AERO 2490 AIRLINES OPERATIONS TITLE
AERO 2490 AIRLINES OPERATIONS
TITLE: INDIVIDUAL ASSIGNMENT 1
Abstract ……………………………………………………………… Page 3
Singapore Airlines Group’s Revenue and Cost Structure……………. Page 4
Part A: Change in Revenue…………………………………… Page 4
Part B: SIA Group’s Revenue………………………………… Page 5
Part C: SIA Group’s Cost structure…………………………… Page 5
Importance of Ancillary Revenues……………………………………. Page 7
Key Factors The Affects The Revenue Source and Costs…………….. Page 8
Singapore Airlines Group’s Annual Profitability Trend………………. Page 10
Key Financial Performance Drivers…………………………………… Page 11
Conclusion……………………………………………………………… Page 12
Reference………………………………………………………………. Page 13
In this assignment, I was commissioned to analyze Singapore Airlines Group (SIA Group)’s financial report from year 2014 to 2017. This is based on my research on the financial status in their annual reports published on their website.
This report will focus on the financial trend of SIA Group. It will broaden the aspect on how I see SIA Group achieve high value for its operating and ancillary revenues. It will also focus on SIA Group’s cost structure based on cost categories, their profit and losses, as well as the key financial performances that brings SIA Group to where they are today.
Singapore Airlines Group’s Revenue and Cost Structure
Part A: Change in Revenue – The graph below shows a statistical comparison from year 2014 to 2017 that has been extracted and collated from the Annual Reports of Singapore Airlines Group.
23749026711700Financial Statistic of Singapore Airlines Group
Based on the data plotted above, there was a tremendous decline in revenue of SIA Group within Year 2014 to 2017.
Comparing the revenue of SIA Group for the period from 2014 to 2017, it is safe to say that their revenue is facing a slight downfall as the years goes by. In the period of 14/15, the revenue was higher as compares to the other years and the year before. There is a probability that a significant event might have contributed to the success of gaining a higher revenue, namely being the title sponsor for 2014 Formula 1 Singapore Grand Prix. Sports enthusiasts all over the world could have taken Singapore’s national carrier to catch the first night race held in Singapore.
The revenue for the financial period of 15/16 and 16/17 continue to face a tremendous downfall despite the frequent flyer programs. The downfall was due to the lower rates of passenger revenue, cargo and airline operations. The engineering services’ revenue had a drop too which contributed to the decrement due to lesser overhaul activities.
Part B: SIA Group’s Revenue – Airlines received an estimation of 60% of their revenue from consumer directly and 40% from selling their loyalty programs to credit cards company by providing maintenance services to aircraft that are not of their group and ground handling services. (INVESTOPEDIA, 2015)
Other than having to focus solely on their parent airline, the Singapore Airlines Group also manages other subsidiaries such as SilkAir, Scoot and Tigerair whom are made to cater to different consumer demands. This is a strategic development of SIA Group to further extend their market reach.
The reason for SIA Group having airlines under their parent company is to improve on their network connectivity and to link routes that Singapore Airlines did not manage to capture. Judging on the number of air travelers that travel with Singapore Airlines in the past years, they are working on to be able to provide network to many destination which will create a certain measure in capturing different features of the market.
Part C: SIA Group’s Cost Structures – Of course, with revenue, there will also be costs. There are many factors that contributes to the expenditure of Singapore Airlines Group and it will be listed below:
Fuel cost does not only snatch a huge amount of SIA Group’s revenue. They are actually spectacularly unstable. Every month, the fuel cost can either inflate or deflate. Therefore, SIA Group will never know exactly how much fuel is going to cost.
The only way for SIA Group to save money on fuel efficiently is to adopt fuel hedging which they have been doing. It depends on how the fuel pricing trend goes and then decide if they would gamble for the rate and proceed with signing the contract to lock the hedging rate for months or years, or they decides to continue purchasing fuel at an inconsistent rate.
Handling charges, landing and parking fees, overflying fees:
Despite being able to provide a broader network connectivity for the demand, SIA Group have to bear the price of the landing fees for each aircraft the moment they touched down at another country’s airport. The more frequent the flights are, the more they have to pay for their landing fees.
Purchasing of Aircrafts and technology:
For SIA Group to maintain their revenue flow, they have to be up-to-date with the recent technology applied on the new generation aircrafts, the advanced version of flight systems used and the other technology that may affect the productivity of the group itself. Environmental factors should be taken into consideration as well.
Aircraft Maintenance, Repair and Overhaul:
SIA Group also has their own engineering company that handles the line maintenance for their own fleet of aircraft. To maintain the service of the aircraft, they would need to spend more money to keep their fleet in check.
Therefore, if there is a need to spend on a more costly component, they would do it as to achieve the highest standard of its safety for the fleet and maintain the best reputation for the group.
SIA Group also has to take into consideration the salary of the people who worked for them. It ranges from the people who deals with the customer service line such as their ticketing officers, to the people who works in their offices as administrative staffs and finance, to their engineering team back at the SIA Engineering Company, pilots and cabin crews and the external staffs whom they may have hired to complete certain tasks.
Passenger costs refers to the costs that they may have spent to compensate to the passengers in various situations such as flight cancellation, flight delay or in another situation where there are reports of lost baggage. Passengers who happen to travel with Singapore Airlines or their subsidiary airlines may receive compensation too if they are involves with air mishaps such as crashes.
Importance of Ancillary Revenue
The importance of ancillary revenue is that it gives the potential for airlines to generate additional revenue that is made available for them. Other than gaining tremendous amount of revenue just by selling flight tickets, airlines can also earn revenue just by selling flight insurance, selling food and beverages on board the aircraft and charges extra baggage fees for checked-in bags. (THE MOTLEY FOOL, 2014)
Singapore Airlines Group have come up with various other methods of gaining extra money from these ancillary revenues. Other than what that have been listed above, they provide travel-relates services such as collaborations with booking websites and car rental organization for their customer to bundle up the perchance with their flight tickets.
The SIA Group also manages an on-air mall in the flights where their customers can purchase items while being on board and that adds up to the contribution to their ancillary revenue. The fact the customers are also allowed to choose their preferred seats with more legroom also contributes to the ancillary revenue as each seat are priced differently. Not only that, SIA Group also provides WIFI with a fee for its customer who wished to have a connection services during the flight.
Key Factors that affected the Revenue sources and Costs
The key factor which will have an effect on the revenue sources and costs of Singapore Airlines Group can be extracted by using the PESTEL Model. It can derive all the external concerns that contributed to the factors that may cause other problems to arise.
In order for Singapore Airlines Group to develop its brand globally, they had to think about the political issues in the Singapore market; likewise in the market overseas. It claimed to be one of the most crucial part for SIA Group to expand their brand internationally and create strategic choices.
The economic factors refers to the interest rates, currency rates, fuel costs, taxation charges, economic growth and such. The economic health of nations generates a robust influence to the flight demand. The main focus is often on the fuel as fuel cost fluctuation may cause rise in flight tickets which would positively dampen the competitive benefit in terms with competition with budget airlines. (UKESSAYS, 2015)
Singapore Airlines Group are known to be putting their excellent customer services and safe flights first for their customers. And because of that, SIA Group is experiencing a situation where their customer are expecting more from what SIA Group can currently provide during the journey. A scenario that I can provide is the food choices. SIA Group would not want to think of providing Japanese style food for a flight to New York.
Rapid growth of technology will always be the priority issue in the aviation industry. It is an ever growing and rapidly changing which requires Singapore Airlines Group to develop and catch up with the current trends or rather, be ahead of them. All technological factors should have the main purpose which is to serve and comply with the safety and service standards. (UKESSAYS, 2015)
Singapore Airlines Group are active in eliminating environmental issues with their fleet of aircrafts. They are targeting to reduce air and noise pollution as well as gas emission from engines to reduce the contribution to global warming. SIA Group might be facing a financial crisis but they are looking into buying new aircrafts whose engines can reduce aviation emission and provide efficient usage of fuel.
SIA Group’s Annual Profitability Trends
The graph below shows the Singapore Airlines Group Operating Profit between the period of FY12/13 to FY16/17 but we are focusing on the 3 year period from FY14/15 to FY16/17.
(Taken from: https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/presentation/slide-staffcommq4fy1617.pdf)
Based on the graph above, we can conclude that the revenue for SIA Group is not consistent due to instability in the economy.
In the Final Year of 14/15, the profit for SIA Group was at $410 million which was definitely higher as compared to the year before. Even though they have achieve a higher revenue value at this period, the SIA Group is facing a rather challenging market in the industry.
At the Final Year of 15/16, their profit revenue shot up to $681 million which SIA Group subsidiaries airlines, SilkAir and Scoot contributed. The industry remains challenging and competitive which was caused by weak economic activity and rapid growth in capacity. With these achievement, SIA Group are fully committed to address changes to fully prepare themselves for the challenges that lies ahead in the future.
SIA Group’s revenue in FY16/17 fell back to $623 million as the industry is facing intense competition on its yield and cost. SIA Group has implemented their ways to tackle changes in the industry to improve their productivity and operations.
Key Financial Performance Drivers
The key financial performance drivers of Singapore Airlines Group can be extracted easily based on what they are doing in the past and in the current state. Below are the list of key performance drivers that bring them to where they are today.
SIA Group has managed to bring the brand of its airline, exposing them to a wide and global route network. With SIA Group’s well diversified global route network, it will enable the national carrier to capture air travelers from a larger catchment area and reduces impact from travel demand disruptions on any particular route. (CRUCIAL PERSPECTIVE, 2017)
Subsidiary airlines revenue:
SIA Group’s growth in revenue might be driven by their subsidiary airline, Scoot as Scoot is competitive cost structure positions well to be able to access previously unviable routes for Singapore Airlines. As it attracts a different market demand in term of air travel, it helps SIA Group to capture the air travelers that Singapore Airlines is unable to capture and generate enormous revenue for a longer term.
Increasing of Asian travel market:
Apparently, SIA Group’s passenger revenue came from the contribution of North and Southeast Asia route region. Despite the excellent product and services Singapore Airlines can provide, their cost structure are rather high comparing to their other Asian competitor. Therefore, Scoot will be there to capture more traffic in the same region to increase the income for SIA Group.
Singapore’s Changi Airport as their home base:
As Singapore Airlines is the national carrier of Singapore, of course it will be based here in their own country. Besides, Singapore’s Changi Airport is one of the most busiest and efficiently run air hubs with the target of capturing the air travelers based in Southeast Asia and the Oceania regions. Therefore, having Singapore as their home based provides great global connectivity for these countries to use Singapore Airlines to travel abroad as their own national carriers may have limited networks.
There is no doubt that the aviation industry will remain uncertain and challenging as the global economic climate and geopolitical concern continues to dampen yield performance. The intense competition the industry is facing, and the addition of new entrant of airlines company could contribute to the pressure exerted on the yield and SIA Group’s operating performance. (SINGAPORE AIRLINES, 2017)
Airlines are using various methods of promotional activities to boost revenue, yields and loads for their airlines. These methods includes: Competitive ticket pricing, credit card discounts, expanding more capacity for popular destinations and better loyalty program rewards.
Based on my research, I believe Singapore Airlines Group will succeed in dealing with the ever challenging market by emphasizing the need to be flexible with their strategic developments and strategic decisions in order to maintain the growth of their revenue and get a grip on their targeted catchment area. With that being said, SIA Group will be able to easily adapt to the fast paces changes that can happen within the industry.
Other than gaining revenue based on the airlines managed under Singapore Airlines Group, I believe that the revenue also comes from the premium services provided by the group itself. They are committed to giving the an excellent services to their customers in different aspect of their experience from being in the landside to the airside and to the services that Singapore Airlines Group can provide.
Word Count: 2233 Words
Singapore Airlines, 2015, Annual Report FY2014/15, Assessed 14 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Annual-Report/annualreport1415.pdfSingapore Airlines, 2016, Annual Report FY2015/16, Assessed 14 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Annual-Report/annualreport1516.pdfSingapore Airlines, 2017, Annual Report FY2016/17, Assessed 14 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Annual-Report/annualreport1617.pdfSingapore Airlines, 2015, Financial Results for Full Year Ended 31 March 2015, News Release: Full-Year Operating Profit Up $151 Million Amid Lower Fuel Costs, Assessed 18 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/News-Release/nr-q4fy1415.pdfSingapore Airlines, 2016, Financial Results for Full Year Ended 31 March 2016, News Release: Full Year Net Profit Of $804 Million, Assessed 18 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/News-Release/nr-q4fy1516.pdfSingapore Airlines, 2017, Financial Results for Full Year Ended 31 March 2017, News Release: Full-Year Operating Profit Down 9% To $623 Million, Assessed 18 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/News-Release/nr-q4fy1617.pdfSingapore Airlines, 2017, Financial Results for Full Year Ended 31 March 2017, Power-point Slides: SIA Business meeting Q4 and FY2016/17, Assessed 18 July 2018
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/presentation/slide-staffcommq4fy1617.pdfEd Grabianowski , 2009, How Budget Airlines Work, Assessed 21 July 2018
https://money.howstuffworks.com/personal-finance/budgeting/budget-airline.htmInvestopedia, 2015, How Much Revenue In The Airline Industry Comes From Business Travelers Compared To Leisure Travelers, Assessed 25 July 2018
https://www.investopedia.com/ask/answers/041315/how-much-revenue-airline-industry-comes-business-travelers-compared-leisure-travelers.aspThe Straits Times, 2014, SIA Exploring Ways To Grow New Revenue, Assessed 26 July 2018
https://www.straitstimes.com/singapore/sia-exploring-ways-to-grow-new-revenueThe Motley Fool, 2014, Will Increased Ancillary Revenue Help Singapore Airlines Ltd’s Earning Soar?, Assessed 27 July 2018
https://www.fool.sg/2014/07/30/will-increased-ancillary-revenue-help-singapore-airlines-ltds-earnings-soar/UK Essays, 2015, Market Analysis Of Airline Company Singapore Airlines, Assessed 29 July 2018
https://www.ukessays.com/essays/marketing/market-analysis-of-airline-company-singapore-airlines-marketing-essay.phpCrucial Perspective, 2017, Singapore Airlines Initiation Research Report 2017, Assessed 30 July 2018
https://crucialperspective.com/singapore-airlines-initiation-report/Singapore Airlines, 2017, First Quarter Operating Profit Rises to $281 Million, Assessed 31 July 2018