Analysis of Singapore Airlines
...ncial statements of the SIA Group, which are expressed in Singapore dollars, are expressed under the Historical Cost convention and its disclosure is in conformance and accordance with Singapore Statements of Accounting Standards and applicable requirements of the Companies ACT, Cap 50. Cathay Pacific and Qantas similarly also adopt the Historical Cost convention with their statements expressed in HK$ and A$ respectively. Changes in Policies SIA, Cathay and Qantas all operate a Frequent Flyer Program (FFP). Previous to 2003/04, SIA FFP that provides travel awards to members was based on accumulated mileage basis. A portion of the passenger revenue attributable to the award of frequent flyer benefits is estimated and deferred until they are utilised. These are included under “deferred revenue” on the balance sheet. Any remaining unutilised benefits are recognized upon expiry. For Cathay, the FFP benefits are accrued in accounts as an operating cost and a future liability. The liability is reduced to reflect the reduction in the outstanding obligation. As for Qantas, the FFP benefits are progressively accrued as obligations as and when the points are accumulated. The accrual is based on incremental cost and reduced when redeemed or entitlement expires. The FFP is recognized as revenues when they are consumed. As of 2003/04 onwards, SIA changed its accounting policy towards its FFP – the deferred revenue for unutilised benefits is recognized as revenues based on an estimate of miles awarded that will not be utilised before expiry. This change has increased the current year’s revenue of the SIA Group and Company by approximately $28.2 million (the change is applied prospectively without adjustments to previously reported amounts) Similarities and Differences in Policies between SIA and Benchmarks There are numerous similarities in the accounting policies ( see Appendix B for the comparison) amongst SIA, Cathay and Qantas – “consolidation” for the 3 Groups include the company and all its subsidiary and associated companies., amortization of “goodwill” is computed over a period not exceeding 20 years using the straight line method, “fixed assets” are stated at cost and the carrying amount is reviewed annually, “depreciation” is calculated based on a straight line method though the period used vary depending on the type of assets such as aircraft or land / building, “leased” assets are capitalized at present value and operating lease payments are recognized as expense in the Profit and Loss statements on a straight line basis over the lease period, “loans and borrowings” are recognized at cost, the liabilities for “trade creditors” are all also carried at cost with allowance provided for uncollectible amounts for the “trade debtors” (bad debts are written off as incurred), gains or losses for “forward contracts” are recognized at the dates of maturity, the interest for “income from investment” is recognized on an accrual basis and lastly the cost for aircraft maintenance are recognized on an incurred basis. As for “recognition of revenue”, all the 3 Groups recognize operating revenue when transportation is provided. However, for SIA, the value of unused tickets are included as current liabilities and recognized as revenue if it is unused after 2 years. For Cathay, the value of unused tickets sales are included as unearned revenue. It was also noted that for the accounting of “inventory and stocks”, all the 3 Groups use the weighted average basis and state it at lower of cost or net realizable value. Lastly, as for accounting policy pertaining to foreign exchange, in April 02, the financial results of foreign subsidiaries, associated and joint ventures of SIA Group are translated into Singapore dollars at the annual average exchange rates (similar to that practiced by Cathay and Qantas) vs at the exchange rate prevailing at the balance sheet date that was previously used. The financial effect of adopting this change in accounting policy was not significant. However, in the current financial year, it was noted that at the operating level, strength of major revenue generating currencies particularly the British pound, Euro, Japanese yen and Australian dollar, against the Singapore dollar provided a net gain of $268 million to the operating profit of the SIA group. The Accounting Policies of SIA Group was observed to be more comprehensive and thorough as compared to that of Cathay and Qantas. There are no significant inappropriate or unusual policies noted. FUNDAMENTAL ANALYSIS ORGANISATION POSITION Singapore Airlines Limited reported sales of 9.76 billion Singapore Dollars (US$ 5.8 billion) for the fiscal year ending March of 2004, primarily due to the poor performance of the first quarter, inflicted by the Severe Acute Respiratory Syndrome (SARS) crisis. This represents a decrease of 7.2% versus 2003, when the company's sales were 10.52 billion Singapore Dollars. Expenditure was 9.082 billion Singapore Dollars, a decline of 7.3% (-S$716 million) over previous year. The lower expenditure was due largely to lower staff costs (-S$276 million), aircraft maintenance and overhaul costs (-S$170 million), commission and incentives (-S$85 million), material costs (-$65 million), airport and overflying charges (-S$60 million) and fuel costs (-S$54 million). (SIA Audited Results for the Year ended 31 Mar 2004, 14 May 2004) The earnings for the year included positive contributions from a few factors. A cut in corporate tax rate for Singapore from 22% to 20% from the year of assessment 2005 resulted in a write-back of S$205 million in prior years’ deferred tax liabilities. At operating level, the strength of major revenue generating currencies, in particular the British pound, Euro, Japanese Yen and the Australian dollar, provided a net gain of $268 million to the operating profit of the group. A change in the accounting policies of frequent flyer, “KrisFlyer” programme, where previously unutilised benefits were included under “deferred revenue” has now from 2003-04 been recognised as revenue based on an estimate of miles awarded that will not be utilised before expiry. This change has increased 2003-04 revenue by approximately S$28.2 million. (ibid) During 2003-04, the group's sales were comparable with the two benchmarked companies. While Singapore Airlines Limited enjoyed a sales decrease of 7.2%, the other companies performed not much better: Cathay Pacific Airways Limited sales were down 10.6%, and Qantas Airways Limited experienced growth of 0.5%. Singapore Airlines Limited currently has 29,734 employees. With sales of 9.76 billion Singapore Dollars (US$ 5.8 billion), this equates to sales of US$ 195,063 per employee. At a time when major airlines are struggling to breakeven let alone make profits, SIA has proven its resilience and mettle by being profitable. Organisationally it still maintain a strong presence in the market. SWOT ANALYSIS A strategic analysis of the company was carried out by using SWOT. Strength (S) and Weakness (W) are environmental factors that are internal to the company whilst Opportunities (O) and Threat (T) are factors that are external to the firm. Strengths a. Brand Image – SIA enjoys a strong brand image. Consumers rate airlines primarily on their perceptions of each airline’s service quality, reliability, management strength, workplace, and growth prospects. Airlines that are successful at conveying these traits are well liked, trusted, and admired by the public. In this aspect, SIA has been aggressive in marketing and advertising, spending about $208 million in 2003. Results mattered and SIA delivered. This is evident in the numerous acclaims SIA has won since her inception. b. Service Excellence- SIA has a reputation of delivering excellent service. Right from the onset, the management of SIA has set out to be an industry pacesetter. In those days this airline had Asia's youngest fleet, and concentrated on being the first in Asia to bring their passengers such amenities as inflight faxes and telephones. Continued efforts to maintain SIA's service excellence has consistently earned it international travel and passenger awards. SIA’s state-of-the-art inflight entertainment system, KrisWorld, is found in every class. There is a choice of 22 video channels in the KrisWorld system along with 12 audio channels, 10 Nintendo games and real-time text news which is updated on an hourly basis, bringing general news, financial and sports headlines. c. Strong Management Team – SIA has a well qualified management team that is able to act decisively and swiftly. One example is the SARS crisis in Mar 2003. By the end of the month they had slashed Singapore Air's schedule by nearly a third, trimmed its fleet by 13%, and delayed the delivery of five new jets until 2006. When that wasn't enough, in late April the carrier laid off 206 flight attendants-in-training and ordered its 6,600 cabin crew to take a week of unpaid leave every two months for the next year. The carrier's swift action had saved it from losing some $900,000 a day. d. Strong Balance Sheet - The airline carries almost no debt, owns most of its planes, and has a $1 billion cash pile - blessing it with a debt-to-equity ratio of just 22%. That's lower than any other international carrier and well below the industry average of 300%, according to Morgan Stanley. Another of SIA's strengths is its high book value or net tangible assets per share of S$9.40 as at March 31, 2004. The price to book ratio is hence only 1.1 times (obtained by dividing $10.30 by $9.40). This ratio is low by industry standard. Compared to the majority of other airlines, besides high quantitative measures, earnings and asset quality is high in SIA's case. Singapore Air cuts pilot-training costs by using differently fitted versions of the same planes for both long- and short-haul flights. It keeps fuel costs down by using only the latest and most fuel-efficient planes available, giving it the youngest fleet in the sky. e. World Class Airport and Facilities – Home to SIA is Changi International Airport. Changi was the world leader, with smart, modern facilities. In addition, SIA has strategically invested in a number of joint ventures, eg with Pratt & Whitney through SIA Engineering, a subsidiary of SIA, to provide aircraft maintenance services to SIA and more than 70 airlines. The company (SIA Engineering) provides comprehensive support maintenance services covering line maintenance, technical ground handling, airframe overhaul, component repair and overhaul, and a wide range of engineering and technical skills training. Together with SIA’s other joint ventures, it also provides a comprehensive range of repair and overhaul services for engines, engine parts and airframe components. Therefore, besides generating profit, SIA is assured of expeditious in-house capabilities to turn round her fleet of aircraft safely. Weaknesses a. High Wage cost and Workers’ Morale – Senior Minister Lee recently commented in Apr 2004 that high cost is Singapore's biggest challenge and he called on the employees of the airline group to work in unison with management, adding that he was confident they could overcome the challenges ahead. Compared to low cost carriers, this will be the next hurdle for SIA. However this has to be handled gingerly as SIA had in 2003 axed nearly 600 employees. Too aggressive a cost cutting measure without proper change management will undermine the organisation’s morale. Moreover, with the aggressive expansion drive recently by some airlines, such as Emirates and China airlines, some of the staff, due to discontent, may be tempted to switch jobs hence undermining the experience built-up in SIA. b. Labour Relations – There are many unions in the SIA. Of these, the most vocal is the pilots’ ALPA-S. In 2003, during the SARS crisis, SIA had to take drastic measures to cut workers’ pay, inclusive of their pilots. The pilots’ union later confronted the management over profits declared whilst wage cuts were maintained. Tensions between the airline's pilots and management have threatened Singapore's industrial harmony and growth as the airline industry generates about 10% of Singapore’s GDP. It came to a point that the Senior Minister himself had to intervene. Between 1980 and 2003, 25 disputes between the ALPA-S and the management had gone before the Ministry of Manpower for conciliation. Whilst the government has stepped in and resolved the recent issue, the future relationship between the unions and the management remains a delicate matter. Opportunities a. Global Travel Increase – With the SARS crisis behind us and the Global economic recovery, International Air Transport Association (IATA) expects global passenger traffic to rise by 7% this year, with cargo (which can make a big difference to airline results) growing by 5%. SIA would definitely benefit from this increase. b. Technology – New aircraft design, able to offer the longest non-stop commercial service in the world will save on fuel cost and offer better array of entertainment as well as comfort, enabling the airline to command a higher premium. SIA with its big reserves is able to capitalise on these latest technologies. Already, SIA has unveiled the newest aircraft type to join its fleet - the ultra long-range Airbus 340-500. SIA's A340-500 started operations from Singapore to Los Angeles in February 2004. This service to Los Angeles will take 16 hours, and the return service from Los Angeles about 18.5 hours - a saving of up to 2 hours over SIA's current one-stop flights. On 26 Feb 2004, SIA had asked aircraft builders to bid for new plane orders it may place later this year. SIA had recently started on wireless (Wi-Fi) services on board her aircraft. New technologies in Radio Frequency Identification(RFID) enables cargo to be tagged, enhancing security and efficient cargo handling. c. Free Trade Agreements – Increasing implementations of Free Trade Agreements can lead to access rights over routes. One potential region that SIA is eyeing is the domestic routes of Australia. With more countries having open skies agreement, revenue will increase if these opportunities can be capitalized. d. Greater Job Demand – Coming out of the economic recovery, job demand still exceed supply. Hence salary expectations are lower. Therefore SIA has a bigger field to recruit with lower start-up salaries. This will enable SIA to curb its escalation in labour costs as well as welfare benefits as new terms and conditions can be negotiated. e. Outsourcing – Economies of scale afforded by competition offers better pricing and higher quality. With the introduction of a third ground handler at Changi, there is impetus for SIA to divest her stake in Singapore Airport Terminal Services. This may be an avenue for SIA to cut cost, though the airline has to weigh carefully as her reputation of quality food and services may be compromised. Other areas such as airline call centers, loyalty programmes and reservations are potential areas. Threats a. Low Cost Carriers -New low-cost carriers led by AirAsia, which is about to float to fund further expansion, pose a growing challenge to the region's network carriers. Major carriers like SIA have long believed that the longer distances involved in most Asian travel would immunise them from the threat of budget carriers, but that has now been shown to be otherwise. In response, many are setting up their own budget subsidiaries. Low cost carriers’ cost advantages are derived from having non-unionised workforce, superior, more economical business processes such as selling seats over the internet or flying their aircraft more hours each day. Already, SIA’s ticket prices are one of the highest. This premium SIA has thus far been able to command because of her reputation of excellence. However, in this ever changing world, pragmatism may have a bigger say with the emergence of low cost carriers, though not in a large scale in the immediate future. b. Marginalisation of Air Hub - Competition from budget airlines, creeping international de-regulation and new planes, big and small, that can fly longer distances direct are bypassing Singapore altogether, to fast- growing regi...