No easy trot for SIA’s stable in Year of the Horse

GreenHorse2014-110ACCORDING to the International Air Transport Association (IATA), airlines can expect to gallop in the Year of the Horse. It has predicted record profits for the airline industry, revising upward its earlier forecast of US$16.4 billion to US$19.7 billion for 2014. (See Will IATA’s optimism for 2014 hold? Jan 7, 2014)

IATA’s optimism is premised largely upon cheaper jet fuel and rising demand for travel. For the first time in a long while, airlines operating in a less volatile fuel market because of improved political stability in the Middle East will have to find some other monster to blame if they fail to meet expectations. Budget carriers without the hedging capability of legacy airlines will find the news of cheaper jet fuel particularly welcoming in view of their cost structures.

There is more certainty now of the rising demand for travel across the globe although Asia has held its own while other regions dodder. However, while numbers increase, yield will be squeezed. IATA chief Tony Tyler said: “It is a tough environment in which to run an airline. Competition is intense and yields are deteriorating.”

Against this backdrop, what then is the outlook for Singapore-based airlines and Changi Airport?

sia logoIt will be a better year but not an easy trot. Singapore Airlines (SIA) for one is projecting higher advance bookings in the months ahead. The economic recovery in Europe and the United States will be a big boost since traditionally SIA has relied heavily on long haul routes to those regions and has only of late begun to increase focus on Asian operations.

SIA faces stiff competition from Middle East airlines and in particular the Qantas-Emirates alliance on the kangaroo route. Trans-Pacific, it is challenged by major Asian airlines for traffic not only to their home bases but also beyond to destinations in India and other regional points including Singapore. Cathay Pacific’s short transit time via Hong Kong is a strong contender. So while the global pot may be growing larger, SIA will be challenged to maintain its market share, which will in turn exert a lot of pressure on yield.

SIA’s planned launch of new cabin products in 2014 costing US$150 million to include ergonomically designed seats and a touch screen entertainment system will improve SIA’s competitive edge as it catches up with rivals such as Cathay Pacific and Qantas which have upgraded their products in the past two years. Recently announced tie-ups with Virgin Australia and Air New Zealand may help check market erosion in Pacific southwest. However, cost will continue to override loyalty in the early days of the global economic recovery.

tigerBudget carriers can look forward to higher volumes as short haul travel into and out of Singapore continue to grow, particularly as the region heads towards full implementation of Asean Open Skies by 2015. But the competition will intensify with new operators and the incumbents expanding their links aggressively. Scoot, Tigerair and Jetstar will compete with AirAsia and Indonesia’ Lion Air to dominate the Asean skies. AirAsia has already set up bases in Indonesia, Thailand and the Philippines. Scoot is partnering Thailand’s Nok Air in a new budget venture. Qantas has been actively pushing the Jetstar brand across Asia. However, Tigerair seems to be less fortunate in this aspect, entering into a joint venture with loss-making Mandala Airlines of Indonesia and SEAir of the Philippines, the latter of which it is selling to Cebu Pacific Air. Now Tigerair is even competing with sister airline Scoot on some routes. The sibling airlines have announced recently an agreement to cooperate and complement their operations. SIA may find it necessary to redefine the role of the carriers within its stable, particularly when Scoot begins to grow at the expense of the parent airline.scoot

The nature of the point-to-point budget business is such that it is dependent on the economic and political stability of the two points as well as their attraction as tourist destinations. Singapore is well placed in all three aspects, adding to its advantageous location as a convenient hub for connections. However, the current political uncertainty in Thailand and Cambodia are not giving the Year of the Horse a promising start, although normalcy is expected to be restored before long. There may be more concern about the standoff between China and Japan over territorial sovereignty, although diplomacy too is expected to prevail.

300px-SilkAir_Logo_svgThe Year of the Horse is unlikely to be any more exciting for SilkAir which after 25 years as a regional airline squeezed between legacy and budget operators will continue to grow but slowly. In fact, SilkAir reported more than 40 per cent drop in profit for the first half of the financial year. Going forward, its growth will be enhanced by the acquisition of new generation jets that will enable it to fly farther to points in Japan and northern China. However, unlike Cathay Pacific’s regional carrier Dragonair which enjoys the support of the large China hinterland, SilkAir’s operations face stiff competition from national airlines as well budget carriers in the region. (See SilkAir at 25, stepping out of SIA’s shadow, Jan 23, 2014) While it has reiterated its intention of stepping out of SIA’s shadow, it cannot downplay its role as a feed for the parent airline.

Courtesy Changi Airport Group

Courtesy Changi Airport Group

Changi Airport, more than the airlines, will find favour with the galloping horse. The economic recovery in the West, continuing growth in Asia, more liberalized Asean policies and Singapore’s attraction as a destination will bring more travellers to and through the airport. The challenge for Changi is keeping pace with the gallop.

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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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