Published June 9, 2009

The industry sky darkens - but SIA has a Plan B

Global aviation losses may hit US$9b; SIA to reconfigure planes, encourage upgrades to premium seats

By VEN SREENIVASAN
IN KUALA LUMPUR

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THE global commercial aviation industry will lose US$9 billion this year and carriers like Singapore Airlines (SIA) have already started tweaking tactics to weather the storm.

The revised forecast for industry losses by the International Air Transport Association (Iata) is double the agency's previous financial forecast of US$4.7 billion, made in March.

Iata broke the news at its 65th Annual General Meeting and World Air Transport Summit here in Kuala Lumpur yesterday,

Singapore Airlines is moving quickly to adjust to the changing skyscape. It is looking at cutting down on its premium seats - for which it will have to reconfigure aircraft - while also offering sweeteners for seat upgrades.

The airline's chief executive officer Chew Choon Seng said some of the measures were taking effect, although capacity cuts would take time.

'In the longer term, we are still interested in any industry consolidation, and in any investment opportunity in China, India or any growth market. We are watching developments in China with interest, but at this present moment, we are preoccupied in managing our business.' - SIA chief executive Chew Choon Seng

'We are fine-tuning, but the lead time and the investment that is required to reconfigure the airplanes is a long time,' he said.

SIA gets about 40 per cent of its revenue from premium seats, but this segment has been badly hit after last October as companies slash their business travel budgets. SIA has cut back its all-business class daily services to Los Angeles and Newark in the face of falling loads.

Mr Chew said that the airline was also encouraging customers to use their loyalty points to upgrade to premium seats. 'We have been rolling out programmes for people with economy class tickets but with a Krisflyer mileage bank to upgrade to the front cabin at lower rates,' he said. 'By and large, the market has been responding to our pricing initiatives.'

With overall traffic demand sharply down, SIA has committed itself to cutting 11 per cent capacity systemwide, and has also asked its pilots and cabin crew to take several weeks of no-pay leave for the year.

The outlook for the industry continues to be gloomy. Iata - which represents 230 airlines accounting for 93 per cent of global scheduled traffic - revised its loss estimate for 2008 to US$10.4 billion, from the previous estimate of US$8.5 billion.

'There is no modern precedent for today's economic meltdown,' said Iata's CEO and director-general Giovanni Bisignani, addressing over 500 airline CEOs and leading industry players. 'The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced.'

After Sept 11, revenues fell by 7 per cent. It took three years to recover lost ground, even on the back of a strong economy.

Globally, revenues have dropped by some 15 per cent, or US$80 billion, to US$448 billion.

Asia-Pacific carriers will post the largest losses at US$3.3 billion as Japan - the region's largest market - remains in deep recession, while growth markets of China and India undergo major consolidations. Still, this year's numbers for the regional carriers will be an improvement on the US$3.9 billion that they lost in 2008.

Air cargo demand is expected to decline by 17 per cent this year as airlines carry 33.3 million tonnes of freight, compared to 40.1 million tonnes in 2008.

Passenger demand is expected to contract by 8 per cent to 2.06 billion travellers compared to 2.24 billion in 2008.

The revenue impact of falling demand will be further exaggerated by large falls in yields - 11 per cent for cargo and 7 per cent for passengers.

Iata warned that regional intercontinental hubs - including Singapore - are vulnerable to recessionary impact in both European and Asian source markets.

On a slightly positive note, the industry fuel bill is forecast to decline by US$59 billion to US$106 billion in 2009.

But Mr Bisignani remains sober in his assessment of the near-term future.

'Optimists see growth by the end of the year, but pessimists view this as a mirage and expect an L-shaped recovery,' Mr Bisignani said. 'I am a realist. I don't see facts to support optimism.'

On the other hand, when Mr Chew was asked whether there was a recovery in sight, he said: 'We have business cycle ups and downs. Granted, in this particular instance, the drop in scale and pace is more dramatic than what we have faced (in many years). However, it's not a question of whether there will be a recovery, but when, and at what rate.'

One of the biggest challenges facing the industry is huge capacity overhang amid falling demand and yield.

Some 4,000 new planes will enter service in the next three years while global load factors are down 3 per cent from a year earlier.

Mr Bisignani urged governments to drop archaic limitations on ownership which prevent broader consolidation that could stimulate traffic.

'The forces of deglobalisation are gathering strength. World trade is already suffering with a 15 per cent downturn,' he said. 'Protectionism is the enemy of global prosperity . . . we must fight hard to keep the world trading.'

On this count, Mr Chew was on the same page. Asked if SIA was still in talks with China Eastern, he said: 'In the longer term, we are still interested in any industry consolidation, and in any investment opportunity in China, India or any growth market. With regard to developments in China, we are watching with interest, but at this present moment, we are preoccupied in managing our business.'