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Can Singapore Airlines’ New Revenue Model Help The Company?

SIALogo

Singapore Airlines (SGX: C6L) is one of the best managed and most profitable premium airlines currently in the world. Yet, its net income is constantly only around 2% to 3% of total revenue, which represents a very low profit margin.

In an industry that has been filled with multiple airlines going bankrupt over the past few years, Singapore Airlines can actually be considered part of an impressive few that are still profitable.

Multiple threats

That said, the company is facing multiple threats. Firstly, low-cost carriers have been gaining popularity over the past decade and are eating into SIA’s market share. To add to the challenge, its low-cost carrier associate, Tiger Airways Holding (SGX: J7X), is still struggling to survive in this competitive landscape.

Secondly, the crisis in Thailand and the unfortunate incident involving Malaysian Airline’s missing flight, MH370, have caused a drop in the number of Chinese tourists coming to the region. As the main airline of Singapore, SIA is bound to feel the negative effects. Furthermore, there’s also the slowdown in China’s economy to contend with, which might impact SIA.

Lastly, the company’s rising operating costs also does not seem to be slowing down anytime soon.

Creativity blossoms

Such problems have forced SIA to be more creative in increasing its revenue. According to The Business Times, SIA had recently launched a new online shopping mall which allows customers to shop and earn KrisFlyer and Priority Passenger Service miles points.

This is indeed a clever move following the successful launch of a similar concept by a rival airline AirAsia Berhad. SIA’s new online mall might not be a major revenue contributor for the company but it signifies management’s willingness to look at other channels to improve the earnings of the company.

Foolish Summary

At S$10.44 per share, SIA currently trades at a price to earnings ratio of 34 times and a price to book value of 0.92 times. The new venture should add some interesting twists when it comes to investing in Singapore Airlines.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares of AirAsia Berhad.