How do you become a millionaire?
Sir Richard Branson has the answer:
“If you want to be a millionaire, start with a billion dollars and launch a new airline.”
As the founder of three airlines, Sir Branson made this joke as a point to how challenging the airline industry can be.
Although more and more people are flying ever year, the industry is susceptible to intense price competition, volatile fuel prices, paralysing labour strikes, unpredictable weather conditions, and ongoing safety concerns.
Even as one of the top airlines in the world, Singapore Airlines Limited (SIA) (SGX: C6L) is not immune to the myriad challenges faced by the industry. The SIA group reported a 55.2% drop in net profit to S$360 million in its latest 2016/17 financial year. Operating profit also fell 8.5% to S$623 million as group revenues continue to decrease over the last three years.
It was against this bleak backdrop that I attended SIA’s 2017 AGM. How does the management plan to tackle the challenges faced by the group and improve its results?
Here are nine things I learned from the 2017 Singapore Airlines AGM:
1. The airline industry is becoming intensely competitive. The Middle Eastern airlines (i.e. Emirates, Etihad Airways, and Qatar Airways) are growing aggressively while the Chinese carriers are starting to expand internationally. In Southeast Asia, low-cost carriers (LCCs) continue to grow steadily — according to CEO Goh Choon Phong, LCCs occupy over 50% market share in the region.
2. To face these challenges, SIA has set up a “Transformation Office” to manage the next stage of the group’s future growth. There are three areas of focus:
- New traffic segments. SIA plans to grow its LCC segment with the recent merger of Scoot and Tigerair. As an integrated airline, Scoot now offers budget fights to 60 destinations across 17 countries, and plans to add more routes and aircraft in the coming years. The CEO said the merger also allows the SIA group to efficiently deploy its planes between the LLC and full-service segments to better match demand.
- New geographies. As Singapore has virtually no domestic airline market, SIA needs to invest in foreign markets to tap on growth in other regions. The group has partnered with Nok Air in Thailand to establish NokScoot and with Tata Sons in India to establish Vistara. NokScoot is a low-cost medium- and long-haul airline which operates international services out of Bangkok. Vistara is an Indian domestic airline but plans to start international flights in 2018. The CEO said India is projected to be the third largest travel market in the world by 2025 and he sees immense potential there.
- New adjacent businesses. SIA also looks at setting up adjacent businesses which leverage on the group’s competencies as an airline. For example, the Airbus Asia Training Centre is a US$100 million joint venture between Airbus and SIA. It is the largest Airbus flight crew training centre in the world and offers training courses for up to 10,000 flight crew trainees per year. The centre is open to all airlines and currently has 41 clients including SIA.
3. SIA is investing in new aircraft including the Boeing 777X and Airbus A350 Ultra-Long Range for future growth. The CEO explained the new aircraft have long range capabilities that allow SIA to expand its flight network. For example, the A350 Ultra-Long Range will allow SIA to restart its nonstop flights between Singapore and New York. SIA is, in fact, the launch customer for the A350 Ultra-Long Range and will be taking delivery in 2018. According to Senior Vice-President of Finance Stephen Barnes, SIA will be raising debt to finance the capital expenditure and is not considering any equity financing at this point.
4. A shareholder asked if the increased capital expenditure would affect SIA’s dividend. Chairman Peter Seah simply replied that SIA will try to pay a dividend that will remain attractive to shareholders. He added that times are challenging but the board will review the dividend policy when profitability improves. At the moment, SIA has no fixed percentage for its dividend payout.
5. A shareholder asked why the group’s staff costs have increased when revenue is falling. He pointed out that staff costs are one of the biggest expenses but is something management can control (unlike fuel prices). SVP Stephen Barnes noted that staff costs increased about 5% from the previous year and explained it was due to staff headcount also increasing by 5%. The increase came primarily from the Budget Aviation segment (i.e. Scoot and Tigerair) which is seeing strong growth and he expects staff numbers to increase as the segment continues to grow. The chairman added that although the management is conscious of managing its costs, it should never come at the expense of SIA’s service quality. The airline has long built a reputation for having top quality crew and service standards that have propelled SIA to the top of the airline industry.
6. A number of shareholders vigorously questioned the management on its fuel hedging strategy. SIA has lost over a billion dollars due to fuel hedging losses in the last two years — S$269.0 million in FY2016/17 and S$926.6 million in FY2015/16. The chairman explained that SIA hedges its fuel costs to minimize fluctuations in prices but nobody foresaw that oil prices would crash so drastically in the last few years. The enormous drop in oil prices resulted in SIA’s massive fuel hedging loss. He added that other airlines have been hit with a similar problem and the only exceptions are maybe the three Middle Eastern airlines that hail from oil-producing states. The chairman shared that the board has reviewed the group’s fuel hedging strategy and approved a new longer-term strategy based on current fuel prices. He acknowledged that some airlines choose not to hedge their fuel costs but the choice to hedge or not is debatable.
7. A shareholder recounted his negative experience of using his Krisflyer air miles to book a business class flight from Singapore to Shanghai. He made his booking two months in advance but was told it would be put in queue to allow full-paying customers on the flight first. He only received a confirmation one week before the scheduled flight. He reasoned that demand must be high for his booking to be confirmed so late but, to his surprise, the business class cabin was 90% empty when he boarded his flight! While an airline must understandably cater to paying customers first, he feels SIA should plan its seat inventory better and remember to treat its loyal Krisflyer members well. The CEO thanked him for his feedback and assured that SIA continues to value its Krisflyer customers who have earned miles with the airline. SIA will do more to ensure its inventory management is more accurate to allow Krisflyer members to utilize their miles better. He also shared that SIA has introduced more programmes for members to use their miles on and highlighted that the airline’s breakage (expired unredeemed air miles) has been reducing.
8. A shareholder asked if the board had done a strategic review to consider downsizing the group. He voiced his worries about the group’s falling revenue and cash flow coupled with the fact that SIA plans to take on more debt to finance its new planes, and feels that SIA can’t keep on expanding. The chairman assured him that SIA isn’t growing for the sake of growing and that downsizing doesn’t necessarily mean the group will become more profitable. Unlike the U.S. airlines that can rely on a large protected domestic market, he explained that SIA has no domestic market to speak of and has to compete globally. Therefore, the group’s quality of aircraft, crew, and service standards are all key to its success and survival. SIA also has to fly to a large number of destinations to provide regional and global connectivity to remain viable with global travellers.
9. A shareholder complained he had to visit the company’s offices and clear security procedures just to review the minutes of the AGMs. In the end, he decided it was too troublesome and contrasted this with the ease of accessing the local banks’ AGM minutes which are available online. He then asked Chairman Peter Seah (who is also chairman of DBS Bank) to implement the same policy at SIA to benefit shareholders who missed the AGMs. The chairman replied he had no issues with it and will discuss with the board. To that, I have only one thing to say: “Read The Fifth Person!” 😊
Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »