Under pressure

For SIA – its full year 2016 profit slumped 55% to $348.8 million – one of Asia’s premier full-service airlines, it was an acknowledgement that times really have changed and the old way of doing things simply must be confined to the pages of aviation history.

Goh has set up a dedicated transformation office with seven executives to conduct a review aimed at reshaping the business so that it “continues to deliver high-quality products and services, though with a significantly improved cost base and higher levels of efficiency”.

We do expect that some jobs might become irrelevant. GOH CHOON PHONG

It will report directly to Goh and will likely start by re-examining what worked for SIA in the past and why it isn’t working now.

Goh says the Transformation Office’s wide-ranging review will encompass network and fleet, product and service, and organisational structure and processes, to better position the Group for long-term sustainable growth across its portfolio of full-service and
budget airline operations.

“The review is aimed at identifying new revenue-generation opportunities and reshaping the business into one that continues to deliver high-quality products and services, though with a significantly improved cost base and higher levels of efficiency.”

If there is a question many analysts are asking, it is probably: why wasn’t this being done several years ago? The truth is that it was. Since he took charge in early 2011, Goh has already transformed SIA from a group that essentially consisted of the main international carrier itself and a full-service regional, SilkAir, to a stable of airlines that now includes low-cost long-haul Scoot and budget Tiger Airways, which for a traditional SIA was in itself a major shift.

What has probably been lacking is a major onslaught on costs and business transformation to meet new challenges in the marketplace.

As consultants CAPA put it, the Singapore Airlines Group is now entering a new phase in its evolution as it attempts to fully implement the numerous strategic initiatives embarked on over the last six years and identify further areas for potential change.

“The establishment of a transformation office does not necessarily represent a new direction, but is potentially the acceleration of an evolution that began when Goh… took over.”

It points out that profits have consistently been well below historical levels over the past six years and are now, again, on the downslope.

“The short term outlook is relatively bleak as market conditions are challenging and competition is intense. However, there is hope of a brighter long term outlook once SIA completes its attempted transformation. SIA has already adapted to structural changes in the marketplace with several major strategic initiatives. It now must successfully complete the far more difficult task of fully pursuing the synergies and opportunities generated from the ongoing initiatives, and identify new areas of change and cost reductions.”

The truth is that SIA is suffering the same fate as many of the region’s legacy carriers, such as Hong Kong’s Cathay Pacific Airways which earlier this year reported a loss of $99 million, its first annual deficit in eight years. It too has announced a major transformation program which already includes the elimination of 600 jobs, many of them at management level. In SIA’s case, Goh has said that while jobs will not be cut, positions may become redundant as work is redesigned.

“The transformation is not just about how we can cut costs but also how we can generate more revenue (and) improve our processes more efficiently, so that we can be a lot more competitive, going forward,” he added.

Being competitive, with the proper cost base, ticket pricing and returns on investment will be key. It doesn’t take a genius to work out what the challenges are and where they come from… and have come from for some years now.

As with Cathay and other Asian carriers, the growing influence of the Gulf operators – Emirates Airline, Etihad Airways and Qatar Airways – has brought a quantum shift in the aviation landscape. Not only have they thrown unprecedented capacity into Asia they have been syphoning off traffic from the mainstay routes that provided the region’s airlines with their long-haul bread-and-butter income.

Thousands of travellers who once flew from Australasia to Europe along the traditional Kangaroo Route to Europe now make their way there through Dubai, Abu Dhabi and Doha.

Then there is the rise of the Chinese majors – Air China, China Southern and China Eastern, not forgetting Hainan Airlines – which is having a similar impact. Traffic which flew into China via Hong Kong and Singapore is now going non-stop, overflying the once dominant hubs.

Then there are the budget players, the low cost carriers (LCCs) – more than 50 now operating in Asia – that have done more than make an annoying dent in the legacy airline business. These LCCs now dominate domestic traffic in countries across the region, from Thailand to the Philippines, Malaysia to Korea.

As Singapore has no domestic traffic, its LCC opposition, which now carry more than 25% of all passengers travelling through Changi Airport, represents a major and growing challenge.

The argument that budgeteers create new traffic by attracting fresh customers with their low fares is correct to a certain extent. But the fact is that across the region LCCs are competing head-to-head with full-service operators on all of their major air routes.

There may be worse to come. The long-haul, low-cost players are flexing their muscles. Malaysia’s AirAsia X is set to return to Europe, probably later this year, after it dropped flights to London and Paris in 2012 in the face of economic issues. The Philippines Cebu Pacific Air (now that country’s biggest carrier) is likely to join the fray at some stage. Norwegian Air, which already serves Bangkok from Oslo, Stockholm and Copenhagen, will launch flights from London to Singapore in October, using state-of-the-art Boeing B787 Dreamliners. The British Airways-led International Airline Group’s (IAG) new long-haul budget operation Level has announced flights to the U.S. but it is difficult to imagine it won’t turn its attention to Asia, the world’s fastest growing aviation market, at some stage.

While SIA’s own Scoot plans European flights, these are still challenges the parent carrier can’t ignore.

In the face of this, however, the latest SIA financial results must be seen in perspective. The Singapore flagship is hardly any different from most of its mainline competitors. Whoever you speak to they all say the same thing: we are carrying more passengers but making less money because yields are down, under pressure from low fares and the competitive environment.

In its latest quarter, passenger yield – the money earned by flying a person for one kilometer – declined 4.7 per cent to 10.1 Singapore cents (A9.79 cents). Total revenue fell 2.7 per cent, fuelled by the passenger yield erosion. In fact, the average real price of airfares globally has dropped some 40% over the past decade.

The 2016 group result was also hit by a payout of $128 million attributable to SIA Cargo, fined for “competition-related matters”, essentially collusion with other airlines on freight charges.

Indeed, one of the first measures announced following the recent losses was that SIA’s wholly-owned subsidiary, SIA Cargo (it currently operates as a stand-alone unit), is to be re-integrated as a division within SIA, a move intended to improve efficiency through greater synergy with the wider group. The re-integration is expected to be completed in the first half of 2018, when SIA Cargo will become the ‘Cargo Division’ of SIA. It will be business as usual from a customer perspective, as there will be no change to SIA Cargo’s operations. Seven Boeing B747-400 Freighter aircraft will continue to be operated, while the Cargo Division will continue to manage the passenger aircraft ‘bellyhold’ space for SIA.

It should also be noted that while SIA itself suffered a loss in the first quarter of this year, Budget Aviation Holdings, which operates budget Scoot and Tiger, actually reported a profit of $21.3 million at the operating level. Considering that SIA took charge of Tiger in 2015 when it was, to say the least, in some financial difficulty, that shows some promise. Indeed, some analysts believe that Scoot and Tiger may be used to take over some of SIA’s own regional routes in future, making them far more cost effective, much in the way Qantas has used Jetstar to take over its marginal or loss-making routes.

One thing Goh has made clear is that whatever happens, there will be no relaxation in the airline’s determination to maintain its high service standards. He says the review will not impact customers, who can be assured they will always be at the centre of whatever the airline does.

Part of that is ensuring a modern fleet and Goh has already moved to boost borrowings to fund a record $18.5 billion order for 39 new long-range jets from Boeing – 20 B777-9s and 19 B787-10s, plus six options for each aircraft type – placed in February. At the end of March SIA had an operating fleet of 106 passenger aircraft (53 B777s, 23 A330-300s, 19 A380-800s and 11 A350-900s), with an average age of 7 years and 8 months. During the first three months of this year it added two A350-900s. Three A330-300s and one B777-300 were removed from operation in preparation for lease return. It expects to take delivery of ten A350-900s and three A380-800s during the 2017-18 financial year. All the aircraft, apart from one of the A380-800s, are planned to enter into service by the end of March next year. Two A330-300s, four A380-800s, two 777-200s and one 777-200ER are expected to be removed from the operating fleet for lease return or for sale. The total operating fleet is expected to grow to 109 aircraft by the end of the financial year, with capacity for FY2017-18 projected to increase only marginally by 0.4 per cent. The B777-9s are due for delivery from FY2021-22 and the B787-10s for delivery from FY2020-21.

Elsewhere in the group, SilkAir operates 30 aircraft (10 A320s, three A319s and 17 B737-800s). It will take four B737 MAX 8s during the coming twelve months, bringing the operating fleet to 34 aircraft by the end of March 2018. Budget Aviation Holdings has an operating fleet of 35 aircraft – 12 B787s (six B787-8s and six B787-9s), 21 A320s and 2 A319s. During the coming year four additional B787s will be delivered and three A320s that were subleased to IndiGo will be returned to the operating fleet. In addition, two A320s will be removed from service for lease return. This will bring the operating fleet to 40 aircraft (16 B787s, 22 A320s and 2 A319s). With capacity growth at the budget operation growing by up to 15% it is a clear indication that most of the SIA groups growth in the near future will at the LCC level.

In terms of route development it has also become clear there will be no dramatic cut backs, at least for the time being. SIA itself will start serving Stockholm via Moscow five times weekly with A350-900s from the end of May this year, increasing the number of destinations in the network to 62 across 32 countries, including Singapore. Frequencies are actually being increased to Australia, Thailand, Vietnam and Rome. SilkAir began a new thrice-weekly service to Colombo in April, bringing its network to 53 destinations in 15 countries. Complementing SIA’s own daily flights, the two airlines together operate 10 flights a week to the Sri Lankan capital. Scoot and Tiger will lift their network to 61 destinations across 17 countries with the commencement of a new (Scoot) service to Athens from June.

Taking into account the announced new routes, the group will fly to 133 destinations across 37 countries, including Singapore. How this will be impacted by the review program, which is looking at the network and the performance of individual routes, remains to be seen.

In its outlook, SIA says intense competition arising from excess capacity in major markets, alongside geopolitical and economic uncertainty, continue to exert pressure on yields. While the industry benefitted from a lower fuel cost environment over the past financial year it also pointed out the fuel price situation is expected to remain volatile in the near term. But it adds that the addition of more modern, fuel-efficient aircraft with new-generation cabin products is enabling the group to expand its network and enhance its competitiveness in both the full-service and low-cost market segments.

“With Scoot and Tiger Airways preparing to operate under the single Scoot brand, more synergies are expected within the budget segment, both operationally and strategically. The many strategic initiatives implemented to address structural changes
in the industry are now showing positive results. Building on this foundation, the next
phase of the SIA Group’s transformation has been launched.”

While many legacy carriers across the region are similarly suffering, there are some exceptions. Japan’s All Nippon Airways, for example, continues to churn out huge profits. Industry insiders say it would benefit SIA to take a serious look at the measures others have taken. A prime example is Qantas Airways, which in 2014 announced a record loss of some $2.6 billion (admittedly much of which involved the write-down of values on older aircraft). Nevertheless, its three-year transformation program, which officially ends this coming July, has seen $3 billion cut from the bottom line and has already seen chief executive Alan Joyce announce a record profit of $1.2 billion last year.

Besides drastic cost-cutting measures, Qantas’ program included major changes to the corporate structure and processes, including consolidation of support services for cost efficiency and improved productivity, and the split between international and domestic operations for more autonomy and accountability, as well as focus on using information technology and so-called “Big Data” to improve processes across the entire business.

Now in what Joyce calls “a sweet spot”, he also makes it clear that transformation programs aren’t really set periods of time. They are actually never-ending and must continue on in order to ensure an airline adjusts to the constant changes in the market place. It is a message SIA would be well advised to heed.

“They are actually never-ending and must continue.”