When Singapore's Changi Airport opened its swanky Terminal 3 in January 2008, Singapore Airlines said it would use it for its high-yield and high-load services to places likethe UK, US, Australia, Hong Kong and Japan.

Just 20 months later, given the lack of crowds at its check-in counters for several months, the carrier unsurprisingly reported its first quarterly loss since the SARS crisis in 2004. In addition to the S$307 million ($212 million) loss in the three months to 30 June, SIA warned that it could post its first full-year loss since listing in 1985.

Revenues fell 30% to S$2.87 billion as passenger and cargo yields declined. Expenditure was 15.8% lower at $3.19 billion as the company gained from falling jet fuel prices and attempts to keep costs low. Fuel hedging losses reached S$287 million, versus a gain of S$349 million a year before.


The airline does not foresee a need to raise additional capital, but its chairman Stephen Lee warned of a "prolonged period" of weak demand.

Traffic has been falling all year, with June numbers down nearly a fifth. Even though it slashed capacity 14%, passenger load factor still dropped more than three points to 75.7%. Cargo capacity and traffic is down even more sharply.

More than many airlines, SIA is extremely exposed to the downturn in the global economy and continuing worries over the H1N1 flu. The long-haul market has suffered as leisure passengers take holidays closer to home. Almost 75% of its flights traditionally come from outside East Asia. Meanwhile, much of the Asian cargo market is geared towards North American and European markets, but it will take time before domestic consumption in those economies recovers.

The biggest impact has been the fall in premium travel. By some estimates, 40% of SIA's revenues and 60% of its profits come from premium passengers. Demand has dropped dramatically, with little sign of recovery. That has led some analysts to suggest SIA should rethink its business model - reduce the dependence on premium and long-haul travel, and increase focus on regional markets. Others say it should keep operational and fuel costs low, cut capacity and ride out the turbulence.

The carrier says it has a "viable" business model and points out the decline in demand was across cabin classes and all parts of its route network. "SIA is well established as a premium, full-service airline and we remain committed to that," it says. "We retain a long-term perspective. This is a cyclical business and we are confident we will see a pick-up in premium demand as global economic conditions improve."

Meanwhile Hong Kong carrier Cathay Pacific has formed a team to study whether its business model will continue to be viable beyond this crisis. "We are looking at whether the changes in the industry are cyclical or structural," says Cathay. "If it turns out the changes in the industry are structural, we need to ensure our business model is sustainable."

It comes as Cathay posted a first half net profit of HK$812 million ($105 million),mainly due to a HK$2.1 billion fuel hedging gain and lower oil prices. More worryingly, revenues fell 27% to HK$30.9 billion. Cathay chairman Christopher Pratt warns: "We still cannot see any signs of any pick-up in business."

One issue under study is premium seats, with the carrier badly affected by a fall in business travel. Cathay though has denied reports that it will scrap business class, but it could reduce the ratio of premium seats to economy-class seats if the indications are that the economic crisis has changed air travel habits.

It is also taking steps to reduce costs. It plans to park six passenger aircraft and five freighters by year-end, and could defer new aircraft deliveries including Boeing 747-8 freighters and Airbus A330s. It has also announced measures to reduce staff costs.

Traffic continues to drop. In June, Cathay's passenger traffic fell 14% year-on-year while cargo levels were down 9%. This came in a month when the carrier" usually sees a pick-up in demand" due to the summer holiday season.

Pratt adds Cathay "will ensure that quality and brand are not compromised" and it will be "in a strong position when the business rebound comes".

Source: Airline Business