By VEN SREENIVASAN
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IF ever there was a perfect storm for Singapore Airlines (SIA), this must be it.
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| Rough season: One critical problem for SIA is plummeting premium traffic |
Deteriorating operating conditions, falling loads, plunging premium traffic, overcapacity - and, lately, negative calls by leading investment houses.
Merrill Lynch has joined a growing chorus of analysts who note that SIA's traffic numbers have been 'far weaker than all of its major rivals', largely due to the company's reluctance to drop ticket prices aggressively.
'We think it (SIA) has tried to stick to its 'pre- mium price for a premium product' philosophy, while also trying to recover its high hedged fuel costs,' Merrill said in a report yesterday. 'Simply put, the market is highly price-sensitive and unwilling to pay for SIA's frills. Yields will still be sharply down due to the collapse of lucrative business class traffic (40 per cent of passenger revenue).'
This comes as the airline this week disclosed that its passenger load factors plunged to 69.4 per cent last month, from 80.8 per cent a year ago and down from 69.7 per cent in February.
This is below its breakeven points, which have recently been in the 70-75 per cent levels.
System-wide passenger carriage plunged a whopping 21.8 per cent, outpacing capacity cuts of 9 per cent.
On the cargo front, losses would have widened as load factor fell to 58.5 per cent, from 62.8 per cent a year ago.
SIA, one of Asia's biggest air freight operators, has seen its cargo load factors steadily slide in recent months. SIA Cargo, which lost about $113 million in the nine months to Dec 31, 2008, has put 25 of its 300 pilots on no-pay leave and grounded one of its 13 freighters
Overall load factor was 62.6 per cent, compared to 69.9 per cent a year ago, and just marginally up from 62.1 per cent in February.
In its report, Merrill said it expected SIA to post only its second ever quarterly pre-tax loss in the January-March quarter when it reports FY09 earnings on May 14 (the only other time it posted a quarterly loss was in June-September 2003, during the severe acute respiratory syndrome, or Sars, crisis). The research house added that a net loss was possible for the April-June quarter too.
'Although airlines have historically rebounded early in cyclical recoveries, we think it will be different this time,' analysts Paul Drewberry and Ying Ying Hou noted. 'Leisure demand is unlikely to recover until job security improves, while premium traffic needs a turnaround in the financial services sector.'
Merrill's FY10 net profit forecast of $713 million for the airline is about 30 per cent below market consensus.
One critical problem for SIA is plummeting premium traffic, which has traditionally accounted for 40 per cent of its income.
In its latest premium traffic monitor, released yesterday, the International Air Transport Association (Iata) noted that global premium traffic fell 21.1 per cent in February, following the 16.7 per cent decline in January, and a 13.3 per cent drop in December 2008.
The declines were sharpest in Asia, where bookings fell 27.3 per cent in February, after diving 23 per cent in January. March figures have not been released yet, but are expected to be even worse.
The deteriorating operating conditions forced Iata to recently hike its loss forecast for the global air transport industry to US$4.7 billion in 2009 - a sharp rise from the US$2.5 billion loss forecast made last December.
Faced with a perfect storm, SIA has announced capacity cuts of 11 per cent and is grounding 17 of its over 100 aircraft for the financial year ending March 31, 2010. It has also implemented a shorter workmonth for management, forced employees - especially pilots and cabin crew - to take extended unpaid leave, and cut wages. Many industry insiders expect job cuts to follow if the current situation does not improve.
The stock pulled back to $10.88 yesterday, after rising to a high of $11.46 last week on the back of the recent market upsurge.
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