Singapore Airlines' 36th AGM on 29th July 2008

Being a blue chip company, there is sufficient press coverage for their results and AGM. Having attended the AGM, I will just like to highlight a few things not covered by the press thus far.

Interesting questions raised

Organic growth vs Acquisitions

One shareholder quizzed the management why SIA seems to be more eager in expanding organically then via acquisitions, since the latter will eliminate competitors. The answer given was that regional airlines are heavily guarded and any purchase are normally not possible. The most interesting answer, came not from the management, but from a fellow shareholder. He brought up the failed bid by SIA on Ansett Austrialia . Its a painful but well learnt lesson for SIA. He cited this as a reason why it might be better for SIA to pursue growth organically rather than via acquisitions.

The rationale behind acquisitions is understandable. Besides eliminating competitors, acquisitions is one of the few available options to break into otherwise inaccessible markets. SIA had been eying the highly lucrative kangaroo route- (Australia - UK) for years. Attempts to enter this route directly had failed so far. Thus the only way it could do so is via acquisitions, hence the rationale for acquiring Ansett. However SIA did achieved limited success in carving out a pie from the kangaroo route via Virgin Alantic.

Turning to the lucrative Chinese market, SIA failed again at acquiring a 25% stake in Chinese Eastern Airline. While talks to sell a stake to SIA could resume after the olympics, there are just too many things that could prop up to scuttle the deal.

Labour issues

Besides the escalating fuel prices that constitutes 36.5% of total expenditure, staff cost came in 2nd at 16.6%. Labour issues with the aircrew union erupted once in a while and hence I queried the management on what strategy they had in tackling this problem and also about retaining their staff against poaching by other airlines.

On the labour issue, the strategy the management adopted is via communication, it is about letting the staff know how well (or badly) the airline is doing and I translates that to expectation management. On the staff retention, the chairman cited that not only are they facing competition from other airlines, they are facing pressure from the local service industry, particularly with the construction of the two integrated resorts. Politically correct answer of paying a competitive package is offered but I would think staff cost could escalate faster in the near future.

Fuel hedging

There was a significant jump in "other operating expenses" in 1Q 2008. The jump was about $130m SGD. Without this increase, 1Q's results would be comparable to that one year ago. From their CFO, these include various unclassified expenses such as forex losses.

Further on in the Q & A, it was reviewed that gains in fuel hedging (quite successfully done in SIA and which contributed significantly in containing the escalating fuel cost) was offset by forex losses.

If I assume that fuel contracts are paid in USD and since SGD appreciates against the USD, shouldn't the fuel contracts become cheaper than first contracted? How does the forex lost comes in? Maybe I can raised this in the next AGM? One bad thing about myself is I can't think on my feet (this is something I need to brush up). I tend to get smoked in AGM Q & A and I needed time to think, digest what they say... and by the time I realised I received a smoke bomb, it is too late to ask the question again.

Other interesting happenings at the AGM

Food and retirees

Comparing the sumptous standing buffet lunch that Food Empire offers at its recent AGM, that of SIA is a disappointment. It is a simple tea break with bee hoon, fried carrot cake etc. The fortunate thing the food is topped up in a timely manner... if not, most people who make it out of the function room will be greeted with empty trays.

Once the door opens at the end of the AGM, the retirees fanned out and rush to the trays like they had starved for several days and just pile the food onto their plates (these are smaller ones, for tea, not lunch). Can't they just exhibit some professionalism as a shareholder and take the food in a more graceful manner?

While I would not rule out buying into as many SGX listed companies so that I can have access to 'free' food from AGMs/EGMs the whole year round in my twilight years (who say there is no free lunch), but definitely it could be done with more professionalism and dignity.

I upped my stakes in Singapore Airlines on 12th June 2008

This is the only 'blue chip' company I had in my portfolio of 13 companies. The sheer amount of media coverage on any blue chip company actually does not warrant me to say anymore about it, but since I'm treating this as my diary, penning down my thoughts now would still be helpful to my learning experience when I review them several years down the road.

Rationale

Given the slowing economic growth, escalating fuel cost, falling demand due to more expensive air tickets, it is almost taken for granted that the global airline industry is facing increasing dismal days ahead. It looks almost certain that Singapore Airlines, SIA, one of the most profitable airlines in the world, will also not be spared. If so, while many airlines are already cutting back flights to stem mounting losses, why is SIA still boosting flights?

I believe it has the capability to weather the storm and emerge stronger than ever before... and I have the reasons to believe, at least I think I have :)

Revenue strength

1. Branding, SIA had put in great efforts to build up its brand that is synonymous with quality flying experience. This enables them to charge more per ticket then competing airlines. It is not surprising that they repeatedly got voted for best airline of some sort almost every year.
2. Corporate travel contributed significantly to the bottom line of SIA, particularly the business class. It is not uncommon that business class seats sold out like hot cakes on popular routes. It is hence not surprising when SIA started to launch all-business class flights.
   
3. Price insensitivity amongst client base. Most who choose to fly with SIA are either tourist who would rather pay more for the flying experience or businessman who's tickets are their companies' problem. Either way, unless the ticket becomes unreasonably expensive, they will continue to fly with SIA.
   

Cost management

1. Managing Jet Fuel. Fuel cost made up about 36.5% of total expenditure. With the strong branding and relatively price insensitive client base, it is able to partially pass on the rising fuel cost via fuel surcharges, 3 times within 3 months. Coupled with somewhat successful fuel hedgeing (at about USD $100/BBL vs current $166/BBL) and positive currency translation for fuel paid in USD, SIA seems to be managing its fuel cost well.
2. Newer planes with better fuel efficiency. SIA currently operates more fuel efficient Airbus A340, A380, Boeing 777 and disposing off less efficient Boeing 747-400. It is expecting to take delivery of Boeing 777-300ER and Airbus A330-300 later this year.
3. Staff cost accounted for 16.6%, with pilots accounting significantly. It helps (from the business perspective) that SIA operates a flying school that churns out relatively cheap pilots bonded for about 7 years commencing from 1st officer.
   

Outlook

Two major factors are threatening the profitability of SIA (others are talking about loss management). Firstly, the escalating fuel cost, if not managed properly, will definitely eat into earnings. But from my earlier post, I have reasons to believe that fuel price will not aim for the moon. It will come down, sooner or later. Secondly, the rising ticket prices are obviously hurting travel. but from the reasons above, SIA seems well positioned to ride out this storm.