Singapore Airlines faces squeeze

Singapore Airlines faces squeeze

SINGAPORE (AFP): Singapore Airlines Ltd. (SIA) is facing a financial squeeze from rising costs and intensifying competition but can still make S$1 billion (US$700 million) in profits a year, a top official said.

Deputy Chairman Cheong Choong Kong said in an in-house company publication made available to news agencies yesterday that SIA would further cut costs and explore new business areas, including investments in new airlines overseas.

He said SIA's cargo division, currently hit by soft demand, could be spun off as an independent subsidiary within two or three years after it becomes profitable, and did not rule out the possibility that existing subsidiaries like Silk Air could be listed separately from SIA.

SIA, the world's most profitable airline, posted group net profits of S$1.025 billion in the financial year ending March 1996, on revenues of S$6.89 billion. Core airline operations accounted for 74 percent of profits.

SIA joined other international airlines in raising fares by three percent last month due to escalating fuel costs.

Cheong said the strong Singapore dollar -- worth around 1.4 to the U.S. dollar -- lowers aircraft and fuel costs but depresses profits by lowering the value of remitted earnings. Eighty percent of SIA revenues are in foreign currencies.

Higher rents and higher wages have also put financial pressure on the group, which employs more than 26,000 people, even as Singapore's status as a connecting hub is under threat, Cheong said.

"As the aviation world deregulates, and as airlines expand in the way that we ourselves have been doing, it will become increasingly difficult to persuade people to fly from A to B via the Singapore hub," Cheong said.

"The net result of all these difficult problems is narrowing profit margins. We can still continue to make around one billion dollars profit a year, but as our investments and shareholders' funds increase, the rate of return will continue to decline," he said.

Cheong said SIA would meet the challenges by improving productivity through increased automation, reducing the need for foreign labor, and transferring some operations overseas.

Revenue accounting is already being done in Beijing while computer software development has been shifted to Madras, India, while some aircraft maintenance work has started in Xiamen, China, Cheong noted.

"A major solution lies in starting airlines-related joint ventures overseas, where the costs are lower and the growth rates higher because growth is from a lower base, all of which means higher rates of return for the group," he said.

SIA is negotiating for a joint-venture domestic airline in India with the Tata group.

"Such interest need not be confined to that country," Cheong said, but he said such investments were risky and could take time to be profitable.

"The risk is high and there can be delicate, politically sensitive issues. We may not see returns in the first few years. Some ventures may even fail. But there is no other way -- nothing ventured, nothing gained," he said.

In cargo, SIA would take "the long term view" and continue expanding its capacity despite the current soft market resulting from the economic slowdown in Singapore and other major markets, he said.

Cheong said SIA would stick to its core business and ruled out a major foray into the hotel business despite its 20 percent stake in the newly opened Ritz Carlton hotel in Singapore and two small hotels in Indonesia.

"For the foreseeable future, we will stay with the business we know," he said.