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Is SIA Still High Flying?
Tradeable, Tradeable Ideas | 15 May 2014
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By: Lim Si Jie
Articles (169) Profile
  1. SIA announced disappointing fourth quarter results while citing a challenging outlook ahead.
  2. SIA is expanding into a competitive Indian market via its investment in TATA SIA Airlines Ltd.
  3. SIA is shifting its strategy to add premium economy section in a bid to woo passengers with lower fares without compromising on service.

Singapore Airlines Fourth Quarter Results

SIA posted a 60 percent drop in its fourth quarter net profit amid competition from aggressive competitors forcing SIA to discount its fares. It was the second consecutive quarter of declining net profit for SIA.

The company would have posted a net loss for the most recent quarter if not for exceptional gains and tax credits during the period. In the same announcement, SIA also reported its third straight year of falling passenger yields – revenue per passenger for every kilometer flown. Passenger yield is an important measure of a carrier’s revenue and pricing power within the industry.

It has certainly not helped SIA given that there are still economic uncertainties in its key markets. The challenging outlook ahead of SIA does not bode well for investors in the long run.

Singapore Airlines India JV Aims To Launch In September

TATA SIA Airlines Ltd, which is 49 percent owned by SIA and 51 percent owned by TATA Group is planning to operate 87 flights every week during its initial year of operations.

Will SIA's latest JV with TATA into India bear fruit? As Kingfisher can probably attest, maybe not.
Will SIA’s latest JV with TATA into India bear fruit? As Kingfisher can probably attest, maybe not.

TATA SIA will initially be operating domestic flights but will eventually expand to international full-service flights. India has a rule that forbids carriers with less than five years of operations and 20 aircraft to operate international flights. However, India is in the midst of scrapping that rule.

Although entering into new markets might bring about an increase in revenue and market share, it is important to note that India’s aviation industry does present a tougher operating environment as compared to most other markets.

AirAsia, which is also backed by TATA Group, will also launched its budget airlines in India. India currently has one state-owned airline, Air India and six major private airline groups – IndiGo, Jet Airways, SpiceJet and GoAir, including the two new joint ventures, SIA-Tata and AirAsia India.

India already has a saturated aviation industry where most of the airlines are operating at a loss. I wonder if such a move by SIA could eventually become profit making. I have my reasonable doubts about it.

Singapore Airlines to Add Premium-Economy Section

SIA has always positioned itself as a full-service airline that provides its passengers with outstanding service. However, with the persistent weakness in demand for full-service flights due to the hampered world economy, SIA is looking to sell their luxurious service at a more affordable price.

SIA's new premium economy cabin to attract businesses which are cutting down on travelling expenses. Right move? Not too sure either...
SIA’s new premium economy cabin to attract businesses which are cutting down on travelling expenses. Right move? Not too sure either…

Singapore Airlines’ passenger yield, a key measure, has fallen for three consecutive years. In the aftermath of the global financial downturn, many companies have cut travel budgets and restricted executives to no higher class than premium economy.

SIA plans to roll out the premium economy service starting next year. SIA will be trying to catch some of its rivals that have already launched premium-economy cabins ahead of SIA.

This may sound like a plan waiting to succeed and bring in more business for SIA. But there is one problem. The real question that investors would want to know is whether premium economy is going to cannibalize SIA’s business-class cabin revenue.

SIA did offer premium economy on one route for several years, and the fear of cannibalization is likely to be the reason they didn’t expand it to other routes.

#Bearish In The Long Run

Despite slowly recovering from the aftermath of the 2008 financial crisis, the world economy would probably still be on the slow road to recovery in the nest few years. The service that SIA provides is highly price elastic and given the circumstances, I am rather bearish about SIA’s prospects in the long run.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Singapore Airlines  8.940 -- --   
Business: Co provides air transportation services to destinations spanning a network spread over 6 continents. [FY19 Turnover] SIA (80%), Budget Aviation (10.5%), SilkAir (6.2%), SIAEC (3.1%), others (0.2%).

Insight: May-19, FY19 revenue edged up 3.3% to $16.3b. Pass... Read More

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