Sia Investment

2. MACROECONOMIC OVERVIEW

Singapore Airline Ltd is in the Airline industry and has subsidiary companies operating in the Travel and Airline Services sectors . We will focus our analysis on Airline Operations as it contributes to majority of the group’s profit . In addition, the largest portion of SIA’s revenue from external sources comes from Airline Operations . Airline Operations thus has a substantial impact on SIA’s profit margin as well. In this report, we will analyse SIA, and assess if it is a good medium-to-long term investment.

2.1 Industry Outlook & Analysis

Singapore Changi Airport outperformed the world’s average passenger traffic growth of 5.9%, recording a strong 8% growth, with a total of 35 million passenger movements in 2006. The World Travel and Tourism Council’s recent projections also indicate that the demand for travel and tourism worldwide will continue to grow 4.2% annually over the next ten years . Even more visitors are expected to be attracted to Singapore, especially with developments of the Integrated Resort underway. Moreover, the expected opening of Terminal 3 will increase Changi Airport’s capacity to accommodate the surge in tourist numbers . Hence, the Airline industry in Singapore is set for strong growth with the steady increase in passenger traffic.

Jet fuel prices have been climbing steadily and are now over US$95 per barrel . This has resulted in a substantial rise in the expenditure of all airlines. AS such, industry players are now faced with the challenge of transferring minimal costs to consumers, whilst maintaining a healthy bottom line.

2.2 Competitors

Despite SIA being one of the world’s leading airlines, it still faces pressure from competitors like Cathay Pacific, Qantas Airways and Malaysian Airlines .

China’s rapid aviation growth, accompanied by the Beijing Olympics 2008, has made China Airway extremely attractive to foreign carriers such as Delta Airline, Cathay and SIA . Both SIA and Cathay have bid for China Eastern Airline (CEA) in order to achieve a bigger slice of the China airline industry. SIA eventually won the bid, suggesting that it is still a leading player in the Airline industry . The intense competition between airlines is mainly due to the overlapping of air routes. This competition is further heightened by the enforcement of the ASEAN open skies agreement in December 2008 . This will cause SIA to lose its comparative advantage in terms of its extensive flight destinations and routes. In order to sharpen its competitive edge, SIA has to further enhance their brand name through higher quality services and innovative facilities.

Lastly, SIA has increased its fuel surcharges for the third time this year, in order to partially offset their increased expenditure due to the rising jet fuel prices . None of its main competitors have done so. A week ahead the implementation of the revised fuel surcharges, SIA’s share price had fallen by $0.30 . This suggests that there are negative sentiments stirring amongst investors. From this perspective, SIA has to take care not to overlook the competition from its rivals, and to not lose the cost advantage that is previously held over its competitors.

Competitive Strategies

SIA has established itself as leading player in the airline industry and built up a reliable and renowned brand name, associated with service excellence and quality. This advantage which it has over its competitors lends credibility to itself and its subsidiary companies. Having subsidiary companies in the same industry makes the control of quality easier and increases the reliability of its services. These thus enable SIA to distinguish itself as a world –class airline.

In its aim to remain the world’s premium airline, SIA adopts a disciplined approach towards the management of costs, rationalizing business processes to stay lean and effective. SIA focuses on growing capacity on high demand routes, while delivering operational efficiency, environmental improvements and customer benefits . It does so by differentiating itself from its competitors through three main aspects, namely: its route network, its fleet and its products and services offered.

SIA aims to have the largest and most frequent network by constantly launching flights to new destinations to expand its network; increasing the frequency of flights to key destinations; and growing their codeshare services with partner airlines. With the launch of A380 and the addition of new aircrafts to its fleet, SIA adheres to its policy of operating a young and modern fleet that is always growing. Also, SIA differentiates itself by continuously improving