Singapore Inc.

For years Singapore Airlines spearheaded innovation in inflight service in the world’s international skies but was a conservative player when it came to branching out into potentially risky ventures beyond its full-service comfort zone. Today it is in multiple markets, including no-frills… and not everything is going to plan

Singapore Airlines had clearly had enough after watching the value of its two-fifths stake in low-cost carrier Tigerair plunge by 40 per cent over the past three months. The Tiger’s roar had faded to a whimper with a net loss of A$163. 75 million for the three months ending September, diving from a profit of $21. 4 million a year earlier. That would have been bad enough if SIA wasn’t having its own financial issues, reporting a 52 per cent fall in operating profits to $35. 5 million for its first quarter, ended June 30, trailing market estimates as it continues to grapple with industry overcapacity and weak yields, which have declined for 12 consecutive quarters.

Goh has more than enough on his plate so it is little wonder he decided it was time to act.

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When SIA’s first half results to September 30 were announced last month the news was hardly encouraging. Net profit in the six months was down A$139. 25 million, or 55. 5 per cent year-on-year to A$111. 76 million. Much of it was again attributed to Tiger’s losses.

The bottom line has been affected by dips in operating profit for not only the parent airline but also subsidiaries like SIA Engineering and full-service regional subsidiary SilkAir, which saw its income decline by 85. 7 per cent. Only SIA Cargo showed some improvement, though even that was a reduction in losses from $35. 9 million to $16. 2 million. The financials of another subsidiary, long-haul low-cost Scoot, aren’t broken out in results but it also isn’t making money. SIA simply says it is on track in terms of its business plan. Then there’s the cost of launching a new full-service joint venture in India, Vistara.

SIA chief executive Goh Choon Phong has more than enough on his plate so it is little wonder he decided it was time to act. As Tiger’s woes worsened it was immediatelyannounced the budget carrier would raise up to $210. 1 million through a rights issue, with SIA agreeing to subscribe for its entitlement as well as excess rights shares, up to a total of $125. 7 million. Potentially, this could raise SIA’s stake from 40 per cent to as much as 71 per cent, effectively turning Tiger into an SIA subsidiary. Part of the rescue plan also included ditching loss-making Tigerair Australia by selling the 40 per cent not already owned by Virgin Australia to the Australian carrier, itself part owned by SIA and also losing money, for A$1.

Altogether it paints a depressing picture and underscores a question posed by airline analysts Aspire Aviation, which recently published an online report headed: “There comes a time when the question must be asked: Is Singapore Airlines (SIA) better off without its subsidiaries?” It is a fair inquiry given this is a carrier which for years trod the conservative path, operating a high quality full-service international airline and a regional full-service subsidiary, SilkAir. How times have changed. Initially, its investment in the then Tiger Airways and later the launch of wholly-owned long-haul budget Scoot surprised the market.

Involvement in the joint venture Vistara with India’s Tata Industries also raised eyebrows, considering the chaotic and loss-making state of that country’s airline industry. Also on the drawing board, yet another new LCC, NokScoot, a joint venture with Thailand’s Nok Air.

Aspire isn’t alone in questioning SIA’s strategy. “If ever there was proof that Singapore Airlines has no business straying from its full service business model, it has been provided by Tiger Airways,” Credit Suisse analyst Timothy Ross said in a research report. “What continues to bewilder us is why it continues to pump in more cash. ” Tiger’s return on equity was a negative 93 per cent last year, making the stock the worst performer among 34 airline peers across Asia, data from Thomson Reuters StarMine shows.

Has Goh taken several steps too far with strategies that stray too much from SIA’s traditional approach to business? He is a somewhat illusive figure who keeps a low profile. A SIA veteran and formerly head of cargo, while he does appear at various press conferences on specific issues, since being appointed chief executive in late 2010 he has steadfastly refused to grant one-on-one interviews with specialist aviation writers and continues to do so.

In Singapore critics have attacked him for allowing service standards to deteriorate and accuse him of having a lack of public persona. One even went so far as describing him as “the man who is destroying SIA”.

That seems a bit harsh since, like all of his contemporaries, Goh is facing an extremely tough period in terms of intense market competition and over-capacity issues, particularly in South-East Asia. For the majority of airlines in Asia plunging profits and shrinking yields are currently the rule, rather than the exception. The massive build-up of budget airline seats in the region – much of it on routes SIA and its subsidiaries fly – and the aggression of Middle East carriers such as Emirates Airline, Etihad Airways and Qatar Airways, is making profitability more and more elusive.

Complicating matters, the arrival of new generation aircraft with longer legs and improved fuel efficiency is allowing some operators to fly nonstop to longhaul destinations across the globe without having to pause at Singapore’s Changi hub on the way. Add the growth of rival hubs such as Hong Kong and Dubai, and Singapore’s traditional dominanceas the primary crossover point for traffic through Asia is coming under increasing threat.

So why has SIA performed the dramatic backflip to become a multi-brand group of airlines striving to tap into all market segments? While Goh eschews in-depth interviews, much of his thinking can be gleaned from his various appearances at press conferences and, in more detail, from transcripts of briefings he has given to industry analysts on the airline’s quarterly and annual results.

For example when Scoot was launched in 2012, targeted at the budget medium to long-haul market, he declared that it would enable the SIA group to serve a largely untapped new market and cater to the growing demand among consumers for low-fare travel.

“We are very excited about what our new low-fare subsidiary will offer to consumers,” he said. “As 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. ” It is a theme he has constantly pushed, that meeting the competition on all fronts is a key to future success. At an analysts briefing earlier this year he explained SIA was taking a “portfolio approach”, recognising the LCC segment is a distinct growth segment, which SIA wants to be a part of. The various budget operations – Tiger, Scoot and NokScoot – will all work together. “Tiger and Scoot make natural partners in connectivity, one with narrowbody aircraft servicing largely the region and the other with the ability to go medium, and potentially in the future perhaps long-haul, and operating widebodies, and for them to connect with each other,” said Goh. “This actually therefore allows SIA to be present in virtually all the different segments of the travel industry. And what needs to be done, as we have done for Singapore Airlines and SilkAir, is closer integration so that the portfolio could actually benefit from each other in an even more integrated manner. ” He points out there is also the question of geography. Singapore has a population of just five million and is situated in a position where it might not be able to tap into some traffic. “For example, if you are wanting to tap traffic between India and Europe, Singapore would not be a natural position to tap it, even though that is a very big market. There’s of course the other thing about the constraint of air services agreements that Singapore has with other jurisdictions, other countries that would limit some of the growth that we would like to do. So to break out of all those constraints, we look at how we can diversify ourselves geographically. ” NokScoot, he explained is an opportunity for Scoot to expand beyond Singapore. “Even though Bangkok is very close to Singapore, it is actually a very differentdestination… an even more popular destination, especially for budget travellers… the cooperation with Nok allows NokScoot access to a network that will connect passengers to the rest of Thailand as well as Indochina. The fact that the Bangkok hub and the Singapore hub actually cater to slightly different types of customers, actually allows us to ‘twin’ them, and the whole idea is that NokScoot and Nok will work in terms of connectivity, just like what we would like to see Tiger and Scoot to do. Of course it’s got to be in the manner that is win-win for all and a twin hub can then eventually look at how we can leverage both Singapore and Bangkok’s quite different attractions to provide even greater propositions for the customers. ” Similarly, Goh sees India, with a fast-growing middle-class population which is expected to reach 550 million people by 2025, as a way of improving SIA’s ability to reduce its reliance on the Singapore hub and draw traffic from other markets.

The joint venture with Tata will open new windows of opportunities, he says, giving SIA the ability to participate directly in the growth and future growth of India, not just between Singapore and India but to “tap all the traffic between India and other economies… India is obviously one of the two huge engines of growth in Asia. It allows us, therefore, also to diversify our traffic base and not just be only dependent solely on the Singapore base. And also because of the locations of both SIA in Singapore and this new venture in India, we see good commercial synergies in the future when this airline is set up. ” He has, however, warned that “by no means do we think that this is going to be a walk in the park. ” Vistara, which took delivery of its first A320 in October, is expected to launch by early next year. Based

Tigerair seems destined to remain the real problem child of the SIA group for some time to come.

in Delhi, it plans to have a fleet of 20 aircraft within four years. It will initially operate only domestically.

As for Tigerair, it seems destined to remain the real problem child of the SIA group for some time to come. With more control over its operations, Goh will need to decide on new strategies for its future.

One of the problems is that while rivals such as AirAsia, Lion Air and Cebu Pacific in the Philippines are expanding with offshoots across the region, Tiger has been shrinking and losing ground. It has been plagued by bad investments in joint ventures that include Tigerair Philippines and Tigerair Mandala of Indonesia. The former has been sold to Cebu Pacific and the latter ceased operations on July 1.

Indeed, SIA itself doesn’t have an impressive investment record having in the past ejected from stakes in Virgin Atlantic and Air New Zealand at a loss.

Analysts say the shrinking of Tiger’s operations means it must carve out a new growth strategy to cope with the aggressive expansion of competitors and that may put SIA in a position where it has to commit to even more investment or face closing the operation down.

As Aspire Aviation puts it: “In recent times, it has become fashionably strategic for a protagonist to spawn sidekicks but not every airline subscribes to that philosophy.

Some of the offshoots have become successes in their own rights, and many others on the other hand had been shelved or disposed off as impulsive ill-conceived by-products. ” Whether that applies to Tiger remains to be seen.

On the other thorny question, the possibility of brand confusion given the growing number of arms SIA will have, Goh has conceded it is an issue. “That is the reason why right at the outset we have made sure that there is a good separation in terms of brand. When we launched Scoot we made it very clear that it is a separate company with an independent management making its own decisions on how it positions its product. It is not SIA. We should not allow brand confusion between what SIA provides and what Scoot provides. Of course the alignment between Scoot and Tiger is a lot stronger, and that’s the reason why we believe, also from the outset, that it makes sense for both entities to cooperate closely together. ” As for SIA itself, Aspire makes the point that, to be fair, it is as affected as any airline by the state of the global economy. “Do not, however, be mistaken. SIA is still a formidable competitor. Few airlines have achieved its consistency in product quality that makes it a perennial favourite among travellers. ” But it warns that unless it is resigned to the new state of play, it has to do much more than wait for the pressure to ease. “It cannot be business as usual. ” Clearly, for Goh, it is hardly business as usual. He has also bucked the airline’s practice in other ways. For example, after resisting the introduction of a premium economy cabin, SIA is now doing so, being fitted first on the 777‑300ERs and A380s. New A350s (SIA has ordered 70) will also come with premium economy. At the same time, more than $343 million will be spent over the next few years on new inflight product. Another key strategy will be an increase in the already significant cooperation with other airlines.

“We don’t believe that by working with others we are lowering the perception of Singapore Airlines,” says Goh. “If you look at it, the world is such that there’s no one single airline that could cover the world. It continues to be a case where we focus on all the three key pillars that we have always been doing: service, product, and network,” he told analysts earlier this year.

“We have been expanding quite aggressively our network reach and connectivity through partnerships. ” SIA now has more than 5,000codeshare flights, six times more than the number of flights it operates out of Singapore. “That gives us a lot more reach to allow our customers the convenience of travelling between points. And this is still an ongoing effort. There are still a number of codeshare partners that we’re working with and we are negotiating. And we would like to expand and continue to expand this network with our partners for the benefit of seamless connectivity for our customers. ” One example is a new alliance with its Star Alliance partner Air New Zealand which will begin in January next year. It will see the two carriers operating one return service each per day on the Singapore-Auckland route and SIA continuing its daily return service between Singapore and Christchurch. They aim to increase their existing capacity between New Zealand and Singapore by up to 30 per cent year round over time. There will be codeshare connectivity to and from 11 cities across the UK and Europe including London, Manchester, Amsterdam, Barcelona, Copenhagen, Frankfurt, Istanbul, Moscow, Munich, Rome and Zurich.

Neither has SIA been slow to adjust its own network when financial returns haven’t been forthcoming. It recently withdrew two of the world’s longest commercial airline routes, it’s all-business class service between New York’s Newark Liberty and Singapore and between Los Angeles International Airport and Singapore because they were not working. “Although disappointing that we will be halting these services, we remain very committed to the US market. Over the past two years we have increased capacity to both Los Angeles and New York by deploying A380 super jumbos on flights via Tokyo and Frankfurt. We will also continue to explore additional options to enhance our US services,” explained Goh.

On the other hand, it has upgraded services to New Delhi and Mumbai, replacing 777s with A380s. As Goh told CNBC in a television interview: “The developed economies are recovering. We do see, for example, in Europe and the US recovery indemand for travel. The economy in this part of the world is also growing, but there’s a lot more capacity being added. So, when there is imbalance in terms of growth in demand and growing capacity, you have an issue. We adjust our supply according to what we think the demand is. We have always been quite dynamic on adjusting our frequency, adjusting our capacity. ” He says SIA has always been very cost-conscious and cost-efficient. “If you were to do a comparison you’d find that our unit costs are probably one of the lowest of the full-service carriers. ” Beyond that, the carrier has also been looking for new revenue streams. It set up a new revenue unit last year which has been actively looking at what else can be done to generate revenue beyond just ticket sales.

“We’re also looking at new business ventures that are adjacent to airlines, for which we have expertise in,” explained Goh. “And the one that we have announced,the Airbus Asia Training Centre, an exclusive joint venture with Airbus for this region, which means that Airbus will not have another venture with someone else in this region.

“And with the kind of growth of aircraft demand – and we’re talking long-term now – in this part of the world, both ourself and Airbus believe that this will be a business

Our unit costs are probably one of the lowest of the full-service carriers. GOH CHOON PONG

that would have great potential growth prospects. ” Fleetwise it can also look forward to significant savings in terms of fuel efficiency and operating economics as new jets arrive. Currently with a fleet of 107 that comprises 29 Airbus A330‑300s, 19 A380-800s, and 59 Boeing 777 types, it has another 115 aircraft on order. These are 70 A350‑900s, five A380s, five 777‑300ERs and 30 787‑10s.

All in all, SIA is faced with a myriad of challenges in a fast changing and highly competitive marketplace. The strategic decisions it makes over the next 12 months and the performance of its emerging projects such as India’s Vistara and NokScoot, not to mention how successful it is in putting the roar back into Tiger, are going to be crucial to its ongoing success. Despite the shrinking profits it does have healthy cash flow and a strong balance sheet. But as everyone knows in the airline business, these are fragile assets if management makes the wrong decisions.