Singapore Air loses as flyers swap champagne for cheap seats

singapore-airlinesSINGAPORE: Singapore Airlines Ltd, first in the world to put a double bed, mattress and duvet on a commercial plane, posted a surprise loss at its marquee brand for the first time in three years. The stock plunged the most in almost six years.

Intense competition from Emirates, Qatar Airways and Etihad that offer services such as a personal butler and shower on board aircraft has crushed profits at Singapore Air and its Hong Kong-based rival Cathay Pacific Airways Ltd as the two Asian airlines conduct a strategic review of their business. To fight back, Singapore Air chief executive officer Goh Choon Phong is boosting borrowings to fund a record US$53 billion (RM 229 billion) order for new planes.

“Evidently, the pressure of the Middle Eastern carriers and the lack of a domestic market is impacting, similar to Cathay,” Joshua Crabb, head of Asian equities at a unit of Old Mutual Plc, said from Hong Kong. Crabb said he doesn’t own Singapore Air stock.

Singapore Air group — which includes brand Singapore Air, a regional airline and two budget carriers — announced a surprise net loss of S$138.3 million (RM430 million) in the three months ended March, compared with a median forecast for a profit for S$54.3 million in a Bloomberg survey of six analysts. The company, which took a previously-announced provision of S$132 million in the quarter relating to its cargo unit, said Friday it was re-integrating the business into the main airline.

Brand Singapore Air had an operating loss of S$41 million in the quarter while Budget Aviation Holdings – which operates the two low-fare carriers Scoot and Tiger — had a profit of S$22 million at the operating level, according to a statement the carrier issued to the Singapore stock exchange on Thursday after the market closed for trading. The loss at the main airline is the first since the fourth quarter of fiscal year 2014, according to company filings.

Shares of Singapore Air fell as much as 6.7% on Friday, the biggest intraday drop since August 2011, in the city-state to S$10.04.

CEO Goh said bold and potentially radical actions were needed to tackle costs. The company said it had set up a “dedicated transformation office” to conduct a wide-ranging review, encompassing network and fleet, product and service, and organisational structure and processes “to better position the group for long-term sustainable growth across its portfolio of full-service and budget airline operations”.

“We will leave no stone unturned,” Goh said at a post-results briefing, where he fielded questions predominantly on the review.

“Some changes may be radical, but if needed, we will do it.” Singapore Air expects to provide an update on the plan within six months.

Cathay has embarked on a three-year revamp to cut costs after reporting in March its first loss in eight years. Cathay has set a target to save 30% in employee costs at its Hong Kong head office as part of the biggest revamp in two decades.

Passenger yield at Singapore Air, or the money earned from carrying a passenger for one kilometre, fell to 10.1 Singapore cents, hovering around the lowest level in six years.

Singapore Air’s “strategy of aggressive price discounting is not sustainable and the carrier needs to rationalise unprofitable routes, cut capacity or frequency to improve yields and profits”, UOB Kay Hian analysts K Ajith and Sophie Leong said in a note today. They maintained their hold rating on the stock.

Singapore Air is the only Asian airline to fly the Concorde and the first in the world to fly the superjumbo A380. When the aircraft entered service in 2007, the plane featured suites created by French luxury yacht designer Jean-Jacques Coste and cushions from fashion house Givenchy. In 2015, Singapore Air started offering champagne to passengers who flew its premium economy seats.

“Business travel demand has not been very strong and this impacts Singapore Air parent airline, which derives around 45% of its passenger revenue from the first and business class cabin,” said Corrine Png, Singapore-based CEO of Crucial Perspective, a research firm focused on Asian transport equities. Long-haul routes are facing overcapacity and there’s pressure on yields, she said.

Singapore Air also announced a total dividend for the fiscal year of 20 Singapore cents per share, compared with 45 Singapore cents last year.