Having recorded a full-year operating loss of S$39 million, Singapore Airlines (SIA) is cautious about adding capacity and is not currently mulling any new aircraft orders amid rising uncertainties in the global economy.
“Despite signs of recovery, the global economy remains volatile and fragile,” said Singapore Airlines.
“In fact, we have announced that we will be putting back capacity cautiously, an increase of just 2% this financial year over the last.”
Indeed, Singapore Airlines is retaining capacity discipline despite a strong economic rebound in the Asia-Pacific region led by the burgeoning Chinese economy, and especially so as SIA is one of the biggest global air carriers facing the difficulty of a two-speed recovery.
In the face of this, directionality can become a big headache for carriers from not only a capacity management perspective, but also a marketing perspective as well as a revenue management one.
Directionality arises when different economic circumstances or market maturities take place at different ends of a route, such as the anaemic European economy versus the booming Asian economies.
Image courtesy of KWsideB
The relatively weak Euro leads to a surge in traffic from Asia to Europe whereas the demand for the returning sector is significantly hindered by the sluggish European economies.
Indeed, the A380 has a lower unit cost as measured in Cost per Available Seat Kilometers (CASKs) against smaller but crucially more flexible twin-aisle aircraft; however and perhaps ironically enough, the twin-aisle aircraft enjoy lower total trip costs and most importantly, they arguably generate higher yields than Very Large Airplanes (VLAs) do.
For markets where directionality issue exists, deploying an aircraft large enough like the A380 can satisfactorily cope with the strong demand on the outbound sector, thereby fully realizing the potential demand and hence maximizing the revenue at one end of the route. In doing so, however, this creates serious problems at the other end of the route, where demand is significantly weaker.
Moreover, airlines often have to lower their prices in order to fill those seats, which mean lowering the yields of the entire flight considerably.
Given that the Breakeven Load Factor (BELF) = CASK / yield (revenue per RPK) x 100%, a people-mover like the A380 carrying a large amount of low-yield, passengers simply does not bode well for premium carriers such as Hong Kong-based Cathay Pacific and Singapore Airlines, albeit having a low CASK.
While an A380 unquestionably works well for a carrier that places a heavier emphasis on O&D (Origin & Destination) traffic like Emirates, an A380 for carriers like Cathay Pacific which put their emphases on frequencies, even a fully-loaded A380 can still be unprofitable. That doesn’t take into account the A380’s insufficient revenue cargo volume which hampers its profit-generating capability.
In the meantime, higher frequencies theoretically lead to higher demand since the time lag between the preferred departure time and the available departure time is reduced when considering potential demand, thereby maximizing the total revenue.
Furthermore, should demand on a single flight be excessively high, deploying a relatively smaller aircraft helps create a shortage in supply in which yields can persistently be raised.
Though carriers adopting this frequency-based model should be aware that unless it has a dominant position such as Singapore Airlines at Singapore, Cathay Pacific at Hong Kong and British Airways at London Heathrow, so that the demand spilled (i.e. potential demand – traffic, or potential demand lost) is likely to be recaptured by other flights on the same carrier, or otherwise this potential demand may be lost to competitors.
Nevertheless Singapore Airlines revealed to me that 6 A380s still remain on option but it will evaluate the Higher Gross Weight (HGW) version of which British Airways (BA) is the launch customer for the type.
“SIA’s options for six additional A380s are not convertible to other aircraft types. These six A380s remain on option at this point as we review our capacity needs for the next few years. No decisions have been taken on exercising them,” the airline tells me.
“We will have taken delivery of all 19 of our A380s on firm order by mid-2013, which is when Airbus will start to offer the HGW as an option for the A380. We will be evaluating our need for the HGW A380 beyond that time.”
Singapore Airlines is very well-placed to improve its profitability by managing capacity carefully, no matter whether it makes new aircraft purchases in the foreseeable future or not.
“Aside from nine A380s and five A330s remaining on firm order, we also have on firm order 20 A350-900XWBs and 20 787-9s. In addition to the six A380s on option, we also have options/purchase rights for another 20 787-9s and 20 A350-900XWBs. At this point, we do not have any immediate requirements for additional aircraft orders.”
- Daniel Tsang
