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Singapore Airlines to absorb its regional subsidiary SilkAir

Full-year profit surges to seven-year high, boosted by business travel demand

SilkAir's fleet will be upgraded before the brand is merged with parent Singapore Airlines. (Courtesy of SilkAir)

SINGAPORE -- SilkAir, Singapore Airlines' 29-year-old subsidiary, is to be merged with its parent, as a part of the carrier's wide-ranging business transformation. The move is aimed at maximizing revenue by streamlining the brand strategy and standing out from the crowded low-cost carrier market.

"We do believe that with the merger, and with the single-brand, it will make it much easier for customers to understand [that both SilkAir and Singapore Airlines] belong to the same organization," Singapore Airlines Chief Executive Goh Choon Phong told reporters on Friday. It will be "easier", Goh said, to sell to American and European customers connecting flights via Singapore to SilkAir's various Asian destinations. It is about offering "better connectivity", he stressed.

Ahead of the merger, Singapore Airlines is investing more than 100 million Singapore dollars ($74 million) to upgrade SilkAir's fleet and bring it on a par with its own. The work will start in 2020. New lie-flat seats will be fitted in business class, with renewed entertainment systems. The merger will happen after a sufficient number of planes have been upgraded, with the airline not disclosing the exact timing.

SilkAir, a full-service airline which flies single-aisle narrow-body aircraft on routes mostly within Asia, has been suffering from price pressure from low-cost competitors in the region. Its passenger yield -- the revenue from flying one passenger a kilometer -- for the fiscal year ended in March fell 11.5% from the previous year. Operating profit for the year was S$43 million, a drop of 57%. Scoot, the LCC in the Singapore Airlines group, fared better with a 15% increase in operating profit.

SilkAir's network of 49 destinations includes popular resorts such as Bali in Indonesia, Koh Samui in Thailand and Cebu in the Philippines, where the presence of LCCs is already strong. Other than Southeast Asia, the Singaporean carrier also flies to countries in South Asia including India, to North Asian nations such as China and Japan, and to Australia.

Goh Choon Phong, chief executive of Singapore Airlines.

"Streamlining SIA Group into two brands -- one for premium travel and one for the budget travel market makes perfect sense and greater revenue and cost synergies can be reaped from the integration of operations," Corrine Png, CEO of transportation consultancy Crucial Perspective, said. "This is positive."

Leveraging the group's route network is a part of a three-year transformation program. Started a year ago, the program is aimed at enhancing revenue and making the entire operation efficient, in order to survive cut-throat competition in the Asian aviation market.

The program is yielding results, the company said, as it revealed on Thursday its highest net profit in seven years for the year ended in March. The good results came in spite of the increasing oil price.

Net profit surged to S$892.9 million Singapore dollars, almost 2.5 times that of the prior year, with strong demand both in passenger and cargo segments. Revenue for the year increased 6% to S$15.8 billion. For the January-March quarter, the largest airline in Southeast Asia in terms of market capitalization returned to the black, recording S$181.8 million net profit. The same quarter a year ago saw a loss of S$138.3 million.

Much to its relief, passenger yield at main brand Singapore Airlines stabilized. Passenger yield contraction was limited to 1%, smaller than the 3.8% squeeze the previous year. For the January-March quarter, yield improved by 1% year-on-year. The airline's operating profit almost doubled to S$703 million for the fiscal year.

"We are quite happy to see that the yield decline has bottomed out," Mak Swee Wah, executive vice president of commercial, said at a press conference. He pointed out the demand from the corporate market had improved. "The market has been quite healthy, as a reflection of the state of the world economy," he said, and noted that business demand was broad based, both in terms of geography and industry.

Damage from the oil price increase was limited, partially due to a gain from fuel price hedging. The average fuel price rose 18% but the increase in net fuel costs for the company was limited to 4.1%.

However, there are some risks ahead. "Fuel prices have been trending higher and volatility is expected to persist in the months ahead," the company warned in a press release. "The overall demand outlook for cargo remains moderately positive, but is subject to geopolitical uncertainties which may have implications on global trade," it noted.

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