Asean Open Skies takes a positive step forward

Courtesy The Bangkok Post

Courtesy The Bangkok Post

At last a positive step for Asean Open Skies as member nations ratified the agreement to allow their airlines to fly freely from their home countries to any city within the bloc. The umbrella pact was to have been implemented last year.

However, the deal is conditional on Indonesia restricting access to only five airports in Jakarta, Bali, Surabaya, North Sumatra and South Sulawesi. This is understandable since Indonesia, being the largest Asean member country, sees itself giving away more than receiving.

The main beneficiaries are likely to be budget carriers for the short hops. Secondary airports may also experience traffic growth with more direct connections. These, not excluding the major hubs, may however be constrained by capacity.

The elusive Asean Open Skies dream

Courtesy Asean

Courtesy Asean

STILL waiting. Asean Open Skies continues to be an elusive dream for the ten-nation bloc as members renewed their commitment at this year’s Asean meeting of their leaders in Kuala Lumpur. Asean, which stands for Association of Southeast Asian Nations, is made up of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

A new declaration to form an Asean Community all but reiterated the association’s original manifesto, the progression reinforced as building “economies that are vibrant, competitive and highly integrated, and an inclusive community that is embedded with a strong sense of togetherness and common identity.” The Community will be formally instituted on Dec 31, aiming to eliminate trade barriers to form a single market and production base.

Since the Open Skies policy has been part and parcel of that umbrella ambition, it marks another milestone as a positive thrust in the desired direction although the target was to have it fully implemented this year. But where does the Open Skies stand in the development?

Much was said in the past about hurdles posed by the region’s disparate geography, economic disparity, different political make-up and diverse cultural practices. Not in the least, the different levels of economic progress and welfare across the region continue to pose difficulties for member nations to move at the same pace towards the ideal commonality. A single market modelled on that of the European Union (EU) is still a long way off.

No one denies that liberalisation will benefit Asean and fuel aviation growth in the region. It may open up channels for collaboration among operators but lest it be misconstrued, it does not necessarily run on complementary operations as a single entity against the rest of the world. Open skies means freeing up the competition across the borders and breaking down barriers of entry which allows neighbouring carriers to compete with home carriers on a level playing field. Therefore, the fear of competition among Asean carriers – each at a different level of growth – is real. The major carriers operate very much the same routes, and there is competition to channel traffic away from home bases through hub and other airports. Asean has a myriad of carriers, many of them thriving on niche and closed markets. The question is: Are they ready?

The EU has seen increased competition in the single market, benefitting customers and driving carriers to be more cost-efficient. Low cost carriers such as Ryanair and easyJet have grown to be more than just low-end niche players but serious threats to legacy airlines which are already struggling to stave off competition from foreign carriers which are more efficient and service-friendly. The single market has also led to mergers for strength, such as the International Airlines Group which conglomerates British Airways, Iberia, budget carrier Vueling and Aer Lingus, and is 10-per-cent owned by Qatar Airways. (See International Airlines Group partnership works, Nov 26, 2015) It is hard to envisage at this stage such a development within Asean, no less for the reasons already mentioned.

To be fair, the region has seen some progress in the liberalising process, even as the goal post keeps moving away. Some major airlines are already preparing for the eventuality as the market shows signs of growing, particularly in the demand for budget travel. However, if the failure of Tigerair’s forays into the Philippines and Indonesia as a joint-venture partner is any indication of the climate for cross-border investment, it again points to the region’s readiness and propensity to sustain the efforts. The pace is not moving fast enough, and so long as the goal post keeps shifting forward, it is easy to lose that drive.

Priorities can change quickly. Asean nations are caught in the current of the global scramble for economic pacts across a wider region in a world that is increasingly being threatened by geopolitical rivalry down economic lines. They, not as a bloc but individually, risk isolation and being disadvantaged by non=participation. This could be a distraction away from the Asean agenda.

Four Asean members – Brunei, Malaysia, Singapore and Vietnam – signed the Trans-Pacific Partnership (TPP) agreement which took effect on October 5 along with Australia, Canada, Chile, Japan, Mexico, New Zealand, Peru and the United States. Indonesian president Joko Widodo at a subsequent meeting with US president Barack Obama expressed his country’s interest in joining the bloc. Asean itself has proposed a Regional Comprehensive Economic Partnership to engage non-members Australia, China, India, Japan, New Zealand and South Korea. However this does not prevent member nations from independently pursuing bi-lateral trade agreements which may see implementation of some measures such as faster immigration channels between these parties ahead of similar facilitation within a common Asean union.

Within the aviation industry too there are alliances and there are alliances, so to say. Global alliances represented by Star, OneWorld, SkyTeam do not preclude member airlines from forging other partnerships outside their ambit, some of which are cross-border agreements. It seems to complicate the relationships, but apparently it also opens up opportunities that may otherwise be thwarted by restrictions of exclusivity.

This year’s Asean Summit – its 27th – is focused on forging an Asean Community which will be formally instituted on Dec 31. The lack of an Asean identity is viewed as a major hurdle in the progress towards a no-barriers common marketplace. Singapore prime minister Lee Hsien Loong said: “One of the constraints on government – and one of the reasons Asean finds it difficult to make progress together – is (that) there is not a very strong sense of Asean identity:” (The Straits Times, Nov 23, 2015) He added: “I think there is some distance yet.”

There was mention of the Asean community engaging in projects such special lanes for citizens of member nations at airports and facilitation vide an Asean Business Travel Card.

But new issues that surfaced recently aren’t going to make the forward thrust any easier. Indonesia, the largest community in the bloc, has expressed its intention to rein in administration of part of its airspace presently under the purview of the Singapore authorities, but its aviation safety record is raising reservations. Following findings by the United Nations International Civil Aviation Organization (ICAO), the US Federal Aviation Administration (FAA) has downgraded its safety rating of Thailand’s aviation authority over concerns about safety standards.

Such issues are likely to shift the priorities of not only the affected nations but also the bloc as a common entity, particularly considering its small composition of member states. So it appears that Open Skies will be taking a backseat in the meantime

This article was first published in Aspire Aviation.

EU model for Asean?

Courtesy AirAsia

Courtesy AirAsia

Outspoken AirAsia chief Tony Fernandes has called on airlines in Southeast Asia to press for a regional aviation regulator modelled on the European Union (EU)’s centralised administration of matters such as safety standards and carriage obligations of airlines to passengers.

Mr Fernandes said: “If you let the bureaucrats do it, it will never happen. So, all airline must join hands to call for one regulator, adopting the European model for respective national regulators and Asean regulators to exist concurrently.”

It could not have come more timely when the Asean open skies policy scheduled for full implementation this year looks unlikely to be realized. All’s been too quiet on the common front past almost half the year. And while airlines are preparing for the competition, setting up joint ventures to take advantage of the proposed liberalisation, much still depends on the political agreement among the disparate group of ten very different economically assessed nations.

At the same time, it cannot be assumed that while the airlines recognise how liberalisation would open up new opportunities for them, they will find it easier to work together to propose a common framework for adoption. As different as the national political bodies are, so are their home airlines. The single market will see heightened competition within the region with the growth of low-cost carriers, but the real challenge comes when national airlines look beyond the region, competing on the long haul.

Yet if it works in Europe, why not Asean? That’s the poser waiting to be answered.

Tigerair keeps sinking

Courtesy Tigerair

Courtesy Tigerair

THE tide has not changed for Tigerair as the budget carrier which is 40% owned by Singapore Airlines continues to be plagued by poor performance.

Tigerair posted an operating loss of S$16.4 million (US$13.1 million) for the quarter ended June 30, 2014, which is the first quarter of its new financial year. This was more than twice the loss of S$6.2 million for the same quarter last year.

The company cited two primary reasons for the contraction. First, the exclusion of Tigerair Australia from the results after it was acquired 60% by Virgin Australia in July last year. This raised the question as to whether Tigerair had made a bad investment decision at a time when it was desperately trying to cut losses.

Second, the huge loss incurred by Mandala Indonesia Airlines, which was everything but a savvy decision at a time when Tigerair was pressured by the regional competition in a race to set up joint ventures and expand its network particularly in light of the impending full implementation of the Asean (Association of Southeast Asian Nations) open skies policy in 2015. The cost for that hasty misadventure amounted to S$35.3 million for the quarter. This widened the loss to S$65.2 million. The Indonesian carrier has since July 1 ceased operations with a provision for shutdown costs of S$14.6 million. On a note of forced optimism, Tigerair could look to an improved bottom line, as stated by CEO Lee Lik Hsin in a press release: “With the cessation, the Group will no longer be exposed to loss-making Mandala.”

Either way, Tigerair appears to be trapped, perhaps a victim of circumstances, but in cold business, that may only serve to amplify the weaknesses not of the market but of the player in question, only simply because it is all about the competition.

So did Mr Lee also say: “Despite the competitive operating conditions faced by Tigerair Singapore, our first quarter results showed a slight improvement over the last quarter.” Some consolation there; you choose the quarter for comparison as you deem fit. While corresponding quarters best take care of seasonal aberrations, consecutive quarters can point to a changing trend. The truth often lies somewhere in between, how much of it depending on how skewed the interpretation is presented. No one can argue the toss with Mr Lee. Figures don’t lie; what is more important is the reading of the story they tell.

For the same quarter ending June 30, Tigerair Singapore posted an operating loss of S$19.8 million, compared to an operating profit of S$5.9 million last year. However, by the same argument, it was an improvement over the operating loss of S$29.4 million in the preceding quarter. The point of contention is whether this is a sufficient indication of a turning trend, losing less. The good news was that revenue grew by 3.2% – but that was as far as it went – on the back of an increase in capacity by 14.8% resulting in a higher load factor by 0.8 percentage points which unfortunately was offset by lower yields by as much as 11.5%. The bad news is that costs went up by 19.9%.

Tigerair continues to gripe about overcapacity that has affected its bottom line. In the statement it issued, Tigerair said: “Tigerair Singapore continues to operate in a challenging environment due to persistent oversupply of capacity in the region.” That, we have to admit, is the crux of the competition. While soothsayers continue to raise the optimism of rising Asia, the truth is that the competition has intensified as the region becomes more liberal. This is exacerbated by the thin line between budget and legacy. Asean too may have oversold the dream of its open skies, and the proliferation of upstarts, whether independent or wholly/jointly owned entities, has brought about intra-airline instead of inter-airline competition that in the case of Tigerair sees it competing with sibling Scoot.

Tackling overcapacity can mean aggression or a retreat. Tigerair is already executing plans to ground eight surplus aircraft. With the cessation of Mandala operations, the Group will have four more surplus aircraft returned to the hangar.

In May when Tigerair replaced Mr Koay Peng Yen with Mr Lee at the helm, it said: “Tigerair Singapore had started the process of consolidating its services in preparation for a decisive turnaround in its prospects.” In his parting shot, Mr Koay said: “We have re-calibrated our strategy and taken the necessary steps to reposition Tigerair.” (See Can leadership change save Tigerair? May 16, 2014) Maybe it is still early days. Apart from the change of leadership, we are still none the wiser about that re-calibration unless it was all about shedding Mandala to mark the intended turning point. What else, one is apt to ask.

This article was first published in Aspire Aviation.

Is ASEAN Open Skies a myth?

LESS than a year to its full implementation, the ASEAN Open Skies remains an uncertainty. First mooted some 20 years ago, it has been a long time coming. While there was some open discussion in its early days, all seems somewhat quiet of late. Is it likely to be postponed? Or is it after all a myth?

The issue really hinges on how ready the ten-nation association are collectively. Even deeper than that, how prepared are they to overcome the hurdles, real or perceived, that stand in the way of full implementation. Unlike the European Union, ASEAN is by definition an “association” and not a common government with binding law enforcement obligations. The bloc is made up of a disparate string of nations that are vastly different in their stages of economic development. How they weigh the opportunities that such a common policy could bring against possible losses at home would determine their readiness for participation. Some nations may still prefer the seeming protection of local businesses accorded by bilateral exchanges. This was already tacit when at the outset, the various nations agreed on “the importance of the development of Competitive Air Services Policy which may be a gradual step towards an Open Sky Policy in ASEAN.”

Yet the good news is that against the uncertainty, the skies are already becoming more liberal as a number of airlines have stepped up expansion plans across the region. The battle for dominance has begun.

ASEAN nations

Courtesy The Bangkok Post

Courtesy The Bangkok Post

Indonesia is the largest nation in the association, occupying a land mass made up of more than 13,000 islands that is almost 75% the total area of the other nine nations put together. It is also the most populous with 250 million people, followed by the Philippines (98,000,000) and Vietnam (90,000,000). While ASEAN has a combined population of over 600 million – which speaks a lot about its huge market potential – expectedly the focus is likely to be Indonesia. But Indonesia, hampered by slow infrastructural enhancement and the past poor safety records of its carriers, fears the loss of domestic markets to better endowed foreign competitors. In May 2010, Indonesia declared it was not ready to fully open its skies and would limit access to only five airports, namely Jakarta, Surabaya, Bali, Medan and Makassar. Other ports would be subject to bilateral agreements and foreign carriers would not be permitted to ply domestic routes.

So it is with the less developed nations of Myanmar, Laos, Kampuchea and Vietnam even as they seek more foreign investments and ways to boost their exports. Accessibility to the landlocked outback of these nations could open up opportunities for growth, as noted at a meeting of ASEAN transport ministers in 1996 that the association aimed “to promote interconnectivity and interoperability of national networks and access thereto taking particular account of the need to link islands, land locked, and peripheral regions with the national and global economies.” The question really is how ready they are to embrace this objective to see to its implementation.

At the other end of the spectrum is Singapore, which is the smallest of the nations but the most advanced economically and most ready to go full hog with the implementation of the ASEAN Open Skies policy. After all, Singapore has been a pioneer in advocating liberal skies on the global stage. A concern among its ASEAN neighbours may be that of how they perceive Singapore carriers as benefitting from an enlarged Asean hinterland. It works both ways. Foreign carriers, particularly short-haul operators with limited capacity and resources, will benefit from Changi Airport’s hub connections to tap into other markets in the region. Besides its strategic geographical position, Changi offers excellent infrastructure and has appeal aplenty for transits,

Middle-of-the-road Malaysia and Thailand seem less passionate about the push. Brunei Darussalam, which has the smallest population, appears quite comfortable the way it is for now. However, the Philippines with a similar geography as Indonesia could benefit from more liberal connections.

Which airlines will rule the ASEAN skies?

The region’s growth is likely to be led by budget carriers. With the focus on Indonesia, its home-based carriers are not sitting by idly. Flag carrier Garuda Indonesia is acquiring smaller 100-seat planes more suited to the shorter runways of secondary airports, which will be largely served by its budget subsidiary Citilink. Asked how Garuda was gearing up for the ASEAN Open Skies, Garuda president and chief executive Emirsyah Satar said: “The ASEAN Open Skies Agreement will open up the Indonesian market to carriers from other ASEAN member countries, but our position is very strong in Indonesia and we are prepared for the competition. Our network’s aggressive international expansion and continual developments and service improvements will also prepare us for competing in a more liberal environment.” (Interview: Emirysah Satar, president & chief executive, Garuda Indonesia, 4 September 2013) He projected that Citilink would carry 19 million passengers by 2015 and there were plans to add international routes to several destinations in Southeast Asia. Garuda is also developing a new hub in Bintan, which is a hop away from Changi Airport.

Courtesy Lion Group/Picture by Rudy Hari Purnomo

Courtesy Lion Group/Picture by Rudy Hari Purnomo

Compatriot Lion Air, which is Indonesia’s second largest airline, is also expanding its fleet and gearing up its regional subsidiary Wings Air to service smaller airports. Lion Air has long expressed its intention to hub through Changi although it has also announced plans to develop Batam as an alternative transit hub to the congested Soekarno-Hatta Airport in Jakarta for both domestic and international flights. Lion Air president Rusdi Kirana said: “The distance is actually shorter if you transit in Batam rather than flying south to Jakarta to transit. The shorter flying time makes flying more convenient for passengers and it means aircraft burn less fuel, leading to significant cost savings.” From Batam, which, like Bintan, is a stone’s throw away from Changi, Lion Air hopes to fly to destinations such as Guangzhou, Hong Kong, Bangkok, Jeddah, New Delhi and Mumbai.

It is to be seen how the plans of Garuda and Lion Air to develop Bintan and Batam respectively will impact on Changi, which is likely to see higher growth as Singapore becomes an attractive destination in itself and as a desirable feed port for international and regional traffic. In introducing a direct non-stop service from Jakarta to London in May this year, Mr Satar has hoped that Indonesian travellers would fly Garuda instead of routing their travel out of another airport such as Changi.

Other smaller carriers are expected to go for a bigger slice of the growing pie and new carriers launched to serve secondary airports.

Courtesy Airbus

Courtesy Airbus

Not to be left out of the race, AirAsia and Tigerair made early moves to establish their presence in the huge Indonesian market. Until a full open skies policy is in place, joint ventures are the expedient way to gaining a foothold. Indonesia AirAsia, which is 49% owned by AirAsia, operates beyond Indonesia to Singapore, Kuala Lumpur, Phuket and Ho Chi Minh City. AirAsia chief Tony Fernandes’ ambition is to dot the region with the AirAsia brand. The Malaysian budget carrier has also set up joint ventures in Thailand and the Philippines. This means AirAsia, which is headquartered in Kuala Lumpur, and its joint-venture airlines are serving destinations in all the ten Asean countries, as summed up by Mr Fernandes: “Think we are done in Asean.” But liberalization offers more than just opportunities within Asean; AirAsia is well positioned to connect its passengers beyond to destinations in Australia, Japan, Korea, China, India and the Middle East.

Responding to AirAsia’s thrust into Indonesia, Lion Air teamed up with Malaysia’s National Aerospace and Defence Industries to launch Malindo Airways for services from Kuala Lumpur across Asean and to China, India and Japan, a move that Mr Fernandes had rebuffed as no match for AirAsia’s strong brand and positioning as Asia’s largest budget carrier. So far Lion Air appears to be one with the biggest plans, which include an airline leasing company to be situated in Singapore, a new full-service airline Batik Air which was launched in May last year and which plans to fly to Singapore as its first international destination sometime this year, and a premium charter under the Space Jet brand.

Not so lucky is Tigerair, whose partnership with Mandala Airlines Indonesia is teetering on the brink, as was its partnership with SEAir in Tigerair Philippines which has since been sold to Cebu Pacific Air. Its attempt to spread its wings across the region had met with a string of failures added to a blemished record of poor service. Its ambiguous relationship with sibling airlines within the Singapore Airlines (SIA) stable has not improved its fortune; today Tigerair and Scoot are competitors on some routes. Scoot, which is 100% owned by SIA, looks likely to overtake Tigerair in the game. It has partnered Nok Air to operate a domestic service in Thailand. Nok has hoped that this will be its vehicle for expansion overseas. Regional carrier SilkAir continues to fly in the shadow of parent SIA, which may have to continue to shore up the fortunes of its offshoots with feeder traffic from and into its long haul services.

Jetstar Asia, the only other airline based in Singapore that is not part of the SIA group, has proven to be a tough competitor. Parent Qantas has been actively promoting the Jetstar brand across Asia, having also set up joint ventures in Japan, Vietnam and Hong Kong.

Whether the Asean Open Skies is finally formalized or not, regional carriers have already started to prepare for the eventuality. The question as to whether it is a myth is no longer relevant. Clearly, the end-date is not as important as the progression towards it.

Lion Air moves transit hub closer to Changi Airport

Courtesy Reuters

Courtesy Reuters

LION AIR is clearly making moves to be a prominent player when Asean Open Skies 2015 kicks in, especially when it is expected that home country Indonesia, which is the most populous nation in the region, will experience the highest growth in air movements as a result of the liberalization.

Lion Air has plans to grow the airport on Batam island – a stone’s throw from Singapore – as an alternative transit hub to the main but increasingly congested Soekarno-Hatta Airport in Jakarta. From there, the airline hopes to fly to destinations beyond Indonesia, such as Guangzhou, Hong Kong, Bangkok, Jeddah, New Delhi and Mumbai.

Lion Air president Rusdi Kirana said: “The distance is actually shorter if you transit in Batam rather than flying south to Jakarta to transit. The shorter flying time makes flying more convenient for passengers and it means aircraft burn less fuel, leading to significant cost savings.”

Considering Indonesia’s multi-island geography, it may not matter where the transit takes place if the cost is kept low and the convenience of connection is not that much worse off. There is no reason why Lion Air cannot use Batam for its spoke operations but only for its flights. Jakarta will continue to be favored by the major legacy airlines and the added advantage of accessibility by land.

But what is more interesting about Lion Air’s move Batam’s proximity to Singapore’s Changi Airport. Is the airline looking at a siphoning possibility at lower costs in competition with airlines such as AirAsia which had for a long time been pestering the Singapore government to allow it to operate out of a domestic but separate base? Lion Air too has announced its intention to hub its flights at Changi with Open Skies, and Batam is near enough.

Boosting his proposal, Mr Kirana also announced Lion Air’s launch of a hangar on Batam to provide maintenance, repair and overhaul services, the first of four such hangars

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.

SilkAir at 25, stepping out of SIA’s shadow

Photo courtesy Boeing

Photo courtesy Boeing

AT 25, SilkAir is still around and growing not much or rather slowly. It has reiterated its intention to step out of Singapore Airlines (SIA)’s shadow and distinguish itself as one in its own right, but it cannot deny its role as a feed for the parent airline.

This year SilkAir is announcing new destinations that include Kalibo in the Philippines and Mandalay in Myanmar, secondary destinations that may best be served by budget carriers. Therein lies the ambiguous positioning of SIA’s regional airline, which, unlike Cathay Pacific’s Dragonair that enjoys the support of the large China hinterland, finds itself squeezed between legacy and budget operators and faces competition from national as well as budget carriers in the region.

In fact, SilkAir reported more than 40 per cent drop in profit for the first half its current financial year with a worse Q2 performance of S$8 million (US$6.27 million) compared to S$19m for the same quarter last year, attesting to the intense competition in the region. The plunge of almost 58% was attributed to passenger carriage growth not keeping pace with capacity increase apparently aimed at developing new markets in the region. The inability to fill up capacity points to the limited growth facing SilkAir.

However, SilkAir is optimistic that 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. But it will not be an easy trot for the airline in the Year of the Horse as it faces even stiffer competition in the bigger arena. Ironically, SilkAir may also face competition from sister airline Scoot as the latter expands its network. It is something that parent airline SIA will have to reassess, redefining the role of the various carriers including Tigerair in its stable.

An expected fall in the cost of jet fuel – or the price holding steady at least – because of political stability in the Middle East will favour SilkAir as it should all other carriers, only that low-cost operators without the hedging capacity of legacy airlines will find this news especially welcoming in view of their cost structures. There are more certain signs now of economic recovery in Europe and the United States, and this will be good news for SIA, which in turn will also benefit SilkAir as its feed carrier – the extension epithet that SilkAir at 25 wants to shirk off. Full implementation of Asean Open Skies by 2015 will fan the growth of low cost operators in the region and SilkAir too will be able to ride the wave of increased demand for travel. In the bigger arena, the continuing growth across Asia will also provide opportunities for SilkAir to grow beyond the region.

But like other airlines, SilkAir will face stiff competition and pressure on yield. While the International Air Transport Association (IATA) has predicted record profits for the airline industry this year, revising upward its earlier forecast of US$16.4 billion to US$19.7 billion, IATA chief Tony Tyler has also warned: “It is a tough environment in which to run an airline. Competition is intense and yields are deteriorating.” SilkAir’s foray into secondary destinations will be challenged by Lion Air and budget carriers such as AirAsia, Jetstar, even Tigerair and Scoot. Not surprisingly, SilkAir CEO Leslie Thng has reportedly said when referring to the airline’s apparently “aggressive growth plan”, that “time and resources would be required to nurture these routes – to build up the awareness of and demand for these routes.” Unfortunately, the luxury of time is a costly affair that not many airlines can afford; an advantage that perhaps SilkAir with the backing of a rich parent could take comfort in.

The SilkAir model seems strangely outdated yet unique in an environment that appears to favour the extremes of affordability. As major airlines work at reviving premium travel with constant upgrading and some of them providing a bridging product such as premium economy which is becoming increasingly popular, and as budget carriers offer even lower fares to compete with not only rivals in the same class but also legacy airlines at their low end, SilkAir’s middle-of-the-road package is seen less as an alternative in its own right but more as a by-product of parent SIA with fewer perks. It is not altogether a bad thing, as it does not suffer the unfavourable public assessment of Tigerair vis-à-vis other budget carriers. With SilkAir there is no other to compare with, the same kind of benefit Scoot is presently enjoying in its association with parent SIA.

One may even be tempted to ask whether launching audio and video streaming for passengers to download onto their smartphones and tablets as SilkAir has planned as part of the programme to forge an upgraded identity would make that much more a difference.

At 25, SilkAir may feel it is time to spread its own wings, hence the battle-cry to step out of SIA’s shadow. Not quite sure if it is the best way forward when half of its passengers are connectors on SIA. One thing is clear; Mr Thng said: “We never wanted to match SIA.”

The road forks for Changi Airport and Singapore Airlines

Courtesy Changi Airport Singapore

Courtesy Changi Airport Singapore

IT is only to be expected that the fortunes of a country’s airport and its flag carrier at whose airport it is based are intertwined. So in the early years, both Changi Airport and Singapore Airlines (SIA) grow in tandem. However, in recent years, Changi has seen a surge in traffic passing through it while SIA finds the increased competition by the growing number of carriers including low-cost operators on home ground is threatening its market share.

In its latest performance report, Changi recorded 955 flights per day in August, the highest since April last year. The traffic throughput rose 8.2 per cent year-on-year, attributed largely by increased numbers of travellers from nearby Malaysia and Indonesia. Ever since the toll on long-haul travel caused by the global economic meltdown in 2009, Changi has benefitted from the growth in regional traffic and the flourish of budget carriers. SIA on the other hand has suffered from the cutback in premium travel and has since refocused more attention on travel within the region and on low-cost travel through Tigerair and Scoot.

While it is imperative that Changi and SIA should work together to promote travel to Singapore but, in this case, specifically travel on SIA, Changi is aware that it cannot rely on SIA alone to grow its status as the regional hub, particularly as the region increasingly adopts a more liberal aviation policy. Most anticipated is the Asean Open Skies which is targeted to be fully implemented in 2015. Singapore itself has pioneered and has been adopting a very liberal aviation policy that has spurted the growth of both Changi and SIA. For Changi, it is the more the merrier; for SIA, though it has never known to be openly begrudging the competition, it will mean more pressure on its bottom line.

In an early debate on a possible predicament, Singapore has made clear where its priority lies. But if the road has forked for Changi and SIA, it is by no means a quid pro quo situation. Both entities can still be equally successful in their own rights. The competition faced by SIA is as real as that which confronts Changi, which cannot afford to close its doors and lead to would-be customers using competitive airports instead. To a large degree, the fortunes of both Changi and SIA are still intertwined; as they grow, they will proffer new opportunities for each other. Only that they will have to fight their own battles, more so now than before.

Is AirAsia facing partnership problems?

airasiaIs the Asian budget business overhyped as competition increases and demand matures? Or is it just a problem peculiar to AirAsia’s partnerships?

AirAsia Philippines, established in December 2010 between AirAsia (40%) and local investors (60%) but commenced operations only in 2012, has suspended all flights from its base at Clark International Airport. The reason was cited as one of cutting losses incurred by affiliate Zest Airways, which in August was suspended by the Civil Aviation Authority of the Philippines for safety violations.

However, AirAsia chief Tony Fernandes said it was because the airline was moving its flights to the main Ninoy Aquino International Airport in Manila. At the same time, Mr Fernandes vowed, “We will be going back to Clarke.”

It was ambiguous, to say the least. Is it going to be Manila or Clarke, or both? Know that Mr Fernandes has always been keen on secondary airports where it could dominate. Ever since the Malaysian capital of Kuala Lumpur moved its main airport from then Subang International Airport (which has been renamed Sultan Abdul Aziz Shah Airport) to Kuala Lumpur International Airport in 1998, AirAsia has been lobbying unsuccessfully to make its hub at Subang, which is served by Malaysia Airlines’ Firefly budget subsidiary.

AirAsia has also asked the Singapore authorities to be allowed to set up base at the smaller Seletar Airport which is currently being used on a limited basis for charters and training. Yet when a budget terminal was constructed at the main Changi Airport, AirAsia chose not to use it but insisted on operating along full-service airlines out of the main terminal. Mr Fernandes understood only too well the advantage of being where the action is, as suggested by his preference for NAIA to Clarke because the former offers “more choice, more value.” Changi’s Budget Terminal has since been closed and AirAsia may feel it has made the right decision.

However, AirAsia Philippines’ suspension of flights coming on the heels of AirAsia’s failed relationship with All Nippon Airways (ANA) in its joint venture – then named AirAsia Japan and has since been renamed Vanilla Air by ANA – may suggest more than just a temporary adjustment issue as the carrier makes plans to shift airport bases. (See Everyone loves vanilla, but do they really? Aug 24, 2013) This is not helped by the increased competition in the region and by the overrated potential that some analysts have hyped up although it is to be recognized that with Asean Open Skies, there is room for growth.

Maybe it has to do with the stars too. AirAsia’s new joint venture in India may not take off as scheduled by the end of this year because of administrative procedures. Yet the delay till 2014 may be a blessing in disguise considering the present poor market. Just so in the same way that AirAsia Philippines may resume Clark-Hong Kong flights for the Christmas season. A matter of economics?