If you look at slide 8, you will note that there are 2 items key to their performance. They managed to increase their load factor and hence increasing revenues, while holding to a flat expenditure (lots of cost cutting). While the number of pax/km have increased, their fuel costs have gone marginally down (more efficient a350s?). They also "saved" a significant $112M from fuel hedging loss.
If you look at slide 8, you will note that there are 2 items key to their performance. They managed to increase their load factor and hence increasing revenues, while holding to a flat expenditure (lots of cost cutting). While the number of pax/km have increased, their fuel costs have gone marginally down (more efficient a350s?). They also "saved" a significant $112M from fuel hedging loss.
I wouldn't read too much into headline numbers of SQ's results. There are so many one-off items that "smooth" off earnings. This week has been busy.
I'll take a look at the financial statement footnotes next week to see how creative Stephen Barnes has been this time.
I wouldn't read too much into headline numbers of SQ's results. There are so many one-off items that "smooth" off earnings. This week has been busy.
I'll take a look at the financial statement footnotes next week to see how creative Stephen Barnes has been this time.
That would be most helpful to the non-financials like me.
I think we can categorically say that the turnaround is solely due to the new hump on SWQ (for the uninitiated, that’s Sick of Wifi Questions).
That’s incorrect, unless there’s proof that it’s really the case. I suspect that SQ’s turnaround was attributed by adding 3D maps to all their new aircraft.
OK, here's my take on the results. I'll try and keep it as layman friendly as possible, but it's not always possible. We are all specialists in our own fields, we know how difficult that is. And I'll try move the more complex adjustments to the end, although that's where some very interesting details are.
Let's start with the headline: Q2 profits nearly tripled. This is completely meaningless for two reasons: it looks at only 3 months of operations, which can be affected by all kinds short term variations. In addition, it refers to net profit, which is really an accounting term that is affected by one-off items like disposals, write-downs, etc.
TL;DR: The headline doesn't tell you anything!
Next, let's look at a longer timeframe - in this instance, the first half numbers (April-September). Also, let's look at operating profits, as this is the profit generated directly from operations, and excludes non-operating stuff like disposal of assets, contributions from associated companies, etc (I'm not saying the latter items are not important, but we are trying to answer the question whether SQ is making more money from its operations compared to a year ago).
First half 2017 (1H17) reported operating profit was $513m vs $302m a year ago. So did SQ really increase profits by 70% (slide 15)? Management says yes (slide 16): Mainline Singapore Air had close to 50% increase, and Cargo made a complete turnaround becoming quite profitable compared to a loss last year. Scoot and Silkair made less money (apparently due to increased capacity not matched by increased revenue; yields are terrible this year, especially for Silkair).
But there is still a lot of noise in the operating profit numbers. The main issue is fuel hedging. In the past. SQ had been aggressive in hedging fuel costs. It really hit them hard last year when crude prices dropped. SQ paid $324m more in fuel costs last year as they paid hedged prices (i.e. they had either long term contracts priced when fuel prices were higher, or they had entered into derivative contracts to smooth the impact of fluctuating fuel prices) as opposed to buying fuel at market prices. This year - presumably because they are not hedging as much and/or prices are more range-bound - fuel hedging losses were quite minimal, only $29m.
So removing the impact of fuel hedging (in other words, all else being equal, if SQ had bought fuel at market prices, instead of at hedged prices), it would have made $542m this year vs $626m last year. So actually a drop.
Which is the correct comparison? One could argue that the first set of numbers (including hedging losses) is the right one to look at, as that is what happened. But those numbers have little predictive value. Looking forward, in an environment of relatively low and less volatile oil prices (where hedging impact will be low), the fact that SQ is making less profits on higher revenue (revenue went up 5.5%) should be worrying. Yields are persistently low due to competition. Management should be - and is - worried. That is why the focus on cost-cutting.
TL;DR: If fuel hedging effects are removed, SQ made less profits this year compared to last year on the back of higher revenue. It was less profitable.
We could stop here, but there are some other juicy tit-bits hidden in the footnotes. It appears there are one-off items arising from estimations even in operating profits.
Last year, SQ reported $145m more profits as it changed the estimates of revenue recognition of unused tickets. Let me explain. Airlines typically sell tickets upfront, but can recognize revenue only after the passenger flies. There is always a small percentage tickets which are sold, but never used prior to expiry (own up if you're guilty of that crime! ). Airlines typically estimate the percentage of ticket sales that can be booked to revenue and profit immediately because they know the tickets will be never used. This is usually based on past experience and sometimes these estimates are changed, which would result in a one-time +ve or -ve profit impact. It appears SQ suddenly came to realize last year - when profits were dire due to hedging losses (not a coincidence, I tell you) - that perhaps more tickets are being wasted than they previously expected. LOL!
This year, something else was afoot. Remember the new Krisflyer redemption rates from end-March? General consensus was that it was a slight devaluation. Well, even SQ thinks so too. It recognized a one-time gain of $115m in the first fiscal quarter, right after the new rates went into effect. It estimated that the value of foregone revenue from redemption tickets will drop by $115m in the future (presumably because fewer seats can be redeemed for the same number of miles). I've seen some models of estimating items like this, there are lots of assumptions in them.
Finally, SQ received compensation of $79m this year for changing aircraft delivery slots (CFO talked about delaying deliveries in the analyst briefing). Last year it received only $20m.
Add all that to the $542m vs $625m comparison and what do you get? SQ made $348m of "core" operating profit 1st half this year compared to $461m last year. Not something you'd want newspapers to report. So they called in the spin doctor(s).
TL;DR: Even SQ believes the KF "enhancement" made in March is a devaluation.
Last edited by 259850; 14 November 2017, 01:25 PM.
Reason: Minor edits on valuing mileage redemption to make it clearer.
Parent airline’s pax load factor rose 1.9% yoy in December 2017 as pax traffic increased 3.1% yoy with little change in seat capacity. Passenger demand increased across all regions.
Parent airline’s pax load factor rose 1.9% yoy in December 2017 as pax traffic increased 3.1% yoy with little change in seat capacity. Passenger demand increased across all regions.
*Source: Analyst Report
You forget to complete the equation...
Passengers:
Seat Load Factor on SIA for Q2 is up 1.6% -> more passenger flying (good!)
Revenue:
Passenger Yield (what each of those passengers actually paid) is unfortunately down by 2%. -> SIA lowered prices so much that the revenue by the additional passengers was not outweighing the discounts given on all tickets flown.
To break-even (cost equals revenue), SQ needed at Seat Load Factor of 82% at given ticket prices. They only achieved 81.8%. Hence the operation was (again) not profitable. Look at slide 7 of the analyst briefing and you will notice that SQ never broke even. Meaning: they will have to either increase revenue by selling tickets more expensively or lower cost by cutting service onboard (further).
I don't see any effects of the restructuring: the cost base is the same and SQ was not able to convince passengers that flying with SQ is worth a premium.
Load factors have also not really changed: slightly over 80% is what SQ had easily achieved without any optimization.
In fact it is one of the worst in Asia-Pacific though QF takes the prize for the worst. A relevant issue now that fuel prices are heading back north again.
In fact it is one of the worst in Asia-Pacific though QF takes the prize for the worst. A relevant issue now that fuel prices are heading back north again.
Would we expect that old 772s being replaced by new 787s might improve SQ's rank in that chart? I'm having trouble working out if it includes all of a carrier's flights or only those that cross the pacific. Even so, the A350 ULH fleet might also affect SQ's standing?
Would we expect that old 772s being replaced by new 787s might improve SQ's rank in that chart? I'm having trouble working out if it includes all of a carrier's flights or only those that cross the pacific. Even so, the A350 ULH fleet might also affect SQ's standing?
Yes, indeed, SQ228, the 787s seem to have played a crucial role in both ANA and Hainan's ranking.
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