Is Singapore Airlines better off without its subsidiaries?

Courtesy The Straits Times

Courtesy The Straits Times


THERE comes a time when the question must be asked: Is Singapore Airlines (SIA) better off without its subsidiaries?

Besides an engineering and a cargo arm, SIA also owns three carriers: wholly-owned regional carrier SilkAir, wholly-owned budget subsidiary Scoot, and 40%-owned budget carrier Tigerair. Scoot’s performance has not been reported separately, but neither SilkAir nor Tigerair is meeting expectations, if not faring poorly.

The SIA Group posted a Q1 (Apr-Jun) operating profit of S$39 million (US$31.2 million) which is 52% lower than last year’s S$43 million. It attributed the decline to intense competition that resulted in weaker yields and “depressed travel demand in some key Asian markets.” The bottom line was affected by dips in operating profit for not only the parent airline but also subsidiaries SIA Engineering and SilkAir. Only SIA Cargo showed some improvement, albeit that of reducing losses from S$40 million to S$18 million.

The parent airline’s operating performance deteriorated by almost 50% (amounting to S$44 million), partly the result of a 1.8% fall in yield. This was in spite of lower fuel costs. SilkAir’s operating profit suffered an even steeper decline of more than 85% (amounting to $12 million) also attributed to weaker yields. For the same quarter, Tigerair reported separately an operating loss of S$16.4 million, which is more than twice the loss of S$6.2 million last year. (Tiger air sinks deeper, Jul 30, 2014) The budget carrier has been plagued by bad investments in joint ventures that include Tigerair Philippines and Tigerair Mandala of Indonesia. The former has since been sold to Cebu Pacific Air and the latter ceased operations on July 1. Tiger Mandala alone added S$35.3 million to the Group’s loss for the quarter, widening the loss to date to S$65.2 million.

All three carriers are facing increased and intensive competition. In a statement that it issued, SIA said: “Aggressive fares and capacity injections from competitors will continue to place pressure on yields.” It is unlikely that the situation will change to be any less competitive, if not becoming more so even as the global economy improves further. Much has been said about the aggression of the Middle East carriers, namely Emirates Airlines, Etihad Airways and Qatar Airways, but SIA is also strongly challenged by carriers closer home, Cathay Pacific being its closest rival. The Singapore flag carrier’s dependence on Changi as the hub for East-West connections too has been challenged by the growing importance of Dubai and Hong Kong as alternatives.

To be fair, SIA is as affected as any airline by the state of the global economy. Last year was one of renewed optimism for the industry. Both the SIA and Cathay groups reported improved performance for their last financial year (note the time period’s difference by a quarter); although hit by a surprise Q4 loss of S$50.3 million, SIA’s profit of S$259 million for the year ended Mar 31, 2014 was an increase of 13% while Cathay’s HK$6.2 billion (US$800 million) for the year ended Dec 31, 2013 was an impressive more than 200% improvement. Though not entirely the case, the difference reflects the impact of the competition even in good times.

Do not, however, be mistaken. SIA is still a formidable competitor. Few airlines have achieved its consistency in product quality that makes it a perennial favourite among travellers. Unless it is resigned to the new state of play, it has to do much more than wait for the pressure to ease. It cannot be business as usual.

In recent times, it has become fashionably strategic for a protagonist to spawn sidekicks but not every airline subscribes to that philosophy. Some of the offshoots have become successes in their own rights, and many others on the other hand had been shelved or disposed off as impulsive ill-conceived by-products.

Somehow SilkAir continues to be a middle-of-the-road carrier which after 25 years is still not quite an airline with a distinct identity of its own. The competition aside, its fortunes are in a way dependent on the generosity and good name of the parent airline, operating so-called regional routes and supporting feeder traffic. Unlike Cathay’s Dragonair, it lacks the kind of hinterland market that China offers the Hong Kong regional carrier. But as the region adopts a more liberal aviation policy, SilkAir provides a good alternative to reach growing secondary destinations that are less viable options for SIA, but not when both parent and offspring (along with others) have set their eyes on the same market where segmentation by class is not critical.

It was widely speculated that SIA would shed Tigerair when it set up Scoot. That might still be on the card now that Scoot is not quite the mid-to-long haul budget carrier it was intended to be but competing with Tigerair on the short haul, and perhaps a likely direction following on its sale of a 60% stake in Tiger Australia to Virgin Australia last year. A stronger Scoot could be positioned to make better use of Tigerair’s rights (or, in the event that it is sold, better compete without compromises), which can complement its longer haul operations.

But SIA has come across as a cautious airline inclined to tread carefully on such matters. With healthy cash flow and a strong balance sheet, there just isn’t the urgency. If it waits long enough the tides may just turn. The question is when, and whether it is worthwhile waiting.

This article was first published in Aspire Aviation.

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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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