Can Jetstar take on SIA?

BUDGET carrier Jetstar will be flying direct daily services between Singapore and Melbourne from December and between Singapore and Auckland from March next year. The flights will use two-class configured Airbus 330-200 aircraft.

Aviation observers are quick to pronounce the heat the competition will bring to Singapore Airlines (SIA), which is a dominant player on the SIN-MEL route and the sole operator on the SIN-AKL route after Air New Zealand pulled out in 2006.

But can Jetstar take on an airline like SIA, an established name in those two markets and long reputed for its excellent service?

Just as many people will find the suggestion implausible. It would be more pertinent to ask: Should SIA be wary of the competition posed by Jetstar?

When budget carriers entered the Singapore arena – beginning with Valuair in 2004 – SIA had good reasons to stand apart from them, confident that they were after different markets. That was before the global economic recession took a toll on the airline industry, hitting airlines that thrive on premium travel hardest as corporations cut back executive travel and erstwhile front cabin travellers began downgrading.

In the good days, SIA generated 40 per cent or more of its revenue from premium class bookings.

But will an economy budget fare of S$900 compared to the normal full service fare of $1300 to $1400 be enough to cause SIA some concern, even more so when Jetstar will be operating a business class as well?  And, considering that the airline industry is on the mend with IATA forecasting a return to profitability after two years of losses, and that SIA has reported improved advanced bookings and “a pronounced recovery in demand for travel in business class.”

By all indications, SIA is on course to achieve profitability after reporting a net operating loss of S$39 million for the full year ended March 31, 2010. It was nonetheless a commendable performance if you consider how the airline lost S$428 million in the first half of the year, demonstrating its resilience to claw back even in hard times.

Competition is no stranger to SIA wherever it flies. A return to profitability can only mean it will be better positioned to take on additional competition.

SIA says it welcomes the competition, adding: “SIA is a full-service network airline with premium product and service offerings.” Therein SIA believes lies the differentiation.

Yet some kind of price confrontation is not precluded. That may even be useful initially to redefine the market. But it is unlikely SIA will feel much of a pinch.

The real competition comes with Jetstar’s success beyond Melbourne and Auckland. Jetstar chief executive officer Bruce Buchanan is looking at building “a solid foundation for future growth beyond Singapore to North Asia and Europe.”

That is good news for Changi Airport as the hub for Jetstar’s network of flights through Southeast Asia to possible destinations that include Beijing, Shanghai, Tokyo, Rome and Amsterdam. But for SIA, this is where the heat of the competition may be felt, though it will be cushioned somewhat by the belief that capacity will create demand, added to Singapore’s growing attraction for businesses and tourism.

However, while history has favoured the growth of regional budget carriers in recent years, the few that ventured beyond into the long haul, such as Canada’s Harmony Airways and Hongkong’s Oasis Airlines, had to fold up their wings soon after.

That is not saying Jetstar will meet with the same fate, noting its Qantas parentage and apparently strong home bases and network connections.

Much has changed since the days of Singapore’s first budget carrier Valuair which never realized its dream of flying long haul to London and was subsequently acquired by the Jetstar owners.

Jetstar might well still live that dream after how the economic crisis has reshaped air travellers’ preferences for reduced costs over frills. Some airlines such as Qantas are reducing front-end capacity to increase seating in economy.

Jetstar’s plans augur optimism for the airline business. As the industry recovers, there is certainly room for more competition. And SIA may already be asking what Jetstar can do, apart from offering lower fares, that Air New Zealand has not done before it quit Singapore.

Also published on Fleetbuzz.com, Jul 1, 2010.

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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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