SIA chief needs a steady hand on the joystick
By Kevin Brown
Published: June 7 2011 17:31 | Last updated: June 7 2011 17:31
Almost exactly 100 years after a Bristol Boxkite aeroplane took off on Singapore’s first powered flight, the island state’s flag-carrier is making a similar leap of faith.
Joseph Christiaens, the pilot of that 1911 flight, cannot have been certain where – or if – he would land. Goh Choon Phong, Singapore Airlines’ chief executive, is not taking quite such a big risk in announcing plans for a long-haul budget subsidiary.
But the world’s second most valuable airline by market capitalisation is making a much more dramatic move than it has admitted. It is also one that could have momentous implications for other airlines.
Mr Goh framed his announcement as a simple piece of market segmentation. On this view, it is aimed merely at grabbing a share of an emerging Asian market for long-haul budget travel pioneered by AirAsia X, an affiliate of AirAsia, the fast-growing Malaysian short-haul carrier.
SIA’s announcement is better seen, though, as a major shift in long-term strategy as the airline seeks to reverse a precipitate decline in market share while heading off a potentially calamitous threat from Qantas, the Australian flag-carrier, and its low-cost subsidiary Jetstar.
As this year’s president of the International Air Transport Association, Mr Goh is well aware of the short-term problems facing Asian airlines. Iata on Monday cut its forecast for Asian airline profits this year from $4bn to just $1.2bn following natural disasters in Japan, political unrest in north Africa and the Middle East, and higher oil prices. That compares with $10bn last year.
But it is the long-term trend that worries SIA, which is facing increasingly tough competition on two fronts. Gulf airlines such as Emirates and Etihad are successfully attacking its Australian traffic, while budget carriers such as Jetstar, which operates a hub at Singapore’s Changi airport, are loosening its grip on the leisure and family market.
The upshot, according to figures compiled by the Australia-based Centre for Asia Pacific Aviation, is that SIA’s annual passenger numbers have fallen from 19.1m to 16.6m over the past three years. Worse, throughput at Changi grew by 15 per cent over the same period. As a result, SIA’s market share in its home base has fallen from 50 per cent to 35 per cent (excluding traffic not routed through Changi).
Meanwhile, the proportion accounted for by Qantas and Jetstar has increased from 7 per cent to 10 per cent, and there are clear signs that the Australians want more. Alan Joyce, Qantas’s pugnacious chief executive, is expanding Jetstar’s Changi operation, and is mulling plans to site a new full-service carrier in Singapore. That would allow the group to fly long haul to Europe far more cheaply than it can manage from Australia.
SIA’s focus on the premium market has sustained profitability, with net profit soaring to S$1.1bn in the year to the end of March, up from S$216m in 2009/10. But as the competition ramps up, Mr Goh has clearly decided that the only way to stop the airline shrinking further is to jump into the budget market.
This is a major change of heart for SIA. The group could have set up a low-cost airline at any time in the past five years, but chose instead to limit its exposure to a one-third stake in Tiger Airways, a listed Singapore budget carrier.
Tiger has contributed to profits. But SIA has no management control, which means it cannot be used as a feeder, a role played very effectively in the full-service market by Silk Air, a regional affiliate that delivers passengers to Changi from all over Asia for long-haul flights on SIA.
This network effect is emerging as a crucial feature of Asian operations. Senior officials at AirAsia say that links between the short and long-haul carriers go a long way towards explaining the success of AirAsia X, which flies 11 wide-bodied aircraft to Europe, China, Australia and India. As if to ram home the lesson, Mr Goh on Tuesday announced plans for an operating alliance with Virgin Australia, which is entirely predicated on the benefits to both of a larger network.
Tony Fernandes, the colourful Malaysian entrepreneur behind AirAsia, was dismissive of SIA’s bold move, forecasting that it would hit the airline’s profits. In the short term, that looks like bravado. SIA’s venture will allow it to grow by competing more effectively against both Qantas and AirAsia X on low-yielding European and Asia Pacific routes. It will be also well placed for China and India, and in south-east Asia, where 600m people will soon be linked by an open skies pact.
But its medium-term impact is unpredictable. Other Asian airlines are mulling low-cost options, and more than one may conclude that a strategy endorsed by both Qantas and SIA could work for them too. A century ago, Mr Christiaens landed safely and on course. If he is to follow suit, Mr Goh will need luck and a steady hand on the joystick.
Kevin Brown is the FT’s Asia regional correspondent
Copyright The Financial Times Limited 2011