Singapore Airlines needs a strategic rethink

In posting a 73% improvement in FY2012 fiscal first quarter profits, Singapore Airlines (SIA) has not only exceeded analysts’ estimates of a S$69 million profit, but also turned around from a rare S$38.2 million FY2011 fiscal fourth quarter loss. However, against the backdrop of an ever more challenging economy and historically high jet fuel prices, the Singaporean flag carrier also faces an issue of identity, of what its premium brand supposedly stands for and also what it should implement in order to thrive and stay ahead of its aspiring rivals such as Korean Air, Garuda Indonesia, Emirates Airline, Etihad Airways and more in the increasingly competitive premium market.

In the three-month period ending 30th June, Asia’s second-largest carrier by market capitalisation posted a profit of S$78 million (US$62 million) profit, a 73% improvement from the S$44.7 million recorded in the prior year period. Revenue grew by 6% to S$3.78 billion from S$3.58 billion a year ago, outpacing a 4% increase in expenditures from S$3.57 billion last year to S$3.7 billion this year, thereby leading to a more than five fold increase in operating profit during the period from S$11 million recorded a year earlier to S$72 million this year.

Singapore Airlines carried a total of 4.49 million passengers during the period, an 8.5% increase over last year’s 4.15 million, whereas traffic measured in revenue passenger kilometres (RPKs) rose by 8.8% to 23 billion from 21 billion recorded in the corresponding period last year, indicating an increase in average stage length travelled by passengers. This outpaced a 4.3% soar in capacity measured in available seat kilometres (ASKs) to 2.899 billion this year from 2.78 billion last year, resulting in a 3.9% increase in passenger load factor to 79.5% this year from 75.6%.

SIA’s wholly-owned full-service subsidiary SilkAir was the growth story during the quarter, registering a 15.3% increase in the number of passengers carried to 830,000 in FY2012 first-quarter from 720,000 in the prior year period, with a 24.68% growth in capacity measured in available seat kilometres (ASKs) to 1.69 billion this year from 1.36 billion last year. This was backed by a robust 24.9% increase in traffic measured in revenue passenger kilometres (RPKs) to 1.29 billion in the three-month period from last year’s 1.035 billion, thereby producing a marginal 0.1% increase in load factor to 76.4%.

But this is where the good story ends.

While the 73% increase in FY2012 first-quarter profit was indeed notable, coupled with a stringent cost discipline which saw SIA’s cost per available seat kilometres (CASKs) being stagnant at 9.2 Singaporean cents and SilkAir’s CASK declined by 2.86% from 10.5 Singaporean cents in FY2011 first-quarter to 10.2 cents in FY2012 first-quarter, some worrisome underlying trends have gone unnoticed that will shed light on the multi-faceted challenges facing the world-renowned carrier.

Importantly, Singapore Airlines (SIA) is arguably a mature business and intensifying competition from fellow Asian carriers and especially Middle Eastern carriers has eroded premium yields that SIA once enjoyed. During the FY2012 first-quarter, passenger yields at the Singapore Airlines unit have declined by 3.39% from 11.8 Singaporean cents to 11.4 Singaporean cents whereas the yields at the SilkAir unit decreased proportionately faster by 5.56% to 13.6 Singaporean cents this year from 14.4 Singaporean cents.

As a result, the break-even load factor (BELF) at both carriers soared, as BELF = cost per available seat kilometres (CASK) / yield (revenue per RPK). The BELF at the namesake SIA unit increased from 78% to 80.7%, whereas the BELF at SilkAir increased from 72.9% to 75%.

Namesake Singapore Airlines unit needs reinvestment
A noteworthy point is, today’s Singapore Airlines (SIA) is no longer your father’s Singapore Airlines which used to be an industry benchmark with far superior service offerings against the industry standard. As other Asian and Middle Eastern carriers have made notable strides in product enhancement, Singapore Airlines (SIA) has not had any major cabin overhauls since the introduction of its flagship Airbus A380 fleet in October 2007.

During this period of time, other carriers have noticeably leapt forward, with Korean Air having the lowest seat-count 407-seat Airbus A380 along with a dedicated upper deck for the business class. Korean Air’s First Class seats on the A380 also have a larger seat pitch than Singapore Airlines’ A380 Suite at 83 inches versus SIA’s 81 inches, albeit Korean Air’s First Class is less wide with a seat width of 26.5 inches versus SIA A380 Suite’s 35 inches. The same holds true for business class seats, with Korean Air’s offering featuring a seat pitch and width of 74 inches and 21.6 inches, respectively, versus SIA’s Business Class with a seat pitch and width of 55 inches and 34 inches, respectively. Singapore Airlines has two different configurations for the A380, with one accommodating 471 passengers and the other accommodating 409 passengers with a dedicated business class upper deck.

Singapore Airlines’ arch-rival, Hong Kong-based Cathay Pacific Airways, has spent more than HK$1 billion (US$128 million) on a New Business Class that won this year’s “World’s Best Business Class” by London’s Skytrax, whose 82 inches seat pitch is a staggering 49% larger than SIA’s 55 inches albeit the former is less wide at 21 inches versus SIA’s 34 inches.

Loss-making Malaysian flag carrier Malaysia Airlines (MAS), meanwhile, has a 494-seat A380 featuring a first class with a seat pitch and width of 89 inches and 40 inches, respectively, as well as a business class that has a seat pitch of 74 inches, both of which best Singapore Airlines’. Thai Airways’ A380 will accommodate 507 passengers with a first class seat pitch of 83 inches and a seat width of 26.5 inches.

“What is new today may turn common tomorrow,” Singapore Airlines’ Hong Kong manager Alvin Seah told China Daily.

“We constantly raise the bar on service levels. It is that intuitive touch, what some call the ‘heartware’, that is hard to replicate. SIA has forged a reputation for providing service that even other airlines talk about. That’s where the reputable Singapore Girl comes into the picture. She represents the genuine, warm and caring service that a customer can expect onboard our flight,” Seah commented.

While it is true that a carrier’s service offering does not only hinge on seat count, seat pitch and width alone, the aforementioned examples do highlight how other Asian carriers managed to partly close the gap while Singapore Airlines has not made a significant reinvestment in its namesake unit. And with Asian hospitality also touted by other Asian carriers, as well as a common characteristic of Asian crew members in general, Aspire Aviation thinks Singapore Airlines needs to reinvest to upgrade its service offering.

In particular, Aspire Aviation believes Singapore Airlines should launch a premium economy class of its own, as deteriorating yields, especially the yield cannibalisation from wholly-owned long-haul, low-cost Scoot Airlines, mean the namesake SIA unit has to extract more consumer surplus from passengers who are willing and able to pay for a 50% price premium than an economy class seat, but is not prepared to pay thrice the price of an economy class seat for a business class seat.

While Aspire Aviation understands that the senior management at Singapore Airlines continues to be sceptical and has reservation towards the premium economy concept, fearing that a premium economy class will lead to further yield erosion as a result of trade-down from business class, a premium economy business model works should the airline exercise 3-rd degree price discrimination and manage its yields properly through a strong revenue management system (RMS).

As the premium economy class is a long-haul product that is relatively price-elastic than business class offering, a higher price elasticity of demand means a decrease in price will lead to a proportionately bigger increase in quantity demanded, ceteris paribus and that a drop in revenue as a result of trade-down will be outweighed by an increase in revenue owing to an increase in volume.

As the Singaporean economy is highly dependent on the Chinese economy, evidenced by a second-quarter gross domestic product (GDP) drop of 1.1%, a premium economy class would bode well for an eventual economic upturn driven by air travel demand to and from China. What is more, given the fact that Singapore is a mature air travel market where low-cost carriers (LCCs) account for 27% of capacity at Singapore Changi Airport, a premium economy class would bode well for this paradigm shift in premium travel, especially as the number of premium travel continues to slide to just over 8%, according to Geneva-based International Air Transport Association’s (IATA) premium traffic monitor for May 2012.

“We do study the concept of premium economy from time to time, but we have determined that it is not something that we will introduce at this stage,” a Singapore Airlines spokesman told Aspire Aviation.

In addition, Singapore Airlines’ strong balance sheet makes these reinvestments affordable and justifiable, as its debt-to-equity ratio is 0.08 times with a net asset of S$10.84 million, whereas Malaysia Airlines (MAS) has a 2011 debt-to-equity ratio of 10.83 times and lost RM242 million during 2012 first-quarter after losing RM2.52 billion (US$841million) in 2011 (“Malaysia Airlines in crisis“, 14th Mar, 12). This also compares to Korean Air’s more than 700% in debt-to-equity ratio ending March 31st, 2012.

Image Courtesy of Singapore Airlines

Singapore Airlines’ strategic role in SIA Group
While the passenger traffic at SilkAir and Changi Airport has soared, with passenger movements at Singapore Changi growing 12.7%, 8.4% and 9.7% in April, May and June, respectively, Singapore Airlines’ growth in revenue passenger kilometres (RPKs) was slower at 9.8%, 7.1% and 11.9% in the respective months. This compares to SilkAir’s monthly figures for April, May and June that showed a remarkable RPK growth of 26.2%, 22.7% and 25.8%, respectively.

Besides relying on SilkAir to grow, Singapore Airlines needs to grow at its namesake unit in order to end the consistent decline in capacity share at Changi Airport. Singapore Airlines’ capacity share at Changi has slid from 2007′s 52% to 34% in early 2011 to just 24.9% for full-year 2011, according to the annual Airline Business airports survey. SilkAir has another 11% capacity share and Tiger Airways currently has an 7% capacity share. Other LCCs, AirAsia and Jetstar currently have another 8% and 7% shares, respectively.

Worse yet, Singapore Airlines’ advantageous geographic location in the middle of the Kangaroo Route is now being challenged by Middle Eastern carriers such as Emirates Airline, with 25% of the transit traffic originating from Australia shifted from Asia to the Middle East (“Qantas on a wing and a prayer“, 19th Jun, 12). In 2011, Singapore Airlines carried 2.53 million passengers between Singapore and Australia, a 2.7% increase over the prior year. Emirates carried 2.2 million, accounting for 7.9% of the international traffic, whereas SIA accounted for 9%. It used to be 11.3% for SIA and 6.8% for Emirates just 5 years ago.

In response, Singapore Airlines (SIA) cuts its fares and increases its capacity to Australia, which plans to add a fourth daily flight to Perth beginning October 28th in the winter operating season. It also plans to up-gauge the Melbourne flights with the A380 operating 2 of 3 daily flights, up from one. It also announced that it will be increasing frequency of its Mumbai service from 19 per week to 21 per week, add a fourth daily flight to London Heathrow, up-gauge another Hong Kong-San Francisco flight to an A380 from a Boeing 777-300ER and up-gauge a Tokyo Narita flight to an A380 thus bringing the number of daily A380 flights to these cities, Tokyo Narita and Hong Kong, to two.

Singapore Airlines will suspend Abu Dhabi and Athens services while reducing frequencies to Milan, Istanbul and Barcelona at the same time.

Therefore Aspire Aviation believes Singapore Airlines (SIA) should leverage its strong China presence through SilkAir, an advantage that Emirates does not have and few other carriers have other than Cathay Pacific and Dragonair, by bringing more Singapore Airlines-branded flights to Chinese destinations such as Tianjin which is currently only served by Scoot Airlines, Chongqing and Chengdu which are growing fast as well as bring Singapore Airlines-branded flights to Yagon, following the opening up of the once sanctioned Myanmar.

Then Singapore Airlines could rely on SilkAir to further expand its China presence to destinations such as Sanya, Haikou, Taiyuan, Urumqi and Kaohsiung and Taichung, etc.

Furthermore, Singapore Airlines could also tap into the underserved Central Asia market where flights between Asia/Pacific, China and Central Asia are relatively scarce. Potential destinations in the resource-rich region include Almaty in Kazakhstan where Air Astana only flies to Bangkok, Kuala Lumpur, Hong Kong, Beijing and Urumqi; Baku in Azerbaijan and those in neighbouring countries Uzbekistan, Tajikistan.

As Asia/Pacific, China in particular, are hungry for natural resources and the air travel market connecting Central Asia and Asia/Pacific is significantly underserved where even the likes of Emirates and Turkish Airlines do not serve well, the business case of launching flights to there may indeed be feasible and bring more long-term benefits to Singapore Airlines (SIA) should air traffic right restrictions be overcome.

For Singapore Airlines, figuring out the strategic role it plays within the larger SIA Group is of utmost importance. As the SIA Group focuses its Asian growth on SilkAir and embarks on a low-cost long-haul subsidiary Scoot Airlines, Singapore Airlines has seemingly lost its focus on what it does best and where it excels – serving premium traffic.

With Scoot Airlines expanding and flying to Gold Coast, Sydney, Taipei, Tokyo, Tianjin and Bangkok and look to further expand to destinations such as Chengdu, yield cannibalisation with the namesake SIA unit is all but inevitable. And in order to thrive and differentiate itself against competing rivals such as Jetstar Asia and AirAsia, Scoot Airlines must live up to its initial vision of being an airline with character that has “Scootitude”, which is so far not the case albeit with an iPad offering as in-flight entertainment (IFE) that reduces an aircraft’s weight by 7% and increases seating by 40% (“Scoot by Singapore Airlines: What’s in a name?“, 4th Nov, 11).

As Scoot will only have a 1% capacity share at Singapore Changi by end of 2012, Singapore Airlines cannot afford to stand still while relying on Scoot Airlines to recover its lost market share overnight. Simply put, Scoot is no panacea for Singapore Airlines.

What Singapore Airlines needs to do to excel in this competitive era is to renew and reinvest in its success formula – an unrivalled product and service offering, a strong network, a young fleet, overhaul its cabin offerings with the addition of a premium economy class that extracts consumer surpluses and boosts profitability and brings Singapore Airlines to its heydays once again.

While it is true that “what is new today is old tomorrow” and that its unique unmatched service standard matters most, the success formula needs to be renewed and reinvested in. Being proud, sitting back and letting time passing by while other Asian competitors catch up and significantly improve their product offerings is by no means a sound airline business strategy. Singapore Airlines has already fallen behind in the past few years, and it should renew its business model which bodes well for an ultimate global economic recovery.

Fortunately, for Singapore Airlines, it has plenty of flexibility and a strong balance sheet to make any significant investments. Though whether Singapore Airlines would listen to these wake-up calls, face the reality and innovate once again is an utterly different issue.

Image Courtesy of Paul Sadler/Air Services Australia