Singapore Airlines (SIA) says it faces difficult times ahead as competition from regional rivals and a glut of extra seats in key markets puts downwards pressure on yields and offsets the benefit of lower fuel prices.
While the Virgin Australia shareholder and alliance partner reported a big lift in profitability for the three months to June 30 2016, SIA warned of a challenging outlook amid economic weakness and geopolitical concerns.
“Competition remains intense with aggressive capacity injection, and yields will continue to remain under pressure,” SIA said in a regulatory filing to the Singapore Exchange on Thursday afternoon.
“￼￼￼￼￼Yields will be further diluted if key revenue-generating currencies depreciate against the Singapore dollar.”
Net profit for first quarter of SIA’s financial year came in at S$257 million, up from S$91.2 million in the prior corresponding period.
The result was boosted by the divestment of a stake in an engineering business and achieved despite a decline in revenue, which fell 2.1 per cent to S$3.65 billion.
Meanwhile, operating profit was S$193 million, compared with S$111 million a year earlier.
SIA, and others, have been battling the ongoing rise of Middle East carriers offering long-haul to long-haul connections through their hubs and the rapid international expansion of Chinese airlines in recent times, which have eaten into previously lucrative markets. And in Asia, low-cost carriers have won passengers happy to pay lower fares for a no-frills product on short- and medium-haul routes.
All of SIA’s airline businesses – Singapore Airlines, Silkair, Scoot and Tigerair – recorded an improvement in operating profit, as net fuel costs fell S$357 million in the quarter thanks to a 28 per cent decline in the average price of jet fuel.
Despite the lower cost of jet fuel, yields – an industry term measuring revenue per passenger per kilometre – were weaker as capacity growth outpaced market demand.
At Singapore Airlines, yields touched a multi-year low of 10.3 cents, a decline of 3.7 per cent from 10.7 cents in the prior year, while they were down 8.2 per cent at regional wing Silkair and 3.8 per cent weaker at long-haul budget operation Scoot.
Yields for Tigerair Singapore were not disclosed.
SIA’s cargo unit was also under pressure, suffering a deterioration in revenue and operating profit in the first quarter amid a soft freight market and economic uncertainty in Europe and China.
“Cargo yields are expected to remain under pressure as overcapacity persists in the industry,” SIA said.
The company said it booked a S$41 million loss from its shareholding in Virgin Australia, which on Thursday reported a A$228.4 million statutory loss for the three months to June 30 2016.
In terms of the fleet, SIA said it expected to take delivery of eight more A350-900s over the next nine months, which would bring to 11 the total number of the type in the fleet. SIA has 67 A350s on order.
The next generation widebody has been used to open up a new nonstop flights to Dusseldorf, which kicked off earlier in July, as well as launch an ultra long haul offering from Singapore to San Francisco starting in October.
“These more fuel efficient aircraft will offer new opportunities to grow long haul operations and further strengthen the Singapore hub,” SIA said.