May 18, 2018 / 12:44 AM / 5 days ago

UPDATE 2-Singapore Airlines to fold SilkAir into it after $75 mln cabin upgrade

* Cabin upgrades will cost more than $74.5 mln

* In-flight entertainment, new seats to be installed from 2020

* SilkAir’s operating profit fell 57 pct in FY18 (Adds CEO, CFO and analyst comment)

By Jamie Freed

SINGAPORE, May 18 (Reuters) - Singapore Airlines Ltd plans to absorb its underperforming regional arm SilkAir after 2020 when a programme to upgrade cabins at a cost of more than S$100 million ($74.5 million) gets underway.

The move comes as Singapore Airlines undertakes a three-year transformation programme designed to cut costs and boost revenue amid competition from Chinese and Middle Eastern rivals and low-cost carriers.

Singapore Airlines topped market expectations by reporting on Thursday a 148 percent rise in full-year net profit to the highest level since 2011, as passenger and cargo revenue rose and the transformation programme produced early results.

But SilkAir was a weak spot, reporting a full-year operating profit of S$43 million for the 12 months ended March 31, down 57 percent from a year earlier.

Average fare prices at SilkAir, which is wholly owned by Singapore Airlines, have been falling as it competes against lower-cost rivals such as AirAsia Group Bhd on short flights to destinations like Kuala Lumpur and Bali.

“That is not to say there is no place for SilkAir,” Singapore Airlines CEO Goh Choon Phong told media and analysts at a post-results briefing on Friday. “In fact there is still a lot of demand for SilkAir type of service specifically on the bigger destinations, bigger cities in Southeast Asia.”

More than 60 percent of SilkAir’s traffic connects through the Singapore hub, Chief Financial Officer Stephen Barnes said after the briefing, including to Europe and North America where the Singapore Airlines brand is better known.

The cabin upgrade will include the installation of seatback in-flight entertainment in all seats and lie-flat seats in business class on SilkAir’s all-narrowbody fleet.

Through the upgrade, Singapore Airlines seeks to close a gap with rival Cathay Pacific Airways Ltd, whose regional arm, Cathay Dragon, operates jets with cabins more similar to its parent than the wider gulf between Singapore Airlines and SilkAir products.

“Upgrading the narrowbody product and folding SilkAir into Singapore Airlines is sensible and was inevitable,” CAPA Centre for Aviation Chief Analyst Brendan Sobie said. “The product gap between SilkAir and Singapore Airlines has become too wide.”

The upgrade would start in 2020 due to the lead times required by seat suppliers, Singapore Airlines said. The merger would take place after a sufficient number of jets had the new product.

As part of its transformation programme, Singapore Airlines had already handed some of SilkAir’s routes to the group’s budget carrier Scoot and merged part of SilkAir’s finance team with its parent.

Singapore Airlines shares were trading 1.9 percent higher at on Friday afternoon, while the broader Singapore market was down 0.2 percent. ($1 = 1.3424 Singapore dollars)

Reporting by Jamie Freed; Editing by Stephen Coates and Muralikumar Anantharaman

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