Singapore Airlines eyes budget market

WORLD-RENOWN for its premium product, Singapore Airlines (SIA) made a surprised decision to establish a budget long-haul carrier within the next 12 months. It is reversal of a policy that has hitherto dismissed the budget market as something it was not particularly interested in or concerned about the competitive threat posed by its operators.

Budget carrier Air Asia chief Tony Fernandes was quick to take a swipe at his airline neighbor. He said: “We’re not afraid of anyone. In fact, SIA is afraid of us, that’s why they are starting this subsidiary. Imitation is the best form of flattery.”

SIA’s change of mind can be attributed to several factors.

First, the good times of its heyday aren’t returning fast enough. The global economy continues to be volatile. This is not helped by rising jet fuel prices, unrest in the Middle East and a series of natural disasters such as Japan’s nuclear fallout, the floods in Australia and New Zealand and Iceland’s volcanic eruptions that have plagued the airline business.

Second, the premium market with business class contributing what used to be at more than 40 per cent of SIA’s profitability has been slow in recovering. Other airlines such as Cathay Pacific Airways and Emirates have been closing in on the competition. In fact, these two closest rivals have reported record profits, with Cathay overtaking SIA as the world’s most profitable airline.

Third, there appears to be limited new market opportunities for the long haul.

Fourth, budget carriers are beginning to prove to be a real threat to the competition. SIA is challenged especially at the low end by not only its peers but also low-cost carriers such as Air Asia and Jetstar. The shift in travel preferences, especially in the case of leisure travel, for less expensive fares following the financial meltdown in 2008/2009 has taken a toll on premium air travel.

Fifth, the growth of the budget market, particularly in the region, is too tempting for SIA to ignore. Qantas, which is actively growing its Jetstar associate, may have encouraged SIA to do likewise (although SIA already owns 32.9 per cent of budget carrier Tiger Airways but would have full control of the new budget subsidiary).

SIA chief executive Goh Choon Phong said: “We are seeing a new market segment being created and this will provide another growth opportunity for the SIA Group. 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.”

However, one wonders if the policy reversal is not a defensive initiative the way that airlines such as United Airlines and Delta Airlines introduced Ted and Song respectively to pre-empt an outflow of its business to other less costly alternatives. SIA’s budget subsidiary may then grow at the expense of the parent airline. SIA has said its new offspring will compete with SIA (Tiger Airways) on some routes.

Also, the success of the short-haul may not be easily replicated for the long-haul as the products are quite different.

Yet all said, the SIA brand name holds promises of success for its budget subsidiary. Air Asia (which operates budget long-haul routes through subsidiary AirAsiaX) and Jetstar have said they welcome the competition, which will undoubtedly get tougher, and consumers may benefit from a possible price war in the early days.

Meantime, SIA’s full-service rivals may be quietly pleased that SIA’s attention may be divided. However, SIA’s Mr Goh assured that SIA will “remain fully committed to the further growth of SIA, which will continue to offer the highest-quality products and services to our customers.” The budget subsidiary will operate independent of SIA, which may well then be able to concentrate on offering a premium product above par those of its rivals and perhaps generate a new niche demand.

Cathay Pacific, for one, has said it will stick to its premium brand. It will not follow SIA in setting up a budget subsidiary and prefers to seek other opportunities instead. One thing it is said to be putting in place is the introduction of a premium economy product, which for some reasons SIA has so far eschewed and opts instead to boldly go budget.

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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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