Despite Upturn in 3Q, SIA Cargo Faces Major Challenges: Report
Singapore Airlines Group last week reported a third quarter operating profit of S$292.9 million (US$206.2m), a 1.7 percent increase on the previous year, which was partly due to a strong
performance by its SIA Cargo unit and lower fuel costs.
Although the quarterly results of SIA's cargo division reflect the general improvement in global cargo volumes, a recent report by airline consultancy group CAPA points out that SIA Cargo has been unprofitable for seven of the past eight years.
In fact, the CAPA report (which was published before SQ's 3rd quarter results were announced) predicts that the SIA subsidiary faces another challenging year as conditions in the cargo market
SIA Cargo, which is also marketing belly capacity across the SIA Group passenger fleet (including Singapore Airlines, Scoot, Silkair and NokScoot) currently operates a fleet of eight 747-400Fs under its own operating certificate across a network of 19 destinations.
Reducing freighter fleet or replacing 747-400Fs?
However, the CAPA report noted that the cargo division will be cutting its freighter fleet to only seven aircraft by the end of FY2017, pointing out that SIA will need to decide within the next few years whether to cut its freighter operation entirely or start investing in 747 replacements. Further cuts to the freighter fleet are not currently being considered as operating fewer than seven aircraft would be sub-scale and inefficient, the report said.
Least profitable group member
As the most recent quarterly results show, cargo remains an important contributor to revenues at the SIA Group. However, CAPA noted that the proportion of revenues generated by cargo has dropped significantly over the past several years as conditions in the global cargo market have steadily worsened, pressuring yields. SIA Cargo has also consistently been the least profitable SIA Group subsidiary.
The CAPA report noted that SIA Cargo plans to continue to operate its fleet of seven B747-400Fs for at least a few more years. These aircraft are still relatively young for freighters being currently between 11 and 17 years old, and with only one aircraft older than 15 years, according to the CAPA Fleet Database.
Getting rid of freighters entirely is an option
Retiring any of the seven remaining 747-400Fs in the next couple of years would involve a hefty write down that SIA Cargo would prefer to avoid, while operating less than seven aircraft would reduce efficiency levels. Besides, as SIA phased out its 747 passenger aircraft in 2012, there are no longer any fleet synergies between SIA Cargo and the parent airline. Maintaining a fleet of seven 747-400Fs is therefore viewed as the minimum feasible size.
As for SIA's long-term freighter requirements, CAPA said the SIA Group could also opt to phase out its entire freighter fleet and rely entirely on belly capacity. This option would make sense if market conditions continue to be challenging in the cargo sector over the next few years and SIA Cargo is unable to return to profitability.
For now, however, the network still has a strategic role that SIA is not yet ready to abandon. The 747-400Fs provide supplemental capacity - and a main deck option necessary for oversize cargo - in several important markets that are also served by the passenger network. The fleet also enables SIA Cargo to have a presence in some important markets that cannot support passenger services.
Large order of pax aircraft
SIA Cargo currently serves five airports not served by SIA the parent airline, Anchorage, Brussels, Dallas, Nairobi and Sharjah, while the other 15 destinations of the SIA Cargo freighter network, are also served by SIA (and in some cases also by Scoot or SilkAir).
In a related development, SIA last week placed a provisional order with Boeing for 20 B777-9s and 19 B787-10s in a deal worth up to US$$13.8 billion at current list prices. In a statement, the airline said the order will allow it to update its fleet and provide additional growth over the next decade. Included in the deal are options for a further six of each of the aircraft types.
Nol van Fenema