WITH GLOBAL ECONOMIC growth expected to level off and inflation a mounting concern,  Singapore Airlines  appears to be facing potential headwinds that could disrupt its flight to recovery in the coming quarters.
The full-service carrier reported a disappointing set of third quarter results after the market closed on Jan 28, falling short of the average profit estimates of analysts tracked by Bloomberg. For the three months ending Dec 31, SIA posted a 29% y-o-y fall in net income to $288.3 million, after it booked charges of as much as $199 million relating to antitrust cargo fines.
The full-service carrier reported a disappointing set of third quarter results after the market closed on Jan 28, falling short of the average profit estimates of analysts tracked by Bloomberg. For the three months ending Dec 31, SIA posted a 29% y-o-y fall in net income to $288.3 million, after it booked charges of as much as $199 million relating to antitrust cargo fines.
While the carrier accepted the plea offer made by the United States’ Justice Department in November, it is currently appealing fines imposed by the European Commission and the South Korean Fair Trade Commission and plans to contest the charges, it said in today’s statement to the Singapore Exchange.
 
Spending on fuel -- SIA’s biggest expense -- also rose 8% to $1.11 billion in the same period. Earlier on Jan 21, the airline had announced an increase in fuel surcharges for tickets issued from Jan 27.
 
While the carrier has so far been able to offset higher costs by increasing the prices of tickets, the adjustments “will offer only partial relief of higher operating costs arising from recent increases in the price of jet fuel,” SIA said, suggesting that yields could face future pressure in the low growth and high inflation environment expected going forward. Passenger yield, a measure of the average price a traveller pays to fly one kilometre, was 12.1 cents in the quarter compared with 10.5 cents a year earlier.
 
DEMAND SLOWING, COMPETITION RISING
Already, there are signs that demand for air travel is slowing. During the October-December quarter, the number of passengers flown dipped 0.9% to 4,372 from 4,411 in the previous corresponding quarter, resulting in a 2.7 percentage point slip in load factors to 79.7%.
 
In addition, CEO Goh Choon Phong, who took over from Chew Choon Seng on Jan 1, will face rising competition from budget carriers.  Tiger Airways, parted-owned by SIA, today reported an improved load factor of 88% y-o-y for the quarter and plans to increase its capacity by 40% and grow its fleet to 35 aircraft by next March from 25 currently. Meanwhile,  Qantas Airways’ Jetstar, which operates a hub in Singapore, also plans to boost its capacity in Asia by 30% this year.
 
SIA also faces stronger competition from other full-service carriers in the region.  Cathay Pacific, one of its fiercest rivals, is carrying more passengers and the Hong Kong-based airline will be launching new business-class cabins in an attempt to lure more executive travellers away from SIA’s targeted consumer base.
 
Indeed, Asia Pacific’s full-service airlines recorded a strong rebound in traffic demand last year, helped by robust economic growth in Asia and an overall improvement in global economic conditions, the Center of Asia Pacific Aviation reported. During the year, the region’s carriers flew 185 million passengers, up 70% from 2002 levels.
 
Then, there is the rise of full-service carriers from beyond Asia. Dubai-based  Emirates Airlines, for instance, is building up a formidable fleet of aircraft with its order of 90 Airbus A380s. In comparison, SIA, with an operating fleet comprising 109 passenger aircraft, took delivery of two Airbus A330-300s and reinstated one Boeing 747-400 and one Boeing 777 during the quarter, as additional capacity was added to its Osaka, Seoul and Houston routes.
 
While SIA is aggressively fighting back, it concedes that growth is likely to be challenging in the months ahead. “As airlines including SIA continue to inject capacity, advance passenger bookings for the final quarter of the 2010-11 financial year are levelling off,” the airline cautions in the statement.
 
Looks like new CEO Goh will have his work cut out for him in the months ahead.