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Why Singapore Air Won't Be Laid Low by SARS


In mid-March, as news of the SARS epidemic spread through Asia, Singapore Airlines Ltd. execs sprang into action. They began holding daily strategy sessions at 4 p.m. to forecast the disease's impact on the airline, and in early April started cutting flights. By the end of the month they had slashed Singapore Air's schedule by nearly a third, trimmed its fleet by 13%, and delayed the delivery of five new jets until 2006. When that wasn't enough, in late April the carrier laid off 206 flight attendants-in-training and ordered its 6,600 cabin crew to take a week of unpaid leave every two months for the next year.

Brutal stuff. But in the weeks since SARS hit Asia's airline industry like a mountain slide, no carrier has won more praise for its response. "Singapore Air was the first to react to SARS," says David Clark, a securities analyst at Lehman Brothers Inc. The carrier's swift action hasn't saved it from losing some $900,000 a day, analysts say: Its planes, 70% full on average before the crisis, now fly at 50% of capacity. But as the threat from severe acute respiratory syndrome subsides, it looks as if Singapore Air will emerge without serious damage. After being hammered throughout April, the carrier's shares surged 18% in the opening days of May.

In addition to cutting costs fast, Singapore Air has made some smart moves to attract passengers to its planes. While management has resigned itself to a drop in Singapore-bound traffic, it is reassuring wary fliers that it's safe to pass through Singapore's Changi Airport from, say, Sydney to New York. In late April, the Singapore government -- the airline's ultimate controlling shareholder -- installed thermal imaging machines to check passengers' temperatures as they enter the airport, pulling anyone with a fever aside for further checks. Crews with tanks of liquid disinfectant strapped to their backs scrub the 80 Singapore Air planes that now land at Changi every day. And the airline is offering half-price deals on flights to Europe.

Singapore Air's most vital weapon against SARS may be its strong balance sheet. The airline carries almost no debt, owns most of its planes, and has a $1 billion cash pile -- blessing it with a debt-to-equity ratio of just 22%. That's lower than any other international carrier and well below the industry average of 300%, according to Morgan Stanley. Despite the hammering it took in March, Singapore Air is expected to post a profit of $520 million on sales of $5.2 billion for the fiscal year ended Mar. 31, says Lehman Brothers Inc. The brokerage expects the SARS shock to cut profits by 50% this year but says the airline will likely make a full recovery next year.

CEO Cheong Choong Kong, who declined to be interviewed, has kept the books balanced by running a tight ship. Singapore Air cuts pilot-training costs by using differently fitted versions of the same planes for both long- and short-haul flights. It keeps fuel costs down by using only the latest and most fuel-efficient planes available, giving it the youngest fleet in the sky. In June, Cheong plans to retire, handing control to his longtime deputy, Chew Choon Seng, who insiders say has been behind many of Singapore Air's cost-cutting policies. Chew will probably continue Cheong's strategy of growth through acquisition to help the carrier get landing rights at key destinations abroad.

So far, though, Singapore Air's forays overseas have been troubled. In 1999, the airline paid $220 million for a 25% stake in Air New Zealand; it is now worth only $28 million after the bankruptcy of ANZ'S Australian subsidiary, Ansett. And Singapore Air has had to write down 90% of the $1 billion it paid for a 49% stake in Virgin Atlantic Airways. "ANZ and Virgin turned out to be a disaster," says Chin Lim, an analyst at Morgan Stanley in Singapore.

But getting its wings clipped has caused only a brief dip in Singapore Air's profitability. And its name comes up whenever airlines run into trouble: It has been mentioned as a possible buyer of both United Airlines (UAL) Inc. and American Airlines Inc. That's a sign of the health of this airline from a tiny Asian city-state. Clearly, it will take more than SARS to bring it down. By Michael Shari in Singapore


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