May 9, 2012 2:57 pm

Competition weighs on Singapore Airlines

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Singapore Airlines became the latest flag carrier to signal poor prospects for the year after warning that intense competition, high fuel prices and an “anaemic” economic outlook would hit operating profit.

The warning came as the company, which has faced increasing competition from Middle Eastern carriers and low budget Asian airlines, reported a 77 per cent fall in operating profit to S$286m for the full year to the end of March.

It said jet fuel prices had spiked year-on-year by an average of 32 per cent to US$133 per barrel. That translated into a 29 per cent increase in fuel costs before hedging, which contributed to a 10 per cent rise in group expenditure.

In the fourth quarter alone, what Singapore Airlines described as “escalation of events in the Middle East” pushed the cost of fuel excluding hedging up 15 per cent.

Full-year revenue grew 2 per cent to S$14.8bn.

Rival Cathay Pacific in March predicted that this year would be worse than 2011 as it reported a 61 per cent drop in full-year profit. Lufthansa this month said it would cut 3,500 jobs after it reported a worse-than-expected operating loss of €381m in the first quarter.

Both Singapore Airlines and Cathay revealed that passenger yield – a measure of how well an airline fills aircraft – had fallen.

Singapore Airlines saw a 1.1 percentage-point drop to 77.4 per cent, just above an average recorded for December for the region of 76 per cent by the International Air Transport Association.

Derrick Heng, analyst at Phillip Securities Research, said: “Based on the current economic environment people could trade down and given that they [the airline] are quite exposed to European and premium routes, you wouldn’t expect them to do that well there.”

Singapore Airlines is next month set to launch a low-cost, long-haul subsidiary called Scoot, already targeting budget-conscious travellers in an advertising campaign with the slogan “Get outta here!”.

Mr Heng said Scoot was unlikely to be “a big game-changer” in the short term, but was “a good move out of their comfort zone”.

Singapore Airlines said fare promotions prompted by “intense competition” were expected to depress passenger yields, especially in Europe and the US, where demand continued to be hit by “the anaemic economic outlook”.

“The recovery of air freight demand will be gradual, possibly only in the second half of the year,” the airline added. The shares closed unchanged at $10.59.

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