SIA pins hopes on new long-haul LCC

“[SIA’s plan] appears to be a recognition that the flag carrier’s long-standing focus on premium traffic (which must, in turn, mutually subsidise lower-priced leisure travellers) is not, in itself, a formula for the future.” – Centre for Asia Pacific Aviation]

6th Jun 2011


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SIA pins hopes on new long-haul LCC

 “[SIA’s plan] appears to be a recognition that the flag carrier’s long-standing focus on premium traffic (which must, in turn, mutually subsidise lower-priced leisure travellers) is not, in itself, a formula for the future.” – Centre for Asia Pacific Aviation]


Singapore Airlines (SIA) is traditionally one of the world’s most profitable carriers, but has been losing market share over the past few years with the rapid expansion of services by Asia’s low-cost carriers, led by Kuala Lumpur-based AirAsia.
In response, the airline announced on 25 May that it plans to set up a new low-cost, long-haul subsidiary (see story, page 8), which analysts say marks a major shift in its long-term strategy aimed at restoring growth and addressing the needs of the expanding leisure market.
In the past financial year, ended 31 March, SIA carried 16.6 million passengers, up just 11 percent from the number carried a decade earlier. That’s equivalent to a 1.1 percent growth rate per annum – hardly impressive.
By comparison, total traffic at Singapore’s Changi Airport from the calendar year 2000 to 2010 grew 32 percent, to 42 million passengers, equivalent to 3.2 percent growth per annum.
In the three business years from 2007-2008, SIA has seen annual passenger numbers drop as much as 15 percent, from 19.1 million to 16.6 million in the business year just ended. In that same period, Changi Airport saw a 15 percent increase in passenger throughput, while SIA’s share of traffic at its home hub dropped from 50 percent to about 35 percent.
“The flag carrier’s strategy over this period has clearly been to prioritise profitability over expansion, often a sound approach,” says the Sydney-based aviation consultancy Centre for Asia Pacific Aviation (CAPA). “But in the fast-growing Asian market this can be a risky long-term option, leaving the way for other competitors to expand and grow their network strength.”
According to the consultancy, SIA’s latest announcement “appears to be a recognition that the flag carrier’s long-standing focus on premium traffic (which must, in turn, mutually subsidise lower-priced leisure travellers) is not, in itself, a formula for the future”. The fastest growth, CAPA notes, is in leisure markets, while business travel is expanding more slowly.
The airline says it plans to launch services with the new carrier within a year, operating widebody aircraft on medium- and long-haul services. No information has yet been released on aircraft types, numbers and specific destinations. The new unit will be managed separately from SIA, but major decisions will be co-ordinated.
CAPA predicts that the new carrier will adopt some of the business model followed by Qantas’s Jetstar subsidiary or AirAsia’s AirAsia X affiliate, such as offering business-class seats and linking its network with its parent airline’s.
“SIA is likely to use the new airline for a combination of adding capacity on existing routes and launching new routes which have a high mix of leisure travellers, with an emphasis on new destinations in India and China,” CAPA says. The new unit will also be able to take over a portion of SIA’s lower-yield routes that draw fewer business-class travellers, including some destinations in Australia and New Zealand – markets where SIA earns a good chunk of its revenue.
The airline, which has a solid global reputation for quality, appears to be recognising that it is no longer enough to focus on the high-yield, top end of the market. The economic downturn of the past two years made business travellers less willing to pay premium rates to fly in comfort, while Middle Eastern carriers have been taking an increasing share of the top-end travel market.
Of course, SIA already has one budget affiliate – Tiger Airways – but it only holds a minority stake in that low-cost carrier (LCC). As a result, Tiger does not mesh with SIA’s services in the way that Jetstar does with Qantas’s, while the legacy carrier has no control over the LCC’s management and just three representatives on the board.
It would not make sense at the moment for the Singaporean flag carrier to launch its own short-haul LCC, since that market is already covered effectively by Tiger, AirAsia and Jetstar. Meanwhile SIA also has its regional subsidiary SilkAir, which has managed both to compete in the short-haul market with increasing competition from LCCs, and to be an effective feeder into its parent’s network.
According to CAPA, there is another element to SIA’s strategy.
“While signalling an important shift, the launch of the new carrier should also be seen as a retaliatory move in response to growing competition from archrival Qantas,” CAPA says. “The Qantas Group is rapidly expanding its low-cost operation in Singapore through Jetstar and is even reportedly considering establishing a new full-service carrier at Changi.”
SIA will also probably use the new carrier to try to retain its share of the Australian market, which now accounts for 17 percent of the company’s revenue – more than any other region outside Asia. Competition is growing in the crucial Europe-Australia market, where the Singapore carrier is in danger of losing out to rivals such as Emirates and Qatar Airways, while Qantas is also being forced to step up its fight for this crucial market.
The new strategy will make SIA the second full-service carrier in the world after Qantas to set up a long-haul LCC, and has much riding on this gamble.
“Every other flag carrier in the region, and maybe beyond, will be watching with more than passing interest,” says CAPA. “This will not be the last such example of a long-haul low-cost operation in Asia’s dynamic aviation market.”
 

 

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