SingAir Still Struggling With Costs, Traffic Changes

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Following the declining demand for long distance travel due to the global economic slowdown, Singapore Airlines (NASDAQOTH:SINGY) is asking its senior pilots to take unpaid leaves. About ten months ago, the company made a similar offer to its junior first officers. SingAir employs 2,350 captains and first officers. During their leaves, the pilots are encouraged to seek temporary employment with other carriers. SingAir clearly has more pilots than it needs. But the company executives believe that this is a temporary phenomenon so there might not be any pilot layoffs.  

The performance of Singapore Airlines and Asia’s other premium carriers is in stark contrast to the performance of budget carriers such as Indonesia’s privately held Lion Air or Malaysia’s AirAsia Bhd, who are expanding at a phenomenal pace, both have ordered at least 200 aircraft with Boeing (NYSE:BA) and Airbus (NASDAQOTH:EADSF) in 2012 and are taking their shopping spree forward in 2013 with hundreds of new orders. Lion Air is expected to place another order of 220 fuel efficient jets this year.  AirAsia, which has significant representation in iShares MSCI Malaysia Index ETF (AMEX:EWM), has so far ordered 475 aircrafts from Airbus.

The lackluster economic environment has caused a drop in business customers while the market for low cost carriers continues to remain robust and the premium airliners, such as SingAir or Cathay Pacific, are bearing the brunt of this fall in demand. Furthermore, SingAir has significant exposure to Europe as that is what it had built its business model on pre-financial crisis, while AirAsia and Lion Air mainly focus on the emerging markets of Malaysia, Indonesia, Japan, Vietnam, China and India.

With the booming market for low cost carriers, the demand for pilots is still very high. And SingAir has moved into the budget space with both SilkAir and the newest brand ScootAir, so I would expect to see a number of these pilots repurposed as these businesses expand.  Boeing expects the demand for pilots in the Asia Pacific region to increase by 185,600 by 2030. SingAir’s staff will not face any problems in finding new or temporary opportunities.

Industry analysts have identified that the worst might be over for SingAir and we will start witnessing a recovery from 2013. But, the realigning its routes with new traffic patterns will continue to take time so I wouldn’t expect a quick turnaround.  SingAir is expecting a rise in demand to rise and like every other Asian airline is moving to change over its fleet to meet that demand.  Last year it sold and retired the last of its 747’s  and has recently increased its initial order, signed in October last year, of 20 A350s by 25 additional aircrafts – 5 A380s and 20 A350-900s. This will take SingAir’s tally of A380s to 24 aircrafts as the company remains one of the biggest customers for A380.

Southeast Asian carriers are providing the bulk of the orders for new aircraft from both Boeing and Airbus.  The budget carriers like Lion Air and AirAsia have been ordering A320s from Airbus and 787 Dreamliners and 737s from Boeing.    Without the growth in Southeast Asia Boeing, in particular, would be in trouble especially with the grounding of the Dreamliner for who knows how long.  Once the FAA gets involved, no matter how important a company is politically, things usually grind to nearly a standstill.  If the Dreamliner is grounded for a long time I would not be surprised to see orders cancelled and shifted to Airbus.

For the first half of its fiscal year ending September 2012, SingAir’s profit fell by almost 30% to $138 million. The sharp fall has come on the back of a 54% drop in the quarterly profits due to poor performance from its travel and cargo units, again a symptom of high RPM’s needed to make its longer routes profitable. Although total half yearly revenues increased by 4% to $6.18 billion so did its expenses – by 4% to $6.06 billion – the lack of increase in margins underscoring this point. The parent company made the biggest contribution to earnings netting $137.9 million in operating profits in the first half followed by SingAir Engineering ($53.86 million) and SilkAir ($30.2 million). SingAir Cargo on the other hand recorded a huge operating loss of $80.8 million in the corresponding period. The group’s low cost subsidiary Scoot is still in its infancy and has a fleet of just four aircraft.

The airline industry’s profits are closely tied to jet fuel prices as it constitutes nearly 40% of the company’s total expenses. The good news for SingAir is that jet fuel prices fell in the seonc half of 2012 reaching a low of $2.94 per gallon in Dec-12 compared to $3.26 in Mar-12. Look to a 6 month lag in changes in jet fuel prices on how it will affect quarterly earnings due to hedging in the futures markets.  Jet fuel prices are seasonal; peaking at the end of the Q1.  Current prices are $3.24 per gallon.  Watch the Singapore Dollar price equivalent, however, to see how this will impact SingAir going forward.  Both jet fuel prices and the Singapore Dollar are rising versus the US Dollar right now so we may be looking at a replay of last spring.  But the USD’s fundamentals are poor and there is a fear coming out of Europe again, the long-term trend for the SGD is down and should be a net benefit in 2013 for Singaporean companies buying fuel locally.

SingAir has significant representation in the MSCI EAFE Equal Weight ETF (AMEX:EWEF) while Singapore’s equity markets are represented in the iShares MSCI Singapore ETF (AMEX:EWS). Both ETFs – EWEF and EWS – have been up by 17.16% and 6.82% respectively. While EWS focuses exclusively on Singapore, EWEF devotes 3.33% of its resources to the country while allocating 31% to Japanese firms.   Since I’m very bullish on the Nikkei for 2013 EWEF would make a better vehicle to get exposure to any upside surprise in SingAir’s performance in 2013.

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