SIA shares fall as airline posts poor profits

SINGAPORE - Shares in Singapore Airlines fell sharply following the announcement of a steep decline in profit and after Chief Executive Officer Goh Choon Phong said he expected the second half of the financial year to be "very challenging", slowed down by the dual headwinds of high fuel prices and the economic situation in key markets.

Shares ended 1 per cent down on Monday at S$10.47, after falling earlier in the session to a four-month low of S$10.40, as the market gave its first reaction to Friday's announcement of a 54-per-cent drop in second quarter net profit on higher losses in the cargo business.

Although the result was not unexpected, the company's downbeat outlook for the second half gave investors an incentive to sell.

Speaking at a briefing on Monday morning, Mr Goh reiterated that there was little relief on the immediate horizon.

"We can expect that going forward the economy will continue to be very challenging or perhaps even more challenging than it is now, and we don't see any reprieve in terms of improvement especially from economies such as Europe," he said.

Still, despite the gloomy outlook, the airline thinks its strategy of developing both the premium and no-frills components of its business leaves it in the best possible position to weather the turbulence.

On the premium front, SilkAir is expanding and working more closely with SIA on fleet and route planning. This has resulted in a 25-per-cent increase in cross-selling between the two full-service wings of the airline, Mr Goh announced.

Meanwhile, at the budget end, Scoot is also expanding while working more closely with low-cost partner Tiger Airways to stimulate new traffic and tap new markets.

As a result of this dual-pronged approach, "SIA is able to participate in the growth of virtually any of the segments of the airline business. At different points in time, different segments of the airline portfolio grow at a different rate and are affected in a different manner," said Mr Goh.

Analysts, though, are sceptical about the impact of such measures on SIA's bottom line.

"Although SIA has attempted to stave off competition from the low-cost carriers and the Middle Eastern airlines via the development of SilkAir and the broadening of its alliance network, we think these actions will not have an immediate impact on profitability. As such, we see further near-term challenges," said CIMB Research. - David Bottomley

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Investors are not very optimistic about SIA's future and started dumping the stocks, and they are not to be blamed for it. It's tough times ahead for SIA, but all is not lost. 

The main fleet may not be performing well, but as a group, they should do much better considering Scoot, SilkAir and Tiger Airways have got great potential in the days ahead. One very good example is Qantas posting poor results but its Jetstar Group did exceptionally well and is able to minimise the impact of profit loss in 2011.

Perhaps low cost is the way to go now.