SINGAPORE (Nov 11): Under CEO Goh Choon Phong, Singapore Airlines has embarked on — and is nearing the end of — a three-year digital transformation journey that has left “no stone unturned”. There are some promising ventures on the horizon, but as the company’s most recent results have shown, its core business is still the main revenue earner.
On Nov 5, the airline reported that earnings for 2Q ended Sept 30 surged 70% y-o-y to $94.5 million on the back of a 5.3% y-o-y growth in revenue to $768.5 million. SIA plans to pay an interim dividend of eight cents a share, the same as in the preceding period. The growth in revenue and earnings was largely driven by the better performance of its associates and joint ventures.
During the quarter, revenue from passengers drove revenue growth, with load factor improving a record 1% in 1HFY2020 and 0.7% in 2QFY2019/20. Load factor at subsidiaries SilkAir and Scoot improved as well, up 2.8% and 0.3% y-o-y respectively.
However, this did not translate into higher operating profits, as SIA’s expenditure offset the higher revenue. SilkAir’s higher revenue was also offset by higher expenditure, partly contributed by the grounding of Boeing 737 Max 8 aircraft. Scoot saw its revenue increases wiped out by higher costs from fuel and costs from the route transfers from SilkAir. SIA’s cargo revenue, meanwhile, dropped as a result of the overall downturn caused by the US-China trade war.
KrisFlyer lifts top line
Interestingly, SIA was able to grow revenue from its non-airline businesses. For instance, it used to outsource KrisShop, which sells SIA-branded souvenirs as well as items such as headphones and wallets from other brands. Last year, SIA took back majority control of KrisShop and revenue has reached $34.4 million for 1HFY2020.
“We no longer look at KrisShop as a channel just to sell commodities or goods aboard the plane. We are developing KrisShop into an omnichannel e-commerce retail [platform], which means we no longer limit sales to just on board the plane,” says Goh.
He expects revenue from KrisShop to continue growing and by the end of the current financial year, to reach more than $60 million, which will be 30% higher than the preceding year.
KrisShop is one of the new revenue streams that are leveraging SIA’s brand, data and competencies. Other revenue streams include pilot training centres — it operates the Airbus Asia Training Centre (AATC) and CAE Flight Training, a joint venture with CAE that was set up in July last year that focuses on Boeing planes.
What is more interesting is the revenue from its KrisFlyer loyalty programme, which SIA broke out for the first time. SIA collects revenue from the sale of “miles” to about 200 distributors, especially credit card issuers, who entice their customers to spend more with the cards. These customers can either accumulate their points or convert them into KrisFlyer miles, which can then be used to redeem air tickets with SIA.
In the last financial year, SIA generated more than $700 million in revenue from the sale of KrisFlyer miles to these partners — an increase of 18% over the preceding year. For 1HFY2019/20, SIA has seen a similar rate of growth. “What is important to note is that as part of our transformation effort, we have stepped up efforts to increase that revenue,” says Goh.
KrisFlyer is posting similar percentage increases in 1HFY2019/20, according to Goh. KrisFlyer membership numbers are going up, with over four million members in FY2018/19. Goh also alluded to the quality of KrisFlyer members, with revenue generated per member rivalling those of other airlines.
SIA also intends to increase its revenue from KrisPay and get more merchants on board the programme. KrisPay is a digital wallet based on blockchain technology that converts KrisFlyer miles for purchases by members with participating merchants.
Fleet renewal
The diversification of revenue streams via the KrisFlyer and KrisShop businesses is in addition to SIA’s ongoing efforts to strengthen its premium position. To achieve this, it is sticking to its tried-and-tested formula of constantly renewing its fleet.
The average age of the fleet is currently six years and two months. The group is set to take on an additional 159 aircraft in the years ahead. By end of this current financial year, SIA will take on 10 new aircraft, but it will also return nine. Come 2022, SIA will start operating the new Boeing 777X aircraft. In addition, “all the products in our cabins will be industry-leading”, says Goh.
Equally important, if not more, the new aircraft are more fuel-efficient, which not only enables SIA to save on fuel costs but also plays well into the airline’s sustainability efforts. The capacity and range of some of the new aircraft models mean that it makes commercial sense for SIA to fly certain routes. “This is important because it is a deliberate strategy. The new aircraft deliveries give us the capability to operate in markets where it would not have been possible or commercially feasible,” Goh explains.
For example, SIA is now able to operate the new A350-900 ULR (Ultra Long Range) to fly to secondary long-haul markets such as Dusseldorf, which opens up new markets.
SIA is also using the same plane to expand the number of destinations in the US, with weekly flights increasing from 40 to 56 and passenger numbers increasing 35% correspondingly. Following its use of the A350-900 ULR, SIA claims its market share of non-stop Singapore-to-US flights has increased 4%.
Code-sharing and integration
SIA is also looking to grow deep commercial partnerships, such as the recently announced code-share agreement with Malaysia Airlines. Its agreements with Lufthansa (trading as Deutsche Lufthansa), Air New Zealand and SAS have allowed SIA to reach interior points of countries that it would have been able to access otherwise.
“We are able to enhance our value proposition when we go for corporate deals because we are able to offer a much more compelling network. At the same time, with the enhanced operations on the [frequent flyer programme] front, we are able to increase our value proposition to consumers at large,” says Goh.
As for the integration of SilkAir with SIA, he says plans are on track, with seven routes transferred to Scoot and another 10 to be done by next July. SIA has also taken over the Singapore-to-Busan route from SilkAir, and 45% of SilkAir’s head office ground staff have been integrated within SIA.
As a group, SIA now serves 137 destinations in 37 countries and territories, and is the No 1 or 2 foreign carrier in India, Southeast Asia, China and Southwest Pacific, according to Goh. “It is significant to point out that without Scoot and the low-cost model into some of those destinations, we would not have been able to achieve so many points for the group. Take China, for example; 70% of the points are uniquely served through Scoot,” he says.
Ideas, data and analytics
According to Goh, the airline has improved its on-time performance for departure and arrival by 5%. Customer satisfaction over inflight and ground services improved as well. More than 10 million hours of customer time have been saved annually.
As part of SIA’s digital transformation journey, it has set up KrisLab, its internal innovation centre, to help generate and implement new ideas. More than 550 ideas have been generated internally to solve business problems, with 75 prototypes created and 17 implemented.
SIA has created six apps for its ground crew to simplify and automate certain processes; more than 100 dashboards have been created to facilitate better decisions and, as a result, more than 9,900 man-days saved.
“Incidentally, 80% of our organisation has been trained in data analytics, design thinking or agile [development], and we expect that by the end of the financial year in March [2020] or thereabouts, 100% of our staff would have gone through the training. That’s not a mean feat, given the size of our [employee] population,” says Goh.
Analysts upbeat
Analysts appear to have been bowled over by the results, but caution that the airline is vulnerable to demand shocks and fuel price increases. Maybank Kim Eng analyst Mohshin Aziz notes that while SIA manages to fill passenger capacity, it has been at the expense of low yields, suggesting that the market is fragile.
“SIA is able to navigate the current tough conditions better than its peers due to its fuel hedge and cost-efficient operations, but the profits will be lower than last year,” says Mohshin in a Nov 6 report. He has a “buy” call, with a higher price target of $10.70.
Mohshin believes SIA is one of the few airlines best placed in the current market, owing to stellar, efficient operations and marketing prowess. “The aviation sector is undergoing one of its most challenging periods due to overcapacity and a relatively subdued market. A structural consolidation is required, but very few airlines have taken action,” he adds.
DBS Group Research analyst Paul Yong is also bullish on SIA, with a “buy” call and a lower price target of $10.40. However, he sees Scoot, SilkAir and the cargo operations as a drag on further earnings recovery.
“While parent airline SIA continues to enjoy the fruits of the transformation programme in the form of higher revenue per available seat kilometre (RASK) and firmer revenues, the weaker-than-expected performances of SIA Cargo, SilkAir and Scoot will drag SIA’s earnings recovery to be at a more moderate pace than expected,” he says in his Nov 6 report.
Yong sees demand shocks such as pandemics and bad economic outlook as risks SIA is easily susceptible to. The airline is also susceptible to increases in fuel costs.
“However, its share price did rebound quickly even during SARS [severe acute respiratory syndrome], once the situation was under control. Fuel costs account for over a third of SIA’s operating costs and should oil prices spike sharply, it would impact earnings,” adds Yong.
SIA shares closed on Nov 7 at $9.25, down 1.4% year to date. At this level, it is trading at 16.1 times historical earnings, giving it a market value of $11.1 billion. As at Sept 30, SIA’s book value per share was $9.96.
