By VEN SREENIVASAN
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THE conventional wisdom, until now, has been that premium carriers such as Singapore Airlines (SIA) will be able to ride out the current economic slowdown better than their lesser rivals.
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Earlier this week, SIA announced that its passenger numbers slid 6.1 per cent last month to 1.54 million - its biggest slump in traffic since August 2003, when traffic declined by 7.6 per cent in the wake of the Severe Acute Respiratory Syndrome (Sars). At 78.1 per cent, its passenger load factor is still above its breakeven level of some 72 per cent.
Cargo remains a headache for the carrier - which is the world's largest player in cargo - with the latest monthly load factor of 60.3 per cent still significantly below its 63 per cent break-even level.
No breakdown was given, but what would have been interesting is SIA's premium load numbers.
Premium seat revenue accounts for about 40 per cent of SIA's total top line. And conventional wisdom had it that this segment is relatively resilient to the fluctuations in economic conditions.
But the magnitude and ferocity with which the global financial crisis has hit the global economy has turned conventional wisdom on its head.
According to the International Air Transport Association (Iata), premium traffic sank 8 per cent in September - a third straight monthly fall. One can make an educated guess, given the state of global financial markets, that things have become worse over the past two months.
And there are no clear skies to be seen yet.
Last week, Iata projected full-year industry loss of US$5 billion in 2008, and another US$2.5 billion of red ink next year. Iata also noted that weakness in travel markets lasted three years in previous recessions.
'We do not expect a return to traffic growth above 4 per cent until 2011,' it noted. 'Economic forecasts imply that airline traffic will remain below the previous trend over the medium term, with passenger travel forecast to be 9 per cent lower by 2016 than pre-crisis industry forecasts.'
In short, don't expect a recovery in air travel demand until 2011. And when it does happen, the growth will be significantly muted.
The challenges showed up in SIA's first-half earnings when it reported a net profit slide of almost 27 per cent to $682 million, from $931.9 million for the April-September 2007 period.
Iata expects Asia-Pacific carriers to double their losses from US$500 million in 2008 to US$1.1 billion in 2009.
While few expect SIA to be among the loss-making carriers, the real question is how badly will it be hit by the financial firestorm?
As JPMorgan noted, SIA's earnings have been less volatile than its peers due to its more flexible cost structure and earnings contributions from subsidiaries Singapore Airport Terminal Services (SATS) and SIA Engineering.
'Net profit CAGR (compounded annual growth rate ) has been 8 per cent for the past 22 years, and SIA has never incurred a loss,' the report noted, adding that its average 15-year ROE (return on equity) was 11 per cent.
However, other investment houses, including Citi, take a more bearish view, especially on its cargo business
'As the world's 4th-largest international air-freight carrier, a lengthy period of weak trade suggests growing overcapacity concerns for SIA Cargo, which contributed 21 per cent of group revenues but just 6 per cent of operating profit in FY Mar 08,' Citi said in its Dec 15 report. It added that the prospect of cargo price-fixing allegations by New Zealand regulators adds to SIA's concerns.
Indeed, the challenges SIA faces are serious.
But the company has the wherewithal to ride the storm.
It has already committed itself to reducing capacity even if it means (in the words of CEO Chew Choon Seng) 'parking planes in the desert'. No precise numbers were offered, but most analysts reckon the reduction has to be at least 5 per cent.
SIA also has unique strengths in an industry better known for its myriad weaknesses and excesses.
With over $5 billion in cash, free cash flow of some $3 billion and no debt, it has a fearsome financial arsenal which gives it options which its rivals can only dream about.
The company also has a cost structure which is one of the most flexible for any premium legacy carrier. Add to this a savvy management team which has been through the figurative baptism of fire from the lessons of the 2003 Sars pandemic-induced crisis.
Yes, the challenges are real and serious. But so are the opportunities that come from being a premier player, hubbed at the centre of one the most vibrant aviation markets in the world.
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