2012 was a significant year for Singapore Airlines (SIA) which saw the Singaporean flag carrier embark on a shift in strategy in reinvesting in its namesake unit alongside strengthening its strategic partnership with Virgin Australia by acquiring a 10% stake in a carrier well positioned in one of SIA’s most important core markets, in addition to the sale of its 49% stake in United Kingdom carrier Virgin Atlantic. These moves, coupled with SilkAir’s remarkable growth achieved in the first 9 months of FY2012/13 and its firm order for 23 Boeing 737-800 Next-Generation (NG) and 31 re-engined 737 MAX 8 aircraft, symbolise the airline’s efforts in an uphill battle to consolidate its market position in a mature market at Singapore Changi airport.
As Singapore Airlines starts the final quarter of FY2012/13, it is increasingly finding itself at a crossroads which is likely to be reflected in the carrier’s 9-month result announcement on 7th February.
Passenger traffic at the mainline Singapore Airlines unit, measured in revenue passenger kilometres (RPKs), soared by 7.8% from 65.6 billion in the first 9 months of FY2011/12 to 70.8 billion this financial year, outpacing a 4.9% growth in passenger capacity, measured in available seat kilometres (ASKs) from 84.8 billion in the prior year period to 89 billion this financial year, thus leading to a 2.1% increase in load factor from 77.3% last year to 79.5% this year. The number of passengers carried increased by 7.06% to 13.72 million in the first 9 months of FY2012/13 from 12.8 million in the same period last financial year.
Though this traffic growth at the mainline SIA unit was dwarfed by a 20% increase in passenger traffic, measured in revenue passenger kilometres (RPKs), at its wholly-owned subsidiary SilkAir from 3.29 billion last year to 3.95 billion in the first three quarters of FY2012/13. Passenger load factor slumped to 74.7% this year from 75.8% last year as passenger capacity soared at a proportionately faster pace at 21.8% from 4.34 billion last year to 5.29 billion this year.
While achieving passenger traffic growth at both full-service carriers amid global economic uncertainties throughout the first 9 months of FY2012/13 may seem to be satisfactory at first glance, Singapore Airlines’ 9-month results are likely to be impacted by softening passenger yields and a slumping cargo business that will inevitably result in a further eroded profitability much akin to the 30% decline in SIA’s fiscal first-half profit to S$168 million from S$239 million in the prior financial year primarily attributable to a 3.4% decrease in passenger yield from 11.8 Singaporean cents last financial year to 11.4 Singaporean cents in first-half FY2012/13 and a tripling in SIA Cargo’s operating loss from S$31 million in first-half FY2011/12 to S$99 million in first-half FY2012/13.
Despite a year-end pickup in cargo business at its arch-rival Cathay Pacific (“Cathay Pacific to be a smarter & leaner airline in 2013“, 3rd Jan, 13), Singapore Airlines Cargo was not as fortunate, with freight traffic continuing to slump at a high single-digit, low double-digit pace and the number of tonnes carried plunging unabatedly at a double-digit pace in the last 3 months of 2012.
Freight traffic, measured in freight tonnage kilometres (FTKs), plunged by 6.5% to 5.18 billion in the first 9 months of FY2012/13 from 5.54 billion in the prior year period, whereas cargo capacity measured in available cargo tonnage kilometres, fell proportionately less by 5.1% to 8.17 billion this year from 8.6 billion last year, thereby leading to a 1% drop in cargo load factor from 64.4% last year to 63.4% this year. The number of tonnes carried, meanwhile, fell by 5.4% from 920.4 million tonnes carried a year ago to 870.9 million tonnes carried this year, with the measure skewed by a continuous double-digit significant slump in the FY2012/13 third-quarter.
All these illustrate that Singapore Airlines must do more to improve its profitability and reinforce its weakening market position at its home base at Singapore Changi.
Long-term profitability of Singapore Airlines challenged
Singapore Airlines has announced a swathe of product enhancements over the past few months, from a US$400 million upgrade in in-flight entertainment system (IFE) to Panasonic Avionics’ eX3 system on 20 Airbus A350-900s due for delivery in 2014, 15 Airbus A330-300s and 8 Boeing 777-300ERs, to appointing interior design firm ONG&ONG for a new airport lounge design around the world, as well as BMW Group subsidiary DesignworksUSA, and Singapore-based James Park Associates (JPA) on new cabin products to be rolled out in the second half of this year.
The airline also launched a S$95 million upgrade of its cabins on board 10 Boeing 777-200ER aircraft to the existing cabin products featured on its Airbus A380 superjumbo that has entered into service on 13th January on the Singapore-Amsterdam route, in addition to a US$50 million OnAir in-flight connectivity programme to be gradually rolled out on the airline’s A380 and 777-300ER fleets over the next 2 years.
In addition, Singapore Airlines has firmed up its commitments to purchase an additional 5 Airbus A380s and 20 A350-900s, which boosts the carrier’s A350-900 backlog to 40 and brings the eventual number of its A380 fleet to 24.
“This major order will provide us with additional growth opportunities and is consistent with our longstanding policy of maintaining a young and modern fleet. It demonstrates our commitment to the Singapore hub, and our confidence in the strength of the market for premium full-service travel. The aircraft will enable us to further enhance our network, providing more travel options to our customers. They will also feature the next generation of in-flight cabin products to keep us at the forefront of airline product innovation,” Singapore Airlines chief executive Goh Choon Phong commented.
Meanwhile, Singapore Airlines has deepened its commitment towards one of its most important markets – Australia, not only through increasing its services to Melbourne and Adelaide with the former seeing a fourth daily service and the latter seeing the number of weekly flights increased from 10 to 12, but also a game-changing partnership with Virgin Australia by purchasing 245.6 million of its new shares at A$0.4288 per share with anti-dilution rights worth A$105.3 million. The acquisition of a 10% stake in the carrier was part of a comprehensive deal under which Tiger Airways Holdings will sell 60% of Tiger Airways Australia to Virgin Australia (“Virgin Australia’s acquisition spree strengthens foundation for growth“, 12th Nov, 12).
These, combined with the expansion of Virgin Australia’s codeshare with SIA which enables the former airline’s customers to access 64 destinations in Asia and 12 destinations in Europe via Singapore from Perth, Darwin, Adelaide, Melbourne, Brisbane and Sydney, are meant to strengthen Singapore Airlines’ overall standing at Singapore Changi as a hub.
However, the long-term profitability of Singapore Airlines’ hub strategy is being challenged, not least because of the rise of low-cost carriers (LCCs) at its home turf.
The capacity share held by low-cost carriers (LCCs) at Singapore Changi has increased from 25% merely two years ago to 27% a year ago and to 29.7% at the beginning of 2013, Centre for Aviation (CAPA) reported, whereas Singapore Airlines’ capacity share shrank from 2007′s 52% to 33% at present. Tiger Airways and SilkAir, meanwhile, now account for 8% and 7% of capacity shares at the airport, respectively, while Scoot Airlines holds another 1%. Jetstar and AirAsia also hold another 7% share each.
This is consistent with the global trend of a shrinking premium travel share, which, despite a 13.7% year-over-year increase in November 2012 in the Asia/Pacific region, the global share of premium passengers has remained at an 8% level, down from the around 9.5% level seen in early 2007 before the onset of the global financial crisis, according to the latest figures from Geneva-based industry body International Air Transport Association (IATA).
Worse yet, Singapore Airlines’ role as a mid-point carrier between Australia and Europe, as well as between Australia and China, is also being challenged, with the number of passengers arriving or originating in the United Arab Emirates (UAE) soaring by 19.8% year-over-year to 2.22 million for the 12 months ending October 2012.
This is further evidenced by the tremendous growth for Middle Eastern carriers such as Dubai-based Emirates Airline and Abu Dhabi-based Eithad Airways, the former of which recorded a 13.6% increase in the number of passengers to 2.03 million in the first 10 months of 2012 from 1.79 million in the same period a year earlier, whereas the latter recorded an 8.8% increase from 416,668 in the first 10 months of 2011 to 453,255 a year later, according to the latest figures from the Bureau of Infrastructure, Transport and Regional Economics (BITRE). In comparison, the number of passengers being carried between Australia and Singapore by Singapore Airlines (SIA) soared by 7.3% from 2.07 million to 2.2 million in the first 10 months of 2012. SilkAir and Scoot Airlines carried an insignificant 159,331 and 18,119 passengers in the same period.
While Singapore Airlines will continue to lure transit traffic to Europe through shorter lay-over times as Qantas passengers will have to endure a lay-over period of 4-8 hours should they choose to fly on the flying kangaroo to Dubai before switching to Emirates flights for onward European connections, in addition to the fact that Singapore Airlines’ continuous expansion into the Australian market and its fifth daily flight to London Heathrow will minimise the 2% impact on the number of passenger traffic and 1% on the number of flights at Singapore Changi, according to Singaporean transport minister Lui Tuck Yew, the Qantas/Emirates partnership will see the narrowing gap between Emirates and Singapore Airlines (SIA) becoming less and less pronounced, should current growth trend persist.
Furthermore, Singapore Airlines has traditionally been capitalising on the connecting traffic from Australia/New Zealand to China and North Asia, yet its Chinese network has deficiencies that may be vulnerable for competitors to exploit, especially the Chinese carriers which have been expanding aggressively into the Australia market.
Currently Singapore Airlines serves Shanghai Pudong, Beijing and Guangzhou while its wholly-owned subsidiary SilkAir serves secondary Chinese cities such as Chongqing, Chengdu, Xiamen, Shenzhen, Kunming, Wuhan and Changsha. In contrast, Hong Kong-based Dragonair, a wholly-owned subsidiary of Cathay Pacific, serves all of the above destinations plus Xi’an, Guilin, Haikou, Sanya, Qingdao, Hangzhou, Fuzhou, Nanjing and the newly-added services to Zhengzhou and Wenzhou, in addition to North Asian destinations such as Jeju, Busan, Okinawa, Taichung, Kaohsiung and Sapporo that neither Singapore Airlines nor SilkAir serves.
Make no mistake, while the service standard offered by Chinese carriers is not compatible to that of Singapore Airlines (SIA) and Cathay Pacific, the competitive threat posed by Chinese carriers should not be underestimated by any means and any shortcoming in service quality is likely to be compensated through lower price and better flight network as a price/service offering as a whole.
For instance, China Southern Airlines serves numerous secondary and tertiary Chinese destinations via its Guangzhou Baiyun hub, such as Yanji, Harbin, Changchun, Shenyang, Jinan, Hefei, Yiwu, Enshi, Changzhi, Lanzhou, Yinchuan, Baotou, Urumqi, Lhasa – just to name a few, and it could potentially offer multiple sector tickets enabling business travellers to make trips to Chinese cities on their way to and from Europe and Australia, a network scope and flexibility other Western carriers are unlikely to match.
In the first 10 months of 2012, China Southern saw a 27.8% increase in the number of passengers carried from 403,290 a year ago to 515,229 this year, followed by Shanghai-based China Eastern Airlines (CEA) whose number of passengers carried surged by 22.9% from 222,882 in the prior year period to 273,915. Chinese national flag carrier Air China, saw a 4.6% increase from 227,606 passengers being carried a year earlier to 238,007.
A partial solution would be forming a partnership with Shanghai-based China Eastern Airlines (CEA), following a failed 2007 attempt with Temasek Holdings to acquire a 24% stake in the carrier. In doing so, it would be a win-win for both carriers as CEA will gain transfer traffic from Singapore Airlines’ and SilkAir’s strong presence in Southeast Asia and India, given CEA’s weak existing presence with Bangkok, Singapore, Kuala Lumpur, Phuket, Vientiane, Mandalay, Dhaka and only 2 destinations – Calcutta and Delhi in India, whereas Singapore Airlines (SIA) and SilkAir serve Hyderabad, Mumbai, Chennai, Bangalore, Kochi, Ahmedabad, Thiruvananthapuram and Vishakhapatnam.
For Singapore Airlines (SIA), it could gain instant access to a myriad of secondary and tertiary cities in Northeast China via CEA’s hub in Shanghai Hongqiao and Southwest China via the SkyTeam carrier’s strong premium hub in Kunming, such as Guilin and Dali. The partnership could further be bolstered by launching SilkAir flights to Xi’an, an existing China Eastern hub and starting Singapore Airlines flights to Chengdu, where CEA could provide onward connections to 13 Mainland China cities spanning the middle and eastern part of China.
Though for this partnership to work Singapore Airlines will have to demonstrate the material benefits it brings to CEA will not be matched by CEA’s joint venture (JV) with Australia’s Qantas Airways in Jetstar Hong Kong, which aims to commence operations in mid-2013 with 3 Airbus A320 aircraft before expanding to a fleet of 18 A320s by 2015 and secure a 6%-7% capacity share at Hong Kong International Airport within 3 years of operations.
While it may seem to be unthinkable for China Eastern to partner with Singapore Airlines and undermine its own US$198 million joint investment in Jetstar Hong Kong, which will address some of CEA’s deficiency in its Southeast Asian network, the potential Singapore Airlines/SilkAir partnership mainly caters for premium passengers whereas the Jetstar Hong Kong venture opens up a new market at the low-end segment, as well as neither China Eastern Airlines nor Jetstar Hong Kong could quickly match the instant access to many Southeast Asian and Indian destinations by an established carrier as SIA.
Tiger on parental support: A prey or a predator?
In response to the competitive threat posed by a rise of low-cost carriers (LCCs) at home, Singapore Airlines (SIA) has adopted a portfolio strategy with Tiger Airways, 32.7% owned by SIA, covering the short-haul low-cost market and Scoot Airlines, which commenced operations with its first flights to Sydney on 4th June, 2012, covering the long-haul low-cost market. However, without a clear strategy at Tiger Airways and Scoot still at an early developmental stage, these low-cost carriers will inevitably weigh on SIA’s earnings and eventually require even greater parental support before turning the corner in a distant future.
The headline figures seem to be going well, with Tiger Airways returning to the black in the FY2012/13 third-quarter at a S$2 million (US$1.62 million) after-tax profit, versus a S$17.4 million post-tax loss in the prior year period, backed by a 47.1% increase in fiscal third-quarter revenue from S$168.4 million recorded a year earlier to S$247.7 million, outpacing a 26.7% increase in operating expense to S$229.8 million from S$181.4 million a year ago. Ancillary revenue, in particular, grew astonishingly by 68.3% from S$28.5 million in the third-quarter in FY2011/12 to S$48 million in the same period this year. Group passenger yield, measured in revenue per revenue passenger kilometres (RPK), rose by 3.5% from 7.89 Singaporean cents a year earlier to 8.17 Singaporean cents this year, whereas unit costs, measured in cost per available seat kilometres (CASKs), were reduced by 4.1% year-over-year to 6.52 Singaporean cents from 6.80 Singaporean cents.
For the 9-month period ending 31st December 2012, revenue rose by 36.9% from S$457 million in FY2011/12 to S$625.6 million in FY2012/13, while operating expense soared by 20.6% from S$523 million a year ago to S$631 million this year, thus leading to a significantly improved operating loss of S$5.4 million versus a S$66 million operating loss a year ago, in addition to a narrowed after-tax loss of S$30 million in the first 9 months of FY2012/13 compared to the S$87.9 million after-tax loss in the prior year period.
“We are encouraged by the turnaround in this quarter. However, we are mindful that the September to December period is traditionally the strongest quarter for the air travel industry, and this has also contributed positively to our performance. We will continue to put in our best effort to keep up the Group’s recovery momentum,” Tiger Airways Group chief executive Koay Peng Yen said.
Yet these headline figures are misleading and masking the challenging conditions Tiger Airways’ overseas franchises are in, let alone the dire and fundamentally weak balance sheet it has which leads Aspire Aviation firmly believe that a further capital infusion by Singapore Airlines (SIA) to shore up the wounded tiger’s weak balance sheet is all but inevitable.
Tiger Airways Singapore remains the lone unit in the black in FY2012/13 third-quarter, with a 34.6% increase in revenue from S$128 million in third-quarter FY2011/12 to S$173 million this year dwarfing a 9.5% increase in expense from S$133 million a year earlier to S$146 million this year, thereby producing an operating profit of S$27 million, reversed from the S$5 million operating loss in the prior year period. Passenger traffic at the unit, measured in revenue passenger kilometres (RPKs), rose by 27.7% from 1.7 billion in the third-quarter of FY2011/12 to 2.2 billion in the same period this year, whereas capacity, measured in available seat kilometres (ASKs) rose by at a slower pace at 15.9% from 2.2 billion last year to 2.57 billion this year thereby leading to a markedly improved load factor of 85.6% compared to the 77.7% recorded a year earlier.
The 9-month results at the Singaporean unit are similarly satisfactory with a 30.7% increase in 9-month revenue from S$340 million in FY2011/12 to S$444 million in 9-month FY2012/13, while a proportionately slower 17% increase in 9-month expense from S$349 million in FY2011/12 to S$408 million led to a S$36 million 9-month operating profit this year, a dramatic reversal from the S$9 million 9-month operating loss in the prior fiscal year. 9-month traffic rose by 17.7% to 5.88 billion revenue passenger kilometre (RPK) from 5 billion RPK a year earlier while 9-month capacity only soared by 13.5% from 6.1 billion available seat kilometre (ASK) a year ago to 6.97 billion ASK this year led to a 3% increase in passenger load factor from 81.3% last year to 84.3% this year.
In stark contrast to the improved profitability at Tiger Airways Singapore, other Tiger units overseas are not on the mend and face a bleak financial outlook in the foreseeable future.
For Tiger Airways Australia, the third-qaurter FY2012/13 operating loss deteriorated by 49.6% year-over-year to S$13 million from S$9 million in the year-earlier period, despite an 80.2% increase in revenue from S$40 million in the third-quarter of FY2011/12 to S$73 million in the same period a year later and a 103.7% increase in passenger traffic from 385 million revenue passenger kilometres (RPKs) in the 3-month period last year to 784 million RPK this year. The worsened result was primarily attributable to the intense price war between Australia’s two biggest players, Qantas and Virgin Australia in the lucrative domestic market.
For the 9-month period, Tiger Airways Australia’s revenues increased by 53.1% from S$115 million in 9-month FY2011/12 to S$176 million in the same period this fiscal year while operating expense soared by a less prominent rate of 32.2% from S$174 million a year earlier to S$230 million this year, thereby leading to a S$54 million 9-month operating loss in FY2012/13, a S$8.6 million improvement from last year’s 9-month operating loss of S$59 million.
Similarly, its Indonesian operation PT Mandala Airlines and its Philippines operation SE Air are in dire financial traits, with the former posting an unrecognised loss of S$14.3 million at 31st December, 2012 and the latter posting a loss of S$8.3 million. Though the accounting practice of writing off the initial US$1 investment in PT Mandala Airlines has meant its impact on Tiger Airways’ profit and loss statement is somewhat skewed and considerably understated, or otherwise Tiger Airways Group would have recorded an after-tax loss of around S$12 million or so had the Mandala Airlines’ loss been truly reflected.
To make matters worse, Tiger Airways is finding there is little room for manoeuvre, both financially and operationally.
Operationally, PT Mandala Airlines lacks the scale necessary to compete with an ambitious Lion Air in the Indonesian market, of which Lion Air holds a 44.8% domestic capacity share, whereas Garuda Indonesia and Sriwijaya Air hold another 22.8% and 12.3%, respectively. Other domestic players such as Batavia Air, Merpati and AirAsia Indonesia hold another 11.2%, 3.6% and 2.2% respective share.
The same holds true for its SE Air unit, which it owns 40% of its shares, with it facing a strong Cebu Air which holds a dominant 45.3% domestic capacity share, whereas Airphil Express and its parent Philippine Airlines hold 20.5% and 15.4% capacity shares, respectively, while SE Air only holds a 5% domestic capacity share.
While the Tiger Airways Australia unit is hopeful for an eventual turnaround should the Virgin Australia acquisition of 60% of its shares be successful, which will invest up to A$62.5 million in Tiger Airways Australia and expand its fleet from 11 aircraft to 35 aircraft by 2018 with an initial injection of A$20 million, the transaction must still obtain the approval from the Australian Competition and Consumers Commission (ACCC) whose chairman Rod Sims has voiced his scepticism in eliminating the third player from the Australian domestic market.
Looking ahead, for Mandala Airlines in which Tiger Airways owns 33% of its shares as well as SE Air, these airline units are unlikely to be able to achieve the optimal scale necessary to compete in each’s local market and have yet to overcome the distribution challenge which has underpinned Cebu Pacific and Lion Air’s success since the latter two have utilised the traditional distribution network via travel agency extensively in The Philippines and Indonesia where the internet penetration rate remains low at 29% and 18%, respectively. A noteworthy point is, SE Air is also facing significant capacity constraints at Manila Airport while its Clark Air Force base is an inconvenient 2-hour drive from downtown Manila, thereby undermining its attractiveness.
Financially, Tiger Airways’ already weak balance sheet looks poised to deteriorate further, as Mandala Airlines continues to expand with new Jakarta-Surabaya, Surabaya-Kuala Lumpur and Surabaya-Singapore routes in January 2013 and Surabaya-Singapore, Pekanbaru-Singapore, Jakarta- Pekanbaru and Medan-Pekanbaru routes in February 2013 and its net debt-to-equity ratio, or net gearing ratio, has already soared from 1.7 times at 31st March 2012 to 1.8 times at 31st December 2012. This primarily stems from a 10.4% decrease in assets from S$1.072 billion as at 31st March 2012 to S$960 million as at 31st December, which outpaced a 9.6% drop in total liabilities from S$823 million to S$744 million over the same period.
The airline’s debt-to-equity ratio and current ratio, the former of which measure a company’s ability to pay down its long-term debt and its riskiness and the latter of which measure the company’s ability to pay day-to-day expenses and meet short-term obligation, are also particularly worrisome. The Tiger Airways Group has a S$744 million total liability at 31st December but only a shareholders’ equity of S$215.8 million, equating to a 345% debt-to-equity ratio while its current ratio, which is calculated by dividing the current assets of S$101.8 million against current liabilities of S$343.2 million, stands at only 0.297, meaning every dollar of debt the company has is only backed up by $0.297 worth of asset.
All in all, Tiger Airways is in a strategically and financially weak position to tap into and profit from the rising Asian low-cost carrier demand, let alone doubling down on a failing regionalisation strategy by investing in struggling South Korean low-cost carrier T’way despite a promising North Asian low-cost market where the low-cost market has remained low at 9.5% compared to 52.0% in Southeast Asia, according to a Citibank note sent to clients on 23 January.
“We think Tiger’s forays into Indonesia and Philippines may yield low returns. While these two markets have huge hinterland potential and will likely experience explosive LCC traffic growth in the coming decade, we believe Tiger’s associates’ lack of scale in these two countries (against dominant players Lion Air in Indonesia and Cebu Pacific in the Philippines) may translate into a period of unprofitable expansion. Besides the lack of scale, both associates may take time before they can establish an effective distribution network. Tiger’s entry into Australia has also been largely unprofitable since it started operations in 2007,” a separate Citibank research note on Tiger Airways on 24 January cautioned.
“We believe Tiger’s pursuit of a Pan-Asia footprint may over-stretch its financial resources and dilute its management focus. The overall Pan-Asia strategy may be misguided,” the research note summarises.
Although Singapore Airlines’ two-pronged portfolio strategy may ultimately produce benefits, including protecting the mainline SIA unit’s market share while attracting increased revenues through the stimulatory effect on price-sensitive, elastic air travel demand, the turnaround efforts at Tiger Airways and the development phase of Scoot Airlines may continue to distract SIA’s management focus from its namesake unit.
It was exactly during this period when its fellow Asian carriers have started to catch up with Singapore Airlines’ superior products whose last major revamp took place in 2007, with Garuda Indonesia having won the “world’s most improved airline” title in 2010 and the title of Asia’s best regional airline in 2012 from London-based Skytrax. At the same time, Korean Air rolled out its 407-seat Airbus A380 superjumbo with an all-business class upper deck, which is the lowest seat count being featured on an A380 while Singapore Airlines rolled out a 409-seat A380 version featuring an all-business class upper deck in response. Malaysia Airlines (MAS) has also rolled out its A380s whose first class boasts an 89-inch seat pitch and a 40-inch seat width compared to SIA’s 81-inch pitch and 35-inch width on its A380 Suite and a business class whose 74-inch seat pitch trumps Singapore Airlines’ 55-inch seat pitch, while Hong Kong-based Cathay Pacific spent more than HK$1 billion (US$131 million) rolling out the highly-regarded New Business Class that won the world’s best business class title in 2012 from Skytrax.
Going forward, how well Singapore Airlines executes on its portfolio strategy will be key to determining how effective it competes with both low-cost carriers (LCCs) such as AirAsia and Lion Air and increasingly stiff competition on international routes with Middle-Eastern carriers and emerging rivals such as Garuda Indonesia which plans to use Boeing 777-300ERs to launch new destinations in Europe such as London, Paris and Frankfurt, etc. while forging a codeshare with Eithad Airways to include 31 new European, North American, Middle Eastern and African destinations.
On the low-cost front, closer ties between Tiger Airways Singapore, Scoot Airlines and Tiger Airways Australia will help the turnaround process at Tiger, albeit it will nevertheless be a drawn-out, incremental one instead of being a panacea. For instance, the recent interline arrangement between Tiger Airways Singapore, Singapore Airlines and SilkAir could be expanded to cover SE Air and PT Mandala Airlines’ destinations. Moreover, Scoot and Tiger Airways may enter into joint-pricing, revenue and cost-sharing deal on routes served by both carriers such as Bangkok and Taipei, while launching codeshares on multiple Scoot and Tiger Airways flights such as on Scoot’s Singapore-Sydney flights which could connect on Tiger Australia flights to Melbourne, Brisbane, Gold Coast, Adelaide and Perth flight. In doing so, Scoot and Tiger Airways, including all its subsidiaries and Tiger Australia, could cross-feed each other’s network which will maximise and fully realise the revenue synergies as if they were one airline.
Scoot Airlines could also enjoy a 20% fuel burn saving and a 30% maintenance cost saving by acquiring 20 Boeing 787-9 Dreamliners to replace its 777-200ER aircraft and Singapore Airlines’ recently issued request for proposal (RFP) for as-yet-unlaunched 323-seat 787-10X double-stretched aircraft which will be 25% more fuel efficient than an Airbus A330-300 when it enters into service in 2018-2019, will ensure the procurement, training and maintenance costs are shared between the Singapore Airlines namesake unit and Scoot Airlines as current plan envisages Scoot having a mixed 787 fleet and SIA will ultimately replace the 19 A330-300s in its fleet and another 15 examples on order.
“Boeing has kept us fully informed about the performance of the 787 since we committed to acquire the aircraft. We are confident that Boeing’s ongoing performance monitoring and external review process will identify and resolve any issues, and look forward to taking delivery of our first 787 on schedule in late 2014,” Scoot Airlines said in a statement in response to the recent spate of 787 battery issues and the ensuing worldwide grounding.
On the premium front, the aforementioned cabin products, in-flight entertainment and connectivity (IFE&C) and global lounge upgrades are moves in the right direction, though Singapore Airlines will have to demonstrate that it will not overlook the needs of its namesake unit and be distracted owing to developments at Scoot and Tiger Airways and that its new 3-class cabin products will be glamorous and be top of their classes once again.
Last but not least, Aspire Aviation continues to believe Singapore Airlines (SIA) needs a premium economy class and cut its first class offering on underperforming routes. The widening price gap between the business class and economy class indicates there exists a market for an intermediate product, a premium economy class designed for long-haul travel that extracts consumer surplus (total use value – total exchange value, the amount of a good one is willing to forego in order to obtain all of another good – total exchange value) from those who are willing and able to pay twice the economy class fare, in exchange for better seats, services and in-flight catering, yet are unprepared to pay for a full business class fare whose fare is triple or quadruple the economy class fare. Should a premium economy class product be structured and priced properly, it should minimise the trade-down from business class to economy class while maximise the upgrade from economy class by utilising a powerful revenue management system (RMS) with price differentiation.
While Singapore Airlines currently does not plan to launch a premium economy class in its latest cabin product upgrade, according to Aspire Aviation‘s sources at the Star Alliance carrier, featuring a premium economy class and mixing 3-class aircraft with 4-class aircraft with first class products will better match premium demand to supply, while maximising the total revenue as premium economy class has a considerably higher price elasticity of demand than business class and first class, whose gain in total revenue will more than outweigh the loss in total revenue owing to the revenue dilution effect of a trade-down, and minimising the loss of revenue by flying empty first class or business class seats on routes where demand for first class products simply does not exist, such as Rome and Amsterdam, etc.
This will in turn improve SIA’s overall profitability and its heavily underperforming Singapore Airlines Suite product uptake especially over the past year or so due to the global financial crisis and the subsequent European sovereign debt crisis.
Simply put, with Singapore Airlines at a crossroads, it needs to delicately balance the needs to restructure its struggling Tiger Airways subsidiary and the likelihood of the low-cost carrier (LCC) raising fresh capital to shore up its finances, while refocusing on the namesake Singapore Airlines unit which made Singapore Airlines great and where it excels with a competitive advantage, albeit at a reduced degree compared to its Asian rivals today.
Execution of Singapore Airlines’ portfolio strategy will be the name of the game in the foreseeable future.