Singapore Air’s empty Business Class seats cost it top ranking

Singapore Airlines Ltd.’s biggest drop in passengers in more than five years cost the carrier its ranking as the world’s most valuable airline. Tan Teng Boo is enjoying the empty seats.

“Before the slowdown, it was always difficult to get a seat,” said Tan, who oversees $200 million as managing director at Kuala Lumpur-based iCapital Global and flies at least three times a month.

For Singapore Air, which gets about 40 percent of revenue from premium travel, failure to fill seats at the front of the cabin means more capacity must be cut and jobs slashed to avert a loss, analysts said. Chief Executive Officer Chew Choon Seng plans to remove 17 percent of the airline’s fleet amid a global recession and sinking travel demand that’s already pushed British Airways Plc and Cathay Pacific Airways Ltd. into losses.

“With the current economic conditions, people will fly less or try to save by downgrading because premium class is so much more expensive,” said Teng Ngiek Lian, who manages $2.6 billion as chief executive officer of Target Asset Management in Singapore. “It’s going to be tough on the airlines.”

Premium travel in January dropped more in Asia than in any other region, slumping 23 percent within the region and 25 percent on routes across the Pacific, according to the International Air Transport Association, or IATA. All Nippon Airways Co. eclipsed Singapore Air as the most valuable airline this month.

“Big Problem”

“When the business class disappears, it’s a big problem,” IATA Chief Executive Officer Giovanni Bisignani said March 19.

Cathay Pacific Chief Executive Officer Tony Tyler said earlier this month the market for premium travel has collapsed as the financial crisis cut demand for travel to New York and London. The Hong Kong-based airline had a loss of HK$7.9 billion ($1 billion) in the second half. British Airways, Europe’s third-largest airline, posted a 20 percent drop in bookings for first- and business-class seats in February.

Singapore Air filled 69.7 percent of seats in February, lower than the 72.7 percent it needed to break even in the quarter ended December. Passenger numbers slumped 20 percent to 1.18 million last month, the biggest decline since June 2003, according Bloomberg data.

Difficult Year

Singapore Air will decommission 17 aircraft, reducing seat capacity by 11 percent, in the financial year starting in April, as the carrier prepares for a “very difficult” 2009, Chew said in a Feb. 16 statement.

The airline has already slashed routes, merged flights, cut fuel surcharges three times since September and reorganized its network in a bid to fill its planes. The airline, the first to fly the Airbus SAS A380 with its beds in suites, may also delay plane deliveries.

“We are just starting to see the fallout from the recession and things are going to get a lot worse before it gets better,” said Jim Eckes, managing director of industry adviser Indoswiss Aviation. “Singapore Air needs to cut down on its staff and take every possible step to reduce costs or risk making a loss.”

Singapore Air posted its first ever quarterly loss in 2003 when a respiratory virus in Asia left planes half empty, forcing it to cut wages and 596 jobs. Profit may slide 46 percent from last year to S$1.1 billion ($728 million) in the 12 months ending March, according to the median estimate of 12 analysts surveyed by Bloomberg. That would be the lowest since 2004.

Global Losses

Airlines globally may report losses of more than $2.5 billion this year, on top of as much as $8 billion of losses in 2008, IATA forecast March 19.

Other carriers have already announced job cuts to save costs. Qantas Airways Ltd., Australia’s largest airline, is eliminating 1,500 positions globally. Air France-KLM Group, Europe’s biggest airline, will cut 2,000 jobs, joining Rynair Holdings Plc and SAS Group in shedding staff.

Singapore Air is currently in talks with labor unions on early retirement, voluntary leave without pay and shorter work months. Some of its cargo pilots have said they are interested in taking voluntary, no-pay leave for up to 30 months. Job cuts will only be considered “as a last resort,” it said Feb. 16.

Singapore Air rose 3 percent to close at S$10 in Singapore trading yesterday. The stock has fallen 11 percent this year, adding to a 35 percent slump last year. The stock is the fourth-worst performer among the 12 airlines on the Bloomberg Asia Pacific Airlines Index. Of the 19 analysts tracked by Bloomberg data, nine recommend that investors sell the shares, five say buy, and rest have “hold” ratings.

That’s a consensus that investor Tan agrees with. While Singapore Air remains his favorite carrier for service and on- time arrivals, he prefers not to own any airline shares.

“The airline business is one of the most difficult to manage and make money,” Tan said.