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Will Increased Ancillary Revenue Help Singapore Airlines Ltd’s Earnings Soar?

Other than making money from selling seats to travellers, airlines can also earn their dough by selling food and beverages on board, charging extra for checked-in bags, and gain commissions from services like car rental and hotel bookings. Collectively, these are termed as “ancillary revenue”.

An annual survey conducted by IdeaWorks and CarTrawler (the former’s a United States-based research company; the latter is a car rental firm) showed that ancillary revenue for global airlines grew to US$31.5 billion in 2013, an increase of 1200% since 2007. Most airlines tap into ancillary revenues to diversify their earnings and at the same time, milk more cash from each revenue-paying passenger.

The survey also showed that the leaders in ancillary revenue are airlines such as Spirit, Wizz Air and Allegiant; ancillary revenue comprises more than 30% of their respective top-lines. For locally-listed airline Tiger Airways (SGX: J7X), 23% of its total revenue of S$734 million for the financial year ended 31 March 2014 came from ancillary sources. Singapore Airlines (SGX: C6L), which also has a significant stake in Tigerair, seems to be going on-board the ancillary revenue revolution too.

In December last year, it set up a “new revenue” unit and since then, Singapore Airlines has offered customers more travel-related services such as tie-ups with Agoda.com for hotel bookings, Rentalcars.com for vehicle rentals, and AIG Travel Guard for travel insurance. Singapore Airlines also recently launched a new online mall called KrisFlyer Spree. The airline already earns extra revenue by charging for Wi-Fi on board certain flights. It also earns extra income by selling “preferred” seats in economy class, which comes with more legroom.

With all the above, it seems clear that Singapore Airlines is busy creating ancillary revenue streams. But, how much money can SIA make from them?

United Airlines, a legacy carrier like SIA, earned US$5.7 billion in ancillary revenue last year, an astronomical rise of 851% since 2007. For its latest financial year, it earned US$38.3 billion in revenue. Ancillary revenue thus translates to 14.9% of total revenue for United. If SIA could generate at least 15% of its total revenue from ancillary sources, it could boost its earnings significantly.

The Singapore flag carrier currently does not break down its revenue into passenger seat revenue and ancillary revenue, unlike Tigerair. For Singapore Airlines’ latest financial year, it saw a 1% rise in revenue to S$15.2 billion but net profit had declined 5.1% to S$359.5 million.

Over the past five years, Singapore Airline’s shares have declined 22%, a stark contrast to the 26% gain for the Straits Times Index (SGX: ^STI), of which SIA is also one of its 30 constituents. This is not too surprising when we consider that the airline’s profit has declined from S$1.1 billion to S$359.5 million during the same period. If the new ancillary revenue drive by Singapore Airlines takes off smoothly in meaningful amounts, we might see some profit growth from the airline.

Singapore Airlines is currently trading at 35 times its historical earnings and is going ex-dividend on Friday.

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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 Sudhan P doesn’t own shares in any companies mentioned.