Game changer?

So May 25th’s announcement that it is to launch a long-haul low-cost airline is as stunning as it is decisive and sends an emphatic message to the global industry that long-haul low-cost has arrived and is the way of the future.

SIA said in a statement that “the new airline is being established following extensive review and analysis,” which was in part focused on the runaway success of AirAsia X with its fleet of A330s and A340s. It added that the new airline would “enable the SIA Group to serve a largely untapped new market and cater to the growing demand among consumers for low-fare travel.”

The new airline has not yet been named and is expected to begin operations within 12 months and will be wholly owned by Singapore Airlines, but will be operated independently and managed separately from SIA.

“We are very excited about what our new low-fare subsidiary will offer to consumers. We are seeing a new market segment being created and this will provide another growth opportunity for the SIA Group,” said CEO Goh Choon Phong.

He added, “We have observed on short-haul routes within Asia, low-fare airlines help stimulate demand for travel, and we expect this will also prove true for longer flights. At the same time, we remain fully committed to the further growth of SIA, which will continue to offer the highest-quality products and services to our customers.”

No details were given but insiders at SIA told Australian Aviation that the airline has a number of older model 777s that would be perfect to launch the new airline.

The Centre for Asia Pacific Aviation in a special report on the announcement said that it expects SIA to “borrow several elements of the long-haul low-cost model pioneered by Qantas subsidiary Jetstar, which includes business class seating and connections with its mainline sister carrier.”
CAPA notes that “neighbouring long-haul LCC AirAsia X has also evolved to include a number of lie-flat seats and much of its success depends on its ability de facto to interline with short-haul AirAsia.”

According to CAPA’s analysis “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.”

However is a sobering warning to Qantas CAPA believes the new airline will also take over some or all flights on lower yielding routes with a low portion of business travellers, including some destinations in Australia and New Zealand – markets which contribute a large proportion of SIA’s revenues to gain maximum expansion.

This prospect has enormous repercussions for Qantas and Jetstar and lowers the bar considerably on fares and thus what Qantas in particular can charge for an economy seat.

It increases pressure, which is already building, on the airline to be far more innovative to the middle market – a sector it has largely ignored for decades.

If passengers are going to be jammed in economy they may as well go on a LCC. More and more passengers are looking at the value proposition of economy on a legacy carrier and turning their backs. “If you’re going to get squeezed in economy you may as well go with a low cost carrier – at least your wallet want get assaulted,” quips on passenger”

Shrinking market

CAPA highlights that the new SIA airline is also a response to the airline’s shrinking market share, while focussing on profitability.

“The surprising, but also potentially far reaching, announcement could signal much more than merely another example of an Asia Pacific long-haul low-cost operation. For Singapore Airlines it marks a major refocus of its long term strategy – restoring growth and catering more effectively for the burgeoning leisure market,” says the CAPA report.

Like Qantas, SIA over the last several years has seen its share of its home market steadily drop as low-cost carriers have rapidly expanded.

“This trend has accelerated in recent months as SIA’s traffic has shrunk and load factors dropped, while low-cost carriers continued to expand rapidly and improve their load factors,” notes CAPA.

Amazingly in the last 10 years SIA has only increased the number of passenger it has carried by a paltry 1.1 per cent a year from 15 million passengers to 16.6 million.

At the same time traffic through Changi Airport has grown from 28.6 million to 42 million – or 3.2% a year.

But the worrying trend has been significant over the past three years where the airline’s passenger numbers have contracted by 15 per cent from 19.1 million in FY2007-08 to 16.6 million in FY2010-11.

CAPA notes that while this was a challenging period for the entire airline industry, Changi Airport was able to grow its passenger throughput by 15 per cent from 37.3 million to 42.9 million.

“Over this relatively short period SIA has seen its share of traffic at Changi shrink from about 50 per cent to about 35 per cent% and this has set alarm bells ringing,” says CAPA.

The numbers are similar in Australia where Qantas’s share of the international market has contracted from 24.5 per cent in 2005 to 18 per cent for 2010.

SIA’s strategy over the last five years has been to prioritise profitability over expansion, which CAPA notes is often a sound approach.

“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. The new measure also appears to be a recognition that the flag carrier’s longstanding focus on premium traffic (which must in turn mutually subsidise lower priced leisure travellers) is not in itself a formula for the future.”

CAPA notes in a twist that the rapid growth is in leisure markets, while business travel is expanding at a more “leisurely pace.”

SIA now has 35 per cent of the market at Changi, based on scheduled capacity (seats) for May, while as a group SIA has a 41 per cent share when including its full service regional subsidiary SilkAir.

AirAsia which was kept out of Singapore for years has a massive 7 per cent, while SIA’s LCC Tiger Airways has 7 per cent.

Interestingly Jetstar and Jetstar Asia’s market share out of Changi is 6 per cent well ahead of Qantas with just 4 per cent.

Major Changes

The new strategy promises major changes, both for SIA and for some of its main competitors suggests CAPA.

“SIA’s new executive team, led by CEO Goh Choon Phong, is apparently not willing to watch the group stagnate and continue to lose market share.

Establishing a long-haul low-cost subsidiary is a bold move but necessary for SIA Group to again grow,” says CAPA.

SIA had an opportunity in 2004 to make a serious move in the low-cost carrier sector but instead of launching its own low fare short-haul subsidiary, the airline decided more timidly only to acquire a minority stake in Tiger.

“Given Tiger’s separate ownership, the LCC has been unable to play a complementary role to SIA – unlike Jetstar to Qantas. SIA has since steadily lost market share. Today to launch its own short-haul low fare subsidiary would be too complicated and risky, says CAPA.

Tiger, AirAsia and Jetstar are now well entrenched in the LCC market from Singapore and SIA’s subsidiary SilkAir has proven to be an effective, lower cost competitor in the short-haul market despite the growing budget competition.

“SilkAir, while now smaller than AirAsia and Tiger in terms of market share at Changi, is a very effective regional feeder to SIA and still generates double the revenues, with a higher profit margin than Tiger’s Singapore unit,” notes CAPA.

But rather than a timid approach SIA is now on the warpath with enough is enough being the philosophy.

As with Jetstar and the Qantas Group, SIA plans to operate the new low fare airline as a self standing independent operation. While it will be managed separately major decisions will be coordinated says the airline.

“This contrasts keenly with the SIA-Tiger relationship where SIA has no control and only has three representatives on the Tiger board – two of whom are current SIA divisional vice presidents,” notes CAPA.

The Sydney based think tank also believes that there is another aspect to the new strategy. “While signalling an important strategic shift, the launch of the new carrier should also be seen as a retaliatory move in response to growing competition from archrival Qantas. 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’s new low fare carrier with wide-body equipment will be able to compete more effectively against Jetstar with its A330s and later 787s, in particular on its new long-haul routes from Singapore.

Jetstar and Jetstar Asia now operate from Singapore to Auckland, Melbourne and Perth with at least two more long-haul low fare routes expected to be launched in the second half of this year and CAPA says they are ideally positioned to capture much of the expanding Asian markets, where Singapore offers a valuable springboard.

CAPA says that the SIA Group will use the new airline to try to retain its share of the Australian market which is under attack from Middle-East airlines.

“Australasia now accounts for 17 per cent of SIA’s revenues, more than any other region outside Asia. But in the key Australia-Europe market SIA is fighting growing competition from Emirates, the new V Australia/Etihad combination and Qatar Airways.”

While SIA still has 30,000 seats a week out of Australia and the Middle-East carriers 20,000 the “equation is shifting fast.”

CAPA says that Qantas is even more exposed than better geographically placed SIA and is also being forced to step up its fight for this market, using Jetstar and potentially a new Singapore-based premium carrier to launch European routes.

It highlights that yields on European routes from Australian are extremely low a factor that has long since driven out virtually all European airlines.
“The new low-fare carrier could also potentially operate alongside SIA on its higher frequency sectors or, more straightforwardly, simply replace SIA on some lower yielding Australian routes such as Singapore-Brisbane,” CAPA believes.

The new airline will almost certainly have some type of premium product which would permit onward coordination with SIA services beyond Singapore, so that the new airline will be able to benefit from its parent’s extensive network.

“A sufficiently low cost operation could also allow SIA to launch new Australian gateways such as Cairns,” suggests CAPA.

The new airline would also be a counter to the much lower cost Chinese airlines that are starting to make waves in the region with their cost cutting.
These Chinese airlines are already causing Cathay Pacific grief on Australia to Hong Kong routes.

It is a sobering sign of the times for airline staff when the airline that revolutionized long haul travel for passengers with its low fares and its snubbing of IATA’s then rules about charging for drinks and movies is forced to launch a low cost airline to combat the new wave of discount travel.

Over the past 40 years the industry has seen the rise of Asian powerhouse airlines such as SIA, CX, and Malaysia Airlines that have dominated the industry with lower costs on one hand and superior product offerings on the other.

The long-haul dynamics are now changing again – and rapidly – with Middle-East carriers often offering better in-flight product with keen pricing on one hand and AirAsia X consistently charging unheard of fares.

Incredibly the airlines that revolutionized travel last in the last decade are now on the ropes.

And one needs to look no further than the 1st quarter results for AirAsia and Malaysia Airlines to get that dynamic in perspective.

On one hand Malaysia Airlines recorded an operating loss of MYR238.25 million, while AirAsia posted a 46 per cent lift in operating profit to MYR241.72 million on a 20 per cent lift in revenue to MYR1.05 billion.

Also in the wings is an Emirates oft-quoted plan to seat 800 on a A380 and fly from Stanstead to Adelaide via Sri Lanka in what would could be the ultimate low cost long-haul operation.