What’s ahead for SIA?

WHILE budget carriers Tiger Airways and JetStar Asia reported profitable performances, Singapore Airlines (SIA) continued to slide into the red, incurring a second quarterly loss amounting to $159 million for the three months July to September. However, analysts generally agree that emerging signs of the global economy recovering augur well for SIA, but will the airline return to its pre-recession glory?

Clearly, the recession has favoured low-cost operators over mainstream airlines. At no other time has air-travel become more price-sensitive than now. While overall the market has shrunk, more people are travelling the short haul, which is less influenced by frills, thus boosting the popularity of regional budget carriers.

When full-service airlines begin to trim or do away with frills to reduce costs in order to compete with low-cost operators, product differentiation diminishes. For example, British Airways (BA) stops serving free meals on short flights. Or, when they levy separate charges for what hitherto has been free, such as a fee for checked baggage introduced by United Airlines.

Even for the long-haul, travellers are becoming less adverse to more affordable mix-and-match itineraries connecting different airlines to get to their destinations, trading schedule convenience for lower costs.

The worst may be over, but it will take a long time to repair the damage wrought by the crisis. Low-cost operators will continue to exert pressure on mainstream airlines. Travellers who have become used to travelling without frills may be reluctant so soon after to forego the savings they have experienced thus far.

However, SIA has often reiterated that it neither fears competition from low-cost operators nor does it consider them the real competitor. Even as the long-haul arm of AirAsia and Jetstar Airlines Australia threaten to draw away some of its erstwhile customers, the low-end product is far from being the Holy Grail it is after.

What really hurts an airline like SIA is the reduced demand for premium travel, which in better days made up at least 40 per cent of its revenue.

It is a double whammy. While corporations are cutting back executive travel, underlying this is the trend of business travellers downgrading and shifting to cheaper modes. The costs of maintaining an empty front cabin are not sustainable by the paying load in cattle class considering how even the fares at the back have dipped considerably.

While SIA is reputed for excellent service across the cabins, its biggest strength lies in its premium class offering. Its future level of profitability will depend on its ability to recapture lost clientele and attract new customers as increased business travel looks set to return.

However, as the reduced pie caused by the financial meltdown has intensified the competition among the major airlines, this will demand a rethink of the game plan. Airlines – hungry for too long and apt to become more aggressive as the economy recovers – will have to develop new and unique formulae to reclaim their prior standing.

Already in Europe, BA hopes to be a step ahead of the competition. Even as the bad times are far from being completely over, the British carrier inaugurated all-business class flights across the Atlantic in September, more than a year after SIA first introduced that configuration, unfazed by the rough patch subsequently experienced by SIA and the earlier failure of three airlines – Eos, MaxJet and Silverjet.

It looks like BA is making up for lost time, but timing a strategy right can bring success where others have failed. It has also modified the product.

Said BA chief executive Willie Walsh, who expected the new service to be profitable within a year: “In the harshest trading environment airlines have experienced, we believe it is more important than ever to embrace the future and innovate.”

BA’s immediate target is clearly rival Virgin Atlantic, which has increased its market share at the expense of BA. Whether its new all-business class flights will help claw back that loss, it is something yet to be seen.

In the same way, SIA too will have to look more closely at what its competitors are doing and review its premium product strategy to address changing preferences. Forced to adjust their travel habits by the recent crisis, today’s business travellers claim they are travelling smart, not cheap, even as they switch from mainstream airlines to budget carriers. That may be a cry for a new business class product.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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