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SIA faces challenges on many fronts — David Leo

NOV 20 — Reporting declining profits, Singapore Airlines (SIA) appears to be caught in the premium and budget crosswinds. The SIA Group posted a profit of S$168 million (RM420 million) for the first half of FY2012/13, down 30 per cent compared to the same period last year. The second quarter was worse, with the profit plunging 54 per cent.

Not optimistic about the impending second half, SIA CEO Goh Choon Phong said: “We can expect that, going forward, the economy will continue to be very challenging or perhaps even more challenging than it is now, and we don’t see any reprieve in terms of improvement, especially from economies such as Europe.”

The airline is waking up — perhaps a little late, but better late than never — to new realities in a changing landscape marked by the growth of budget carriers; increased competition in the premium market even in a sluggish global economy; demographic and geographical shifts that can enhance or limit an airline’s propensity to carry connecting traffic; and a frenzy for forging partnerships to better compete.

At no time is SIA more challenged. In the heyday of the premium boom, SIA had dismissed the threat of budget carriers. Today, it is keen to grow Scoot, which has added Bangkok, Taipei and Tianjin to its network besides Sydney. SilkAir has also been given more freedom to expand. SIA is adopting a broad strategy to embrace both premium and budget markets.

Yet the lines are not all that clearly defined. Scoot and Tiger may be competing increasingly on the same routes, in what Goh referred to as an intended scenario of greater collaboration between the two budget carriers. Parent SIA is replacing seven of SilkAir’s weekly services to Yangon, albeit adding more seats jointly as a consequence.

STRATEGIC ALLIANCE

Granted, the rationalisation has only just begun. A significant development that should help in the process is the sale of a 69 per cent stake in Tiger Australia to Virgin Australia. It was long suspected that when SIA launched Scoot, it was a matter of time before it let Tiger go.

There could not be a more opportune time as Tiger shows signs of recovery following the lifting of restrictions by the Australian authorities on its operations due to safety concerns.

That may be the first step to eventually letting Tiger go completely; this includes the Singapore outfit which is 33 per cent owned by SIA. It would mean a neater plate of singularly challenged airlines for the SIA Group — premium, regional and budget — with undivided focus on independent growth. As it is now, one wonders whether SIA, in balancing sibling fortunes and itself going where they are, will lose focus of what used to make it the darling of premium travel.

If there is concern that losing Tiger may result in restricting SIA’s access to the Australian market, that fear is allayed by the strategic alliance inked between SIA and Virgin Australia. The agreement provides for seamless transfers between the two airlines and shared airport lounges. SIA will benefit from Virgin’s local connections, and passing over majority control of Tiger to Virgin can only strengthen that reach.

Virgin Australia’s Chief Executive John Berghetti said: “By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia’s competitive cost base and build a sustainable budget carrier.” Both partners will together invest A$62.5 million (RM198 million) to grow Tiger, which will continue to operate under its own identity.

COMPETITION FROM KEY RIVALS

SIA’s main concern right now must be the consolidated competition from key rivals Qantas and Emirates Airlines on the kangaroo route. SIA’s recent purchase of a 10 per cent stake in Virgin Australia testifies to this; coming barely three months after its own alliance with Virgin, the move is viewed as an expedient response to the Qantas-Emirates partnership.

The intention then was a commercial arrangement without equity participation, but there has been a change of heart.

That aside, SIA’s alliance with Virgin is an expected, if not inevitable, development, which to some observers is Hobson’s choice. But SIA’s relationship with Virgin dates back to 1999 when it acquired 49 per cent of Virgin Atlantic. That, however, has not turned out to be a stellar buy, which SIA has made known its intention to dispose of.

By comparison, SIA’s 10 per cent stake in Virgin Australia looks like a token gesture. SIA is being cautious, having learnt a bitter lesson from past mistakes, but perhaps overly conservative for one known to stun the world with big, bold initiatives, treading where others fear to go.

The new Virgin stake is reminiscent of SIA’s interest more than a decade ago in Ansett Australia — Qantas’ arch-rival and Australia’s second-largest airline then — when its bid to acquire the airline was upstaged by Air New Zealand. SIA then took a stake in Air NZ, which it subsequently sold at a loss following costly futile attempts to rescue Ansett, which finally collapsed in 2001.

But if it is the Ansett curse that SIA fears, the victim is not likely to be Virgin but Tiger, which for now has secured a new future with Virgin. It is unlikely that Tiger will go down the path of Ansett, though one never knows if it will eventually be assimilated into Virgin’s domestic operations.

We miss the mover-and-shaker days of the SIA that used to drive rather than react to the competition. SIA of late has been operating somewhat under the radar. But that is understandable considering the state of the present global economy.

While noting that the immediate six months ahead look bleak, the next two years should be interesting, as the competition heats up, with SIA and at least two key rivals — Qantas and Cathay Pacific — introducing upgraded premium products, and as we watch how the competition on the kangaroo route between SIA and Qantas/Emirates shapes up.

Hopefully at the material time, SIA would have regained its footing. — Today

* David Leo is an author and aviation veteran.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.

 

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