- Passenger operations at Singapore Airlines unit ‘marginally profitable’
- SIA made S$214.2 million FY14 Q1 net loss after stripping out Virgin Atlantic stake sale
- Tigerair’s possible investment in India’s SpiceJet slightly positive
- New SIA cabin products a catch-up to competitors’
- Qantas/Emirates alliance having significant impact on SIA
- Emirates’ Australian operation matches size of Singapore Airlines’ for the first time
- Singapore Airlines should partner with ANA & United Airlines to address North American network deficiencies
- Singapore Airlines likely to convert orders to A350-900R & -1000
It sounds all too familiar when Singapore Airlines (SIA) reported yet another disappointing quarterly results blaming on high fuel prices, stiff competition and an anaemic global economic recovery for its lacklustre financial performance, which managed to increase its FY2013/14 first-quarter net profit by 56% year-over-year to S$121.8 million (US$96.7 million) only through a S$336 million gain in the sale of its 49% stake in Virgin Atlantic to US’s Delta Air Lines.
Stripping out the stake sale, Singapore Airlines would have recorded a S$183.5 million loss before tax and a S$214.2 million after-tax loss, representing a 258% and 375% deterioration over the S$152.5 million profit before tax (PBT) and S$121.8 million net profit recorded in the prior year quarter, respectively.
If anything, the latest financial and operational performances are a setback for the Star Alliance carrier renowned for its ‘Singapore Girl’ services and benchmark-setting cabin products, despite a S$293 million impairment cost on 4 Singapore Airlines Cargo Boeing 747-400F freighters also weighed on the bottom line.
While it is true that Singapore Airlines’ operating profit as a group improved by 13.5% to S$81.7 million in the first quarter of FY2013/14 from S$72 million in the same period a year ago, as year-over-year revenue gains of 1.66% to S$3.84 billion from S$3.78 billion in FY2012/13 first-quarter were slightly ahead of the 1.43% increase in expenses to S$3.76 billion this year from S$3.71 billion in the prior-year period, the operating statistics paint of a different picture.
At the namesake Singapore Airlines unit where operating profit improved by 4.7% from S$85 million in FY2012/13 first-quarter to S$89 million a year later, a 1.56% increase in passenger traffic to 23.4 billion revenue passenger kilometres (RPKs) from 23 billion RPKs in FY12/13 first-quarter was outweighed by a 3.53% increase in passenger capacity to 30 billion available seat kilometres (ASKs) in this year’s April-June period compared to 29 billion ASKs in the year-earlier quarter. As a result, the load factor dipped by 1.5% year-over-year to 78%.
Interestingly, there was a notable divergence between the namesake SIA unit’s financial and operational performances in both years, with the break-even load factor (BELF) at 82%, 1.3% higher over the FY12/13 first-quarter’s 80.7%, exceeding the 78% and 79.5% load factors in the April-June period this and last financial year, respectively. This was a result of a 2.6% drop in passenger yield from 11.4 Singapore cents per RPK in FY12/13 first-quarter to 11.1 Singapore cents per RPK in FY13/14 first-quarter, outpacing a 1.1% lower unit cost from 9.2 Singapore cents per ASK in FY12/13 first-quarter to 9.1 Singapore cents per ASK in FY13/14 first-quarter.
This is meaningful since this fully illustrates the fact that the namesake SIA unit’s passenger operation is only marginally profitable, where non-operating items could have a disproportionately big impact on operating profit, albeit a 1.62% higher passenger carriage at 4.57 million over the year-ago quarter’s 4.5 million. FY2013/14 first-quarter’s 4% divergence between the break-even load factor (BELF) and load factor has widened from the 1.2% divergence last year, yet these non-operating items have actually led to a 4% improvement in its operating profits year-over-year.
“Passenger yield is used to calculate the BELF (passenger unit cost divided by passenger yield). However, there are also non-operating items not used in the calculation of passenger yield which are included in the reported operating profit figures,” a Singapore Airlines spokesman tells Aspire Aviation.
Similarly, its wholly-owned subsidiary SilkAir grew at the expense of profitability, which saw its operating profit fell by 22.2% to S$14 million in this financial year’s first-quarter from S$18 million a year ago despite carrying 4.1% more passengers to 864,000 during the 3-month period, up from 830,000 passengers last year. A passenger traffic growth of 6.2% from 1.29 billion revenue passenger kilometres (RPKs) in FY12/13 first-quarter to 1.37 billion RPKs in FY13/14 first-quarter was dwarfed by a 16.6% addition of capacity from 1.69 billion available seat kilometres (ASKs) in FY12/13 first-quarter to 1.97 billion ASKs a year later, thereby pushing down load factors by 6.8% to 69.6%.
Though SilkAir’s bottom line was helped during the quarter by a 3.7% increase in passenger yield to 14.1 Singapore cents per RPK from 13.6 Singapore cents per RPK a year earlier, coupled with a 3.9% reduction in unit cost to 9.8 Singapore cents per ASK from 10.2 Singapore cents per ASK in last year’s April-June period, that have led to a 5.5% lower break-even load factor (BELF) at 69.5%. This, however, was regrettably no match to the impact brought about by the fall in load factor, with the margin between BELF and load factor significantly narrowed to just 0.1%.
All these add up to a cautionary tale of an aviation icon in decline. That said, this steady decline over the past year or two could be halted and reversed, given Singapore Airlines’ strong brand and its extensive Southeast Asian network that no other carriers, even Dubai-based Emirates, could match. Simply put, Singapore Airlines is now reaching a make-or-break point.
A refreshed Tigerair unlikely to have a refreshed outlook
At the lower end of Singapore Airlines’ portfolio strategy, Tigerair is making some progress, although its steadiness and sustainability remain to be seen. Gone is the leaping tiger and here comes a refreshed Tigerair that promises to be “warm, passionate and genuine” (“Can Tigerair change its stripes?“, 4th Jul, 13).
Its operating loss in the April-June quarter in FY2013/14 narrowed by 47.4% to S$6.2 million from S$11.8 million in the year-ago quarter, primarily driven by a 30.3% higher revenue to S$236.2 million from S$181.3 million in FY12/13 first-quarter on a robust 36% growth in the number of passengers booked to 1.94 million from 1.43 million in last year’s April-June period; whereas expenses grew at a slower 25.5% rate to S$242.4 million from S$193.1 million in FY12/13 first-quarter.
Passenger traffic measured in revenue passenger kilometres (RPKs) soared by 32.6% to 3.1 billion from 2.35 billion a year earlier, outstripping a 30.2% capacity growth to 3.67 billion available seat kilometres (ASKs) from 2.82 billion ASKs in FY12/13 first-quarter, thereby yielding a 1.5% year-over-year improvement in load factor to 84.8%.
While this positive momentum was partially offset by a 1.8% slide in passenger yield to 7.46 Singapore cents per RPK from 7.59 Singapore cents per RPK a year earlier, Tigerair was reaping the benefits from a drastically higher aircraft utilisation during the quarter at 11.4 hours per aircraft per day, 21.3% higher from 9.4 hours a year earlier, coupling with a higher load factor, spreads the fixed costs such as aircraft ownership costs over a larger amount of outputs. This saw cost per available seat kilometre (CASK) dropping by 3.6% year-over-year to 6.60 Singapore cents from 6.84 Singapore cents and resulted in a 1.6% lower break-even load factor (BELF) to 88.5% from 90.1%.
Ancillary revenue, in the meantime, grew briskly by 49.4% to S$52.9 million in FY2013/14 first-quarter from S$35.4 million in FY12/13 first-quarter.
“Our operating performance improved during the April to June period as Tigerair Singapore and Tigerair Australia recorded significant increases in traffic volume in spite of a traditionally weak quarter for the air travel industry,” Tigerair Group chief executive Koay Peng Yen commented.
Moreover, this streak of positive momentum looks set to grow.
For instance, Tigerair Australia has a new lease on life after having completed a 60% stake sale to Australia’s second-biggest carrier Virgin Australia on 8th July. From FY2013/14 second-quarter onwards, Tigerair Australia’s financial results will be de-consolidated from the Singapore-based parent low-cost carrier (LCC) and Tigerair expects the Australian unit to be profitable on an operating level.
Tigerair Australia’s operating loss was improved by 17.7% during the 3-month period to S$17.3 million from S$21 million a year earlier, as revenue was boosted by 70.2% to S$71 million in FY13/14 first quarter from S$41.7 million in FY12/13 first quarter along with a 0.8% higher yield whereas expenses only rose by 40.8% to S$88.3 million from S$62.7 million in the year-ago period.
As operating expenses grew slower than capacity, which grew by 49.7% to 989 million available seat kilometres (ASKs) from 661 billion ASKs a year earlier, unit cost was lowered by a respectable 5.9%, while a 68.9% higher passenger traffic to 864 billion revenue passenger kilometres (RPKs) from 511 million RPKs in FY12/13 first quarter was also accompanied by a 85.2% increase in the number of passengers booked to 732,000 from 395,000 in the prior year quarter. As a result, load factor surged by 9.9% year-over-year to 87.3%.
Looking ahead, there are significant synergies stemming from the Virgin Australia acquisition which are going to help Tigerair Australia to compete effectively. Firstly, Tigerair Australia and Virgin Australia could optimise their flight schedules in order to cater to the different needs of business and leisure travellers, such as re-timing Tigerair Australia’s flights to evening departure, thereby maximises the revenue stream in which those passengers that place a premium on convenient travelling times would book on Virgin Australia’s pricier flights.
In doing so, not only could Virgin Australia Group maximise its revenue through its revenue management system (RMS), but also acts upon its commitment that Tigerair Australia will continue to expand and offer consumers affordable travel options under the majority ownership of Virgin Australia, instead of reducing the “capital cities flying” between Sydney, Melbourne and Brisbane as analysts suggested.
As it expands its operations with a commonly believed double-digit capacity growth in FY2013/14, of which Tigerair Australia is increasing flight frequencies on all routes except Sydney-Mackay, it will reap the benefits arising from economies of scale. This benefit is poised to grow when Tigerair Australia doubles its fleet from 11 aircraft to 23 examples over the next 5 years, with the potential to further grow its fleet to 35 examples should conditions warrant.
Furthermore, Tigerair Australia should be included in Virgin Australia’s Velocity frequent flyer programme (FFP), since this increases the programme’s attractiveness by expanding the earning and redeeming opportunities to its now 3.7 million member base against the venerable Qantas Frequent Flyer programme. This would be particularly useful in opening up price-elastic leisure travellers’ wallets that otherwise would not fly at all at a time when the Australian economy slows down.
Likewise, Tigerair Singapore continues to trend upwards with a 56.4% improvement in operating profit to S$5.9 million in FY2013/14 first-quarter from S$3.8 million in the year-ago quarter, as a revenue growth of 16.4% to S$160.9 million from S$138.3 million was faster than a 15.2% increase in expenses to S$154.9 million this past quarter from S$134.4 million a year earlier.
Tigerair Singapore added 1 Airbus A320 during the quarter and transported 17.1% more passengers to 1.21 million from 1.0 million a year earlier. Passenger traffic grew by 22.5% to 2.25 billion revenue passenger kilometres (RPKs) from 1.84 billion RPKs in the year-ago quarter, although a 24.3% rise in capacity to 2.63 billion available seat kilometres (ASKs) from 2.16 billion ASKs in FY12/13 first-quarter led to a 1.2% year-over-year lower load factor at 83.9%.
Going forward, Tigerair Singapore seems to be well-positioned as it consolidates its operations at Singapore Changi airport’s Terminal 2 from the budget terminal, which enabled passengers to connect seamlessly without clearing immigration and drove an 88.9% increase in passenger service charge from S$18 to S$34 year-over-year.
Tigerair Singapore is also gaining scales considerably as it adds 5 more Airbus A320 aircraft by the end of FY2013/14. Its capacity share at Singapore Changi has also grown to 9%, bigger than AirAsia’s 8% which decided to close its Singapore base merely 1 year after opening it and the 7% held by Jetstar Asia, data from consultancy Centre for Aviation (CAPA) showed.
It has commenced new services to Denpasar and Yogyakarta in July and Bandung in Indonesia in August while increasing frequency on routes from Singapore to Bangkok, Dhaka, Jakarta, Kochi, Penang and Perth during the current quarter.
There are pauses for concerns, though.
Tigerair Group’s finances remain shaky, with just S$0.1 million in cash flow being generated from operating activities, while S$33.5 million and S$32.4 million of cash was used to invest in its loss-making associates and repay loans, respectively. Had there not been a S$293.7 million cash raising from the preferential offering and rights issue, Tigerair Group would not have been able to increase its cash balance by 194.5% to S$345.1 million at 31st June, 2013 from S$117.2 million 3 months ago, let alone slashing its debt-to-equity ratio dramatically to 0.3 times from 2 times during the period.
At the same time, Tigerair Australia’s return to an operating profit is not guaranteed, as Tigerair Australia is about one-third the size of Jetstar’s domestic operation, the latter of which transported more passengers in 1 month alone than Tigerair Australia’s entire quarter. While it is true that Tigerair Australia has a lower cost base than Jetstar, how aggressive Jetstar will be in defending its home turf remains to be seen, which casts doubts on Tigerair Australia’s ambitious target of breaking even within 2 years.
Worse yet, the continuing losses at Tigerair Mandala and Tigerair Philippines are going to widen and threaten to wipe out any gains at its Singapore and Australia operations. Having reclassified the shareholder loans to Tigerair Mandala and Tigerair Philippines as investments and recorded a S$26.6 million loss as a result, its loss after tax in the quarter widened by a staggering 139% to S$32.8 million in FY13/14 first-quarter from S$13.7 million in the year-earlier quarter.
Now Tigerair Mandala has to grow its ways under the shadows of Indonesia’s Lion Air which has a dominant 44.8% domestic capacity share and Garuda Indonesia’s 22.8% and Sriwijaya Air’s 12.3% shares, as well as Batavia Air, Merpati and AirAsia Indonesia holding another 11.2%, 3.6% and 2.2% respective shares. Tigerair Philippines is not fairing any better with a 3.8% capacity share, whereas Cebu Air has 33.7%, PAL Express 12.1% and ZestAir 8.4%, let alone the recent AirAsia-Zest Air tie-up would make AirAsia Indonesia more competitive.
Meanwhile, a Tigerair investment in India’s low-cost carrier (LCC) SpiceJet would provide considerable benefits to Tigerair Group, despite its 10% fall in June quarter net profit to 505.5 million rupees on a 16.2% higher quarterly revenue at 17 billion rupees compared to 14.7 billion rupees a year ago.
A possible 24% stake investment in SpiceJet, according to the Economic Times, along with an extensive codeshare agreement, would be mutually beneficial for both carriers. For Tigerair, a SpiceJet deal would provide a large amount of feed traffic onto Tigerair Singapore’s network. For example, SpiceJet could drop its current Delhi-Guangzhou route and operate Delhi-Singapore route instead, where SpiceJet passengers could connect onwards to Guangzhou, Shenzhen, Hong Kong, Taipei, Manila, Cebu, Kuala Lumpur, Penang, Bandung, Yogyakarta, Ho Chi Minh City, Hanoi and Phnom Penh, just to name a few.
Tigerair Singapore’s flights to Hyderabad, Chennai, Bangalore and Kochi would also be boosted by a SpiceJet code-sharing as SpiceJet flies to dozens of first and second-tier destinations from these points, such as Mumbai, Goa, Pune, Coimbatore, Mangalore, Jaipur, etc.
One may wonder, then, the reason why it would be wise for Tigerair to invest in SpiceJet in such a competitive and high cost market that is entangled in red tapes that saw the 20.6 billion rupees Jet/Etihad deal receiving Foreign Investment Promotion Board (FIPB) approval on 29 July after agreeing to cede a seat on Jet Airways’ board of directors. Etihad will now have 2 seats on its board of directors and the deal is awaiting approvals by the Securities Exchange Board of India (SEBI) and Competition Commission of India (CCI).
First and foremost, a SpiceJet acquisition provides a fast track for Tigerair to tap into one of the world’s fastest-growing aviation markets with an established brand and a 19.5% market share, compared to IndiGo’s 29.5%, Jet Airways’ 23.1% inclusive of JetLite and GoAir’s 9.8%. This is unlike AirAsia India, the joint venture (JV) between AirAsia, Telestra Tradeplace and Tata Sons, that aims to grow its fleet by 10 aircraft per year from its base in Chennai but has to build its network and brand in India from scratch.
SpiceJet already flies from Chennai to secondary Indian cities such as Madurai, Tuticorin, Kozhikode, Jaipur, Rajahmundry and Hubli in addition to Colombo internationally which will be boosted by Tigerair’s codeshares.
In stark contrast, offering free seats to lure the 23 million daily train travellers to fly on AirAsia India with A320s against 78-seat Bombardier Dash 8 Q400 turboprops used by SpiceJet over a small network focused on third-tier cities with minimal feed traffic does not bode well for its profitability (“AirAsia: Is love in the air?“, 19th Jul, 13).
On the cost side, there is significant synergy to be gained regarding aircraft procurement, maintenance and training, as SpiceJet mulls an order for 50 A320ceo (current engine option) and A320neo (new engine option), according to a Centre for Aviation (CAPA) report. Though it makes much more sense for SpiceJet to postpone its aircraft order to replace and grow its fleet of 31 Boeing 737-800s, 6 737-900ERs and 14 Bombardier Dash 8 Q400s, as Tigerair Group would be able to negotiate a more substantial discount for any re-engined narrowbody such as the A320neo or 737 MAX than SpiceJet could obtain on a standalone basis.
Having its existing and future fleets maintained alongside Tigerair’s in Singapore, in addition to training and common aircraft interiors and seats could significantly reduce SpiceJet’s cost base, thereby enabling it to offer more attractive fares against a Chennai-based AirAsia India.
That said, a SpiceJet investment will weigh on Tigerair’s balance sheet and distract it from turning around its Australian, Indonesian and Philippine units, though Aspire Aviation believes the overall deal is slightly positive to Tigerair over the medium term.
More flexibility could halt Singapore Airlines’ slide
At the top end, Singapore Airlines has renewed its commitment to premium air travel by unveiling its new cabin products in early July, the first revamp since its last major upgrade in 2007.
The US$150 million investment includes a new First Class design from BMW Group Designworks USA and features a stylish reading light, ambient lighting, a new passenger control unit, a 24-inch liquid crystal display (LCD) screen and video touch-screen handsets. While the width of the new First Class remains unchanged at 35 inches, the bed length has been increased from 80 inches to 82 inches.
The new Business Class design from James Park Associates features a padded headboard cushion, increased stowage space and two new seat positions – ‘Sundeck’ and ‘Lazy Z’ that have proved to be popular with business class passengers in a survey. The new seat has a 78-inch length and is the industry’s widest flat-bed.
The new cabin products come with a new KrisWorld in-flight entertainment and connectivity (IFE&C) system based on Panasonic Avionics’ eX3 system. The new KrisWorld will have video touch screens that see the screen size being increased from 15.4 to 18 inches in Business Class and from 10.6 to 11.1 inches in Economy Class, as well as a new graphical user interface (GUI) that includes ‘Quick Search’, ‘Notification Centre’, multi-tasking, content recommendations and other passengers’ ratings on movies.
“The significant investment in our next generation of cabin products reaffirms our commitment to product innovation and leadership, and demonstrates our confidence in the future for premium full-service air travel. Special attention has been given to ergonomics, comfort, convenience and design, as well as to our customers’ interests and lifestyles. The task that we gave ourselves and our design partners when we started the process was to make ‘A Great Way to Fly’ even better. We are confident that we have delivered,” Singapore Airlines’ executive vice president commercial Mak Swee Wah declared.
Singapore Airlines will firstly introduce the new cabin products on the 8 Boeing 777-300ERs arriving later this year on the Singapore-London route as well as on the Airbus A350-900s the airline has on order, although it is likely that 5 new A380s in addition to the 19 A380s in its fleet will also be retrofitted with the new cabin products.
“No, it would not be correct to say that at this point. We are reviewing the possibility of retrofitting our new cabin products to other aircraft in our fleet,” a Singapore Airlines spokesman tells Aspire Aviation when asked if the A380 is going to be excluded from the product revamp.
While Singapore Airlines’ unveiling of new products is a welcoming news, it is arguably a catch-up to its Asian rivals rather than redefining premium air travel. Its new First Class with a respective seat width and pitch of 35 inches and 82 inches is in line with Hong Kong-based Cathay Pacific, whose first class seats have a 36 inches seat width and 81 inches seat pitch and are being refreshed with new glossy dark grey textured materials, a more adjustable meal table, more room in the personal closet and a new 4.3 inches touchscreen controller.
In contrast, Malaysia Airlines’ A380s boast the world’s largest First Class seat pitch at 89 inches whereas Korean Air’s 83 inches business class seat closely follows.
Singapore Airlines’ new Business Class seats with a 78 inches pitch, in the meantime, come closer to Cathay Pacific’s New Business Class at 82 inches while trumping Korean Air’s and Malaysia Airlines’ 74 inches pitch.
If anything, the latest product revamp symbolises Singapore Airlines’ emphasis on premium air travel, which accounts for around 8% of worldwide passenger traffic, down from around 9.5% in August 2007 before the global financial crisis hit, according to the Geneva-based industry body International Air Transport Association (IATA). Premium traffic only grew by 2.9% for the first 5 months of 2013, against a 4.3% growth in overall passenger traffic during the same period and a 4.8% growth in the same metric in 2013 first-half.
This means while the middle class population in Southeast Asia will grow, thereby spurring air travel demand, there is a paradigm shift in premium traffic and Singapore Airlines’ inflexibility in its product strategy, including its failure to embrace the premium economy class concept and a mixed fleet with aircraft featuring no first class, may prove to be a costly indecision.
While Singapore Airlines continues to have reservations towards the premium economy class, especially the effect of a revenue dilution of a trade-down from business class, its arch-rival Cathay Pacific shows that its business model is working, as passenger yields increased 4.4% in 2013 first-half versus a 2.6% drop at Singapore Airlines in FY13/14 first-quarter.
The premium economy product helped cushion a 0.6% decline in revenue at Cathay Pacific which eked out a HK$24 million (US$3.1 million) first-half profit, against a S$251.3 million (US$198 million) combined loss in FY13 fourth-quarter and FY14 first-quarter, after stripping out the S$105.4 million special item in the January-March period and the Virgin Atlantic stake sale in the April-June period.
Make no mistake, the premium economy class is a long-haul product and that while some trade-down from business class is inevitable, it is a much more price-elastic product than business class. A strong revenue management system (RMS) with 3rd-degree price discrimination could maximise the revenue gains by encouraging economy class passengers paying a full price to spend a small extra premium while minimising losses by pricing the highest-cost premium economy ticket closer to the cheapest business class fare.
Moreover, a premium economy class would bode well for an expanding middle class in China, India and Indonesia where passengers may not be willing to pay 4 times more to fly in business class while willing to pay a premium for better catering and onboard amenities and services. Such a revenue potential is large, as 25% of India’s 1.2 billion population and 63% of China’s 1.3 billion population are middle class households, whereas Indonesia is expected to leapfrog Germany and the United Kingdom (UK) as the world’s 7th-biggest economy by 2030, according to a McKinsey & Co. report.
Coupled with a 3-class aircraft featuring no first class, Singapore Airlines could better match availability of its products to different kinds of demand, especially when demand for the first class may not be sufficient to provide a satisfactory return on new routes in emerging markets and in some markets such as Amsterdam, Adelaide, Christchurch, Male, etc. As airline seats are perishable products that could not be held as inventories, it is paramount for Singapore Airlines to maximise revenues while cutting first class on non-perfoming routes that make no business sense.
Partners necessary to remedy network deficiencies
If acknowledging there is a problem is the first step towards solving and remedying it, then the Star Alliance carrier whose roots date back to 1947 is not ready to make that leap of faith yet.
“In terms of long-term strategy, there are three main pillars of our brand promise: service excellence, product leadership and network connectivity. All three are continually enhanced, as demonstrated by extensive investments that have been announced over the past year. Capex commitments alone for the next five years amount to S$12.6 billion, for example,” a Singapore Airlines spokesman insists.
“Our subsidiary SilkAir is an important part of our strategy, providing feed to the SIA network. As part of our portfolio approach to airline operations, we also have exposure to the low-cost market, through wholly-owned Scoot and through Tiger, in which we have a stake of nearly one third. At the same time we have been expanding our partnerships with more airlines to help us grow our network further for the benefit of our customers: our wide-ranging tie-up with Virgin Australia is one example, providing us access to 26 additional destinations in the important Australian market,” the Singapore Airlines spokesman emphasises.
Ironically, it is exactly network connectivity that Singapore Airlines is struggling against Middle Eastern carriers such as Dubai-based Emirates Airline, whose Qantas/Emirates partnership is having a significant impact on Singapore Airlines (“Why is Singapore important to Qantas?“, 5th Aug, 13).
In order to deepen its relationship in one of its most important markets, Singapore Airlines has increased its 10% stake in Virgin Australia to 19.9%, following a purchase of 255.5 million shares at 48 Australian cents per share, or 9.9% of the Brisbane-based carrier from Virgin Group that received its green light from the Foreign Investment Review Board (FIRB) on 21st June.
It has also added Milan and Rome to its Virgin Australia codeshare in June, bringing the number of codeshare or interline destinations to 87.
While Singapore Airlines’ codeshare partnership with Virgin Australia is strong, it focuses as much on Asia/Pacific as on Europe in the “Kangaroo Route”. In comparison, Qantas has added 33 one-stop European destinations including cities that Singapore Airlines does not serve such as Dublin, Newcastle, Glasgow, Nice, Lyon, Venice, Athens, Malta, Prague, Lisbon and Madrid, plus many more, in addition to 31 one-stop Middle East/North Africa destinations.
Since switching its stop-over hub from Singapore to Dubai from 1 March onwards, this saw Qantas and Emirates operate 98 weekly flights between Australia and Dubai with Emirates expanding the reach of its network to cover 55 destinations in Australia with close to 5,000 flights per week owing to Qantas’ extensive domestic network. Qantas’ capacity share at Singapore Changi, meanwhile, has dropped from 4% to just 1.4%, according to a Centre for Aviation (CAPA) report.
At first glance, Qantas’ shrinking capacity share at Singapore Airlines’ home base appears to be a good news for the Star Alliance carrier, but one would be mistaken to think so. Aspire Aviation can exclusively reveal that the size of Emirates’ Australian operation has matched the size of Singapore Airlines’ for the first time, after having transported 1.127 million passengers in the first 5 months of 2013, 14.2% higher than the 986,270 carried in the prior year period, according to an Aspire Aviation compilation of Bureau of Infrastructure, Transport and Regional Economics (BITRE) figures.
In comparison, Singapore Airlines carried just 1,953 more passengers than Emirates does in the same period at 1.128 million passengers, which represents a 4% increase over the 1.08 million passengers it flew in the prior-year period. While the official BITRE figures still show Singapore Airlines leading with a 9.1% share versus Emirates’ 8.7%, it should be noted that BITRE’s comparison is a lagging indicator showing a 12-month statistic for the year ended May 2013.
Besides Europe and Middle East/North Africa, Singapore Airlines arguably has a network deficiency in North America, with Los Angeles being served via Tokyo Narita, San Francisco via Hong Kong and Seoul, Houston via Moscow and New York John F. Kennedy via Frankfurt following the suspension of the world’s longest direct flights to Newark and Los Angeles in this fall.
To expand its North American network, Aspire Aviation believes it will have to partner with Japan’s All Nippon Airways (ANA) and United Airlines, for several reasons. Firstly, both Singapore Airlines and All Nippon Airways (ANA) are already codeshare partners on a number of routes such as Singapore-Jakarta, Singapore-Johannesburg, Singapore-Dubai, Ahmedabad, Bangalore, Chennai, Delhi, Kolkata, Mumbai, and all flights between Singapore and Japan.
Tokyo Narita is also a strong Star Alliance hub where United Airlines flies to Denver, Houston, Los Angeles, San Francisco, Newark, Chicago and Washington.
Joining the transpacific partnership of ANA and United Airlines would add Seattle, San Jose, Chicago and Washington to SIA’s network, as well as Newark later this fall. In return, SilkAir’s extensive network in Southeast Asia that includes destinations such as Da Nang, Siem Reap, Phnom Penh, Badung, Kuching, Davao, Semarang and Makassar should be offered to ANA’s and United’s passengers.
Secondly, Japan and Singapore have a full open skies agreement which allows Singapore Airlines (SIA) to add North American destinations such as Newark and Boston in the future, subject to the US government’s approval.
Most importantly, when the number of slots at Tokyo Haneda increases to 447,000 by end-FY2013 from 390,000 and those at Tokyo Narita increases to 300,000 by FY2014 from 270,000, entering the transpacific partnership would position Singapore Airlines well to tap into any growth opportunity, especially at the downtown Haneda airport that lures a large amount of high-yield premium traffic.
In addition, Tokyo Narita is currently offering a discount in landing fees to make it the “preferred” airport and enhance its competitiveness by charging 50% less to the ¥1,550 per tonne landing charge, equivalent to the scale used in charging International Civil Aviation Organisation (ICAO) Code A aircraft, versus the ¥1,950 per tonne and ¥2,000 per tonne charged to Code E and F aircraft, respectively.
In doing so, Singapore Airlines will not be left out in any growth opportunities in North America stopping over at a high-yield Tokyo market, before new technologies emerge such as the 353-seat 9,480nm (nautical miles) Boeing 777-8X that could carry a decent amount of revenue cargo and passengers across the Pacific and open up new markets (“Boeing 777X & 787-10 show the lure of the X factor“, 2nd Jul, 13).
On the other hand, Singapore Airlines dismisses any concern that its large aircraft order book for 125 aircraft, consisting of 12 Airbus A330-300s, 5 A380s, 8 Boeing 777-300ERs, 70 Airbus A350-900s and 30 787-10s would create any overcapacity, which may place downward pressure on passenger yields.
“We take a long-term approach to our business and have always maintained a policy of having a young and modern fleet, which benefits us in many ways. While we have commitments in place for 125 aircraft, deliveries stretch out over quite a number of years, and the aircraft are intended for both growth and renewal purposes. Our additional A330-300s, B777-300ERs and A380s will be deployed in the same manner as the existing fleets of those aircraft types. The A350-900s are intended for both medium and long-range routes, while the B787-10s are intended for use on medium-range routes,” a Singapore Airlines spokesman explains.
Assuming the eventual leased fleet of 34 Airbus A330-300s is going to be replaced by 30 787-10s, Singapore Airlines will still have 29 Boeing 777-200s, including 11 -200ERs version and 7 777-300s that need to be replaced in its regional fleet, which Aspire Aviation‘s sources at Singapore Airlines say are likely to be replaced by around 20 de-rated A350-900 regional variant that has a maximum take-off weight (MTOW) of 250 tonnes and a 75,000lbs thrust rating (“Special Report: The “One Boeing” lean & mean profit machine“, 1st Aug, 13).
That would leave 50 out of 70 Airbus A350-900s on order to replace its remaining 27-unit Boeing 777-300ER and the remaining 20 aircraft in its medium-haul fleet, which leads Aspire Aviation to believe a conversion to the 350-seat A350-1000s is highly likely. Simply put, Singapore Airlines’ existing aircraft order backlog leaves around 3 A350-900s for growth, while its 5 A380s on order are also likely to replace the A380s that come off lease from Doric beginning in 2017, hardly an over-ordered scenario given the future traffic growth in the Asia/Pacific region.
In conclusion, Singapore Airlines is reaching a make-or-break point, with its indecision over the premium economy concept and not having a mixed fleet with aircraft that features no first class product undermining its ability to match demand with the right products and maximise passenger yields; from a network perspective, the Qantas/Emirates alliance is having a significant impact on Singapore Airlines’ “Kangaroo Route” business, with the size of Emirates’ Australian operation matching SIA’s for the first time, despite its Virgin Australia equity and codeshare partnership.
But as competition mounts on every front, Singapore Airlines will have to come up with innovative solutions or products that bring back its heydays and, importantly, it needs to do so quickly at this critical juncture.