-haul flights planned in the near future.

Scoot (and Tiger Airways) is waiting anti-trust immunity approval which should come within the next few months.

Management reply: Although Scoot is a wholly owned subsidiary of SIA, it is independently operated and has its own management team. Tiger operates entirely independently of SIA and is a separately listed company on the Singapore stock exchange. Details on their corporate strategies would, therefore, be best answered by Scoot and Tiger respectively.

8. Why not shut down SIA Cargo?

Seems radical, especially at a time that losses are narrowing and its fleet has already been narrowed down.

But the business has been an albatross for many years, not least because of the various anti-trust actions taken against SIA (and other carriers).

They have spent tens of millions of dollars to settle these issues, with a total of S$87 million paid in FY13.

This wipes out gains they made on their successful fuel hedging programme.

In view of the litigious inclination of regulators from the US to Australia to Switzerland to Korea, why not just get out of the business altogether?

Management reply: SIA Cargo remains an important part of the SIA Group, and we take a long-term approach to our overall business.

9. How much revenue is it expecting to capture from renewed Singapore-Auckland daily route?

The alliance with Air New Zealand was signed in January, and it has finally come to the final stages of waiting on the approval of New Zealand’s transport minister.

This arrangement will allow SIA to fly the Singapore-Auckland daily route again since its closure in 2007 when Air New Zealand stopped the service.

As the Australian Business Traveller reports:

This arrangement will utilise the Boeing 777-300ER for the most part of the year, with the Airbus A380 to ply peak seasons.

So what are the seating classes available to this route?

Will the new premium economy class be introduced here?

Management reply: We do not provide forecasts, so we are not able to provide revenue expectations. Our 777-300ERs have First, Business and Economy classes, while our A380s have Suites, Business and Economy classes. As announced at the recent media and analyst briefing, Premium Economy class will be progressively fitted on both aircraft types.

10. Why has it dissolved SIA Properties?

The 2012/2013 annual report states on page 156 that wholly-owned subsidiary SIA Properties (Pte) Ltd incurred S$8.7 million in impairment losses because of a write down of its recoverable amount upon liquidation.

When SIA Properties was dissolved on March 31, 2014, it was still invested in property through associate RCMS Properties Private Limited (20 per cent stake).

PT Purosani Sri Persada, the hotel ownership and management group in Indonesia, was divested on October 30, 2012.

Does this streamlining of property investment and management signal an eventual exit for SIA?

11. What was SIA Properties portfolio, and why did it have to take an impairment charge?

How was SIA Properties managed and what were its targets?

[Management has asked for more time to respond to these two questions about SIA Properties. We will update this story if/when those replies arrive. Ed.]

12. What are the projections for revenue capture through pilot training by the new flight training centre?

A February 12, 2014 announcement states the civil aviation flight training centre for Airbus aircraft types will be a joint venture between SIA and Airbus, to be named Airbus Asia Training Centre.

Though this joint venture will cost S$80 million, it will not materialise unless the Civil Aviation Authority of Singapore (CAAS) gives its approval.

Operations are expected to start before end 2014, starting at the existing SIA Training Centre before moving to a dedicated facility at the Seletar Aerospace Park.

SIA hopes to leverage Airbus research and development, where it will also meet the rising demand for pilots in the continuing economic outlook for the Asia Pacific region.

SIA will own 45 per cent of this company, and Airbus will own the remaining 55 per cent.

Airbus Asia Training Centre in Singapore will join the network of Airbus training centres around the world including ones in Beijing, Miami and Toulouse.

13. What stands in the way of approval?

Are there are any specific regulatory and competition concerns?

Management reply: We regret that we are not able to share revenue projections. There are several regulatory approvals to be obtained and this process is well underway.

14. Why has the winding down of Singapore Flying College’s Maroochydore operations taken so long, and cost so much?

Singapore Flying College announced the closure of its Maroochydore operations in Australia in July 2013.

The “Sunshine Coast Daily” reports that the S$50 million jet training college which opened in 2002 shut because of changes to its pilot training curriculum.

The other Singapore Flying College facilities in Singapore and Jandakot are not affected.

Impairment of S$29.4 million have been incurred in the Q4 exceptional numbers as a result.

Management reply: A fair amount of time is usually required to wind up such an operation, and this includes the process of finding suitable buyers for some of the flight simulators and aircraft used at the Maroochydore facility. We are not able to comment on cost.

We thank the company for the replies. — Investor Central

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Investor Central: Singapore Airlines Ltd — What are its targets for Premium ...