Qantas-China Eastern partnership: Dressing up an old arrangement

qf logocea logoQantas and China Eastern Airlines announced a new agreement that the airlines said will enlarge their existing codeshare arrangement signed in 2008 for a deeper level of commercial cooperation on flights between Australia and China. A statement issued by Qantas referred to the new relationship as a “joint venture”. In the application to the Australian Competition & Consumer Commission (ACCC), it was referenced as a “Joint Coordination Agreement”. Whatever the terminology, one wonders if this agreement is any different from the usual run-of-the-mill alliances that are not much more than a formal handshake.

There is the standard co-ordination and sharing of facilities such as airport lounges. A key feature is the co-location of both carriers’ operations within the same terminal at Shanghai International Airport. This reduces transit times by about an hour to facilitate a wider range of onward connections. Qantas CEO Alan Joyce said: “Coordination means the opportunity to improve schedules and connection times, and to deliver improved products such as a joint lounge and streamlined check-in facilities in Shanghai.” The Australian flag carrier is banking on more of its customers opting to fly to not only Shanghai but also beyond from there, in a region where it is much weaker compared to Asian carriers such as Cathay Pacific and Singapore Airlines (SIA).

Many codeshare partners are already making similar arrangements. Star Alliance airlines, for example, operate out of a dedicated terminal at London Heathrow. So what’s the big deal about the Qantas-China Eastern agreement which, subject to regulatory approval, will commence in the middle of next year and be effective for five years?

According to Qantas, the agreement is designed to complement the Qantas-Emirates partnership for Europe, Middle East and North Africa, and the Qantas-American partnership for the United States. That covers almost the whole world and makes Qantas truly a global airline. But to what avail? Interestingly, Qantas itself has limited operations to some of the regions. It operates to only London in Europe, Dubai in the Middle East, Johannesburg in Africa and Santiago in South America. The airline’s presence in North America is limited to Dallas/Fort Worth, New York, Los Angeles and Honolulu.aa logo

The Qantas-American agreement signed in 2011 is a codeshare arrangement for transpacific flights between the US and Australia to also include New Zealand. It does little more than what the global alliances, in this case OneWorld of which Qantas and American are members, have been set up to achieve. American does not operate to Australia.

emiratesThe Qantas-Emirates alliance caused a stir when it was announced in 2013 because of changes made to the traditional kangaroo route when Qantas shifted its operations hub from Singapore to Dubai. While Qantas is leveraging on Emirates’ extensive networks in Europe, the Middle East and Africa, it looked like the move was aimed at checking the competition posed by SIA. However, the real winner is not Qantas but Emirates, which is aggressively making inroads into the Asia-Pacific market. More than a year after, Qantas continues to make losses. It posted the biggest loss in its history of A$2.84 billion (US$2.66 billion) for the last financial year ending June 30.

How different from these other agreements is the new partnership between Qantas and China Eastern, and how will it play out for Qantas?cathay2

The flying kangaroo has long eyed the growing China market as a way to improve its bottom line. A partnership with a Chinese carrier makes sense for a quick and easy penetration into the large market in addition to its current daily service between Sydney and Shanghai. The agreement is also supposed to complement Qantas’ existing services to mainland China via Hong Kong, competing with Cathay Pacific and Dragonair. In its application to the ACCC, Qantas says it “does not consider the Hong Kong and Shanghai gateways to be mutually exclusive” the way that Dubai has replaced Singapore as the hub for its European flights. Quite clearly, Cathay which has a stake in Air China Cargo is a veritable rival to reckon. The rivalry has heightened in the Jetstar Hong Kong saga. China Eastern’s participation as partner in the budget joint venture does not seem to be able to do much to facilitate its application for approval to fly. After two years of its launch, approval is still pending.

siaThen there is SIA, the other competitor with a strong presence in the region, mentioned in the Qantas-China Eastern application to ACCC. Qantas notes how SIA’s subsidiaries Tigerair and Scoot are flying from Australia to Singapore with onward connections to China. As if pre-emptory to the new agreement, the existing Qantas-China Eastern codeshare already covers flights out of Singapore.

While Qantas will gain wider access across China, so will China Eastern within Australia. Passenger air services between Australia and China have been growing at an average rate of 11% for the four years to April 2014. In the past 12 months to June 2014, passenger numbers grew by 8%. In the application to ACCC, Qantas expresses fear of being “marginalised”. On its own, it says it “will not be able to keep pace with the capacity growth being driven by carriers such as China Southern and Sichuan Airlines.” ACCC will have to decide whether the case is about Qantas or Australia, notwithstanding the former`s status as the country`s flag carrier. Yet Qantas has argued that the proposed agreement is far from being anti-competitive, though clearly that fear has been exacerbated by the growing importance of Chinese carriers if only the competition could be limited to a single but partner airline, other strong regional carriers, and rival Virgin Australia’s reciprocity with Delta, Air New Zealand, Etihad and SIA in the wider network.

As with the American and Emirates alliances, the agreement with China Eastern once again is a case of Qantas needing its partner more than the other way round. The partners continue to retain their distinct identity vis-à-vis brand, product and pricing differences. Qantas runs the risk of its customers switching loyalty to its partner by the lure of lower fare, better facilities and services. Emirates, for example, may offer more than just a convenient hop from Dubai to other destinations for Qantas customers when it also competes on the kangaroo route. Before Emirates, there was speculation that Qantas might form the alliance with Cathay instead. That would make a formidable force, but Qantas would have faced the same risk. Besides, a partnership between giants is apt to be paved with problems unless the advantages to one partner are worth its compliance, if not silence.

Will China Eastern similarly flip the game for Qantas? The China carrier has much to gain. Qantas desperately seeking to check competition and new growth may find its prowess neutralized, dressing up an old arrangement.

This article was first published in Aspire Aviation.

Jetstar Hong Kong’s long and costly wait to fly

Courtesy Jetstar

Courtesy Jetstar


Twenty-one months after Qantas announced the birth of its fifth Jetstar venture in March 2012, initially in partnership with China Eastern Airlines, the airline (Jetstar Hong Kong) has yet to receive approval from the Hong Kong authorities to fly. No doubt it is a costly affair waiting, with three remaining Airbus A320 aircraft sitting in Toulouse after six of the orders have since been sold. But prime mover Qantas is confident that Jetstar HK will eventually take to the sky, expecting its case to be heard some time next year although no firm date has been set.

Qantas chief executive Alan Joyce said: “We are confident that Jetstar Hong Kong’s case is solid for the approvals. The process has taken longer than anyone expected, it’s taken longer than any jurisdiction hat we’ve seen in the world, but this is going to be a good business venture which we believe will make good profits.”

If you detect any hint of frustration at the lumbering approval process, you may be right. Yet could you blame Mr Joyce for running out of patience? Indeed it is surprising that Hong Kong as a thriving air hub is taking so long to reach a decision.

Cathay’s objection

Courtesy AIRBUS

Courtesy AIRBUS

It is widely believed that Cathay Pacific’s objection to Jetstar HK is in no small way attributive to the delay. Cathay remained confident that the Hong Kong authorities would not rule in favour of the budget carrier, the argument being that it is foreign controlled, effectively from Australia. That runs contrary to Hong Kong law. In a move to make the carrier more Hong Kong in character, Qantas and China Eastern inducted a third local partner, Shun Tak, whose managing director Pansy Ho assumed appointment as Jetstar HK chairman. Shun Tak would have the majority 51 per cent shareholder voting rights, reducing that of the other partners to 24.5 per cent each. Presumably the authorities will now have to decide whether that is enough, notwithstanding Mr Joyce now saying that the new airline is more local than Hong Kong’s other airlines.

But is there a bigger issue than one about ownership, which by its legality should be indisputable? Right from the beginning, Cathay has made its objection heard, arguing that such a business model does not have a place in Hong Kong. While many of its rivals such as Singapore Airlines (SIA) and Japan Airlines besides Qantas have spawned budget offshoots, Cathay has pooh-poohed the idea. Cathay may deny it, but its opposition to Jetstar HK is an issue of competition. Though in name a budget carrier, Jetstar HK backed by strong parents with international connections will compete with not only Dragonair but also Cathay, the same pressure that other mainstream airlines such as SIA, Air France and Lufthansa are already experiencing. The likes of Ryanair and easyJet in Europe, Southwest and JetBlue in the United States, and AirAsia and Jetstar in Asia are the new threat to the legacy business as the global economy continues to flounder. The market has become that less clearly demarcated.

Is there a case for Jetstar HK?

To say that budget carriers cannot thrive in Hong Kong is a supposition without much experiential evidence to support it. With the large China market at its doorstep, the potential cannot be overplayed. By comparison, the growth of budget traffic outstrips that of full service traffic in Singapore; the low-cost business makes up 30 per cent of Changi’s throughput. It is higher in Indonesia and India. Asia in particular has seen an increased number of budget carriers in recent years to cater to the growing number of travellers responding to the offer of affordable fares. It is no exception that Cathay together with Dragonair which account for almost half the seats sold out of Hong Kong will want to protect their dominant market share.

So, are Hong Kong air travellers worse off than their counterparts in the region, being denied cheaper alternatives? Jetstar group chief executive Jayne Hrdlicka would like to think so. She said: “The travelling public in Hong Jong have clearly signalled that they are fed up with paying high fares relative to their colleagues around the region.” That at best is an assumption, though not entirely baseless. At the same time it does not mean Cathay and Dragonair will immediately lose chunks of their business to Jetstar.

The onus on Jetstar HK is to show that its entry will not diminish the market size but will instead generate an increase in demand for seats, something that all airport authorities like to hear. Almost always that is the wistful thinking that goads airports to open their doors to more carriers. Then there are the arguments for competition to grow the airport. Hong Kong cannot be the air hub it is today without the competition.

Qantas CEO Alan Joyce/Photo courtesy bloomberg.com

Qantas CEO Alan Joyce/Photo courtesy bloomberg.com

Lest anyone thinks that Jetstar HK would not survive the competition even if given the go-ahead, Mr Joyce cited the success of Singapore-based Jetstar Asia, which had been profitable in the four years before last year. Even though it lost S$40m (US$32m) last year, it outperformed SIA’s Tigerair which lost S$200m. The losses were the result of market overcapacity. However, with Tigerair cutting back, Mr Joyce said: “We see a path through for that business to go back into profit like it was in the previous four years. I’m comfortable it will get there.” Now, is not excess capacity the very apprehension of Cathay and Dragonair? Indeed, many airlines are returning to profitability on the back of reduced capacity, the short supply helping to hold up airfares. It is equally valid to ask if Hong Kong as a major regional hub airport is already facing that issue.

At some point Jetstar HK partners will have to reflect on the worthiness of waiting indefinitely for the sanction to fly. No pun intended, if you think of sanction’s other meaning of being punitive. Questions are being asked if Qantas was putting in money chasing a rainbow that seems too far out of reach. And one is apt to ask too: Is the prolonged delay intended to allow time to resolve the issue, one possibility being a stillbirth?

This article was first published in Aspire Aviation.

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.

Competing to be the best: How reliable are survey readings?

Courtesy Cathay Pacific

Courtesy Cathay Pacific


SKYTRAX has named Cathay Pacific as the world’s best airline in 2014, displacing last year’s winner, Emirates. In second and third place are Qatar Airways and Singapore Airlines (SIA) respectively. Asian and Middle East carriers dominated the ranks of the top ten: Emirates (4th), Turkish Airlines (5th), All Nippon Airways (6th), Garuda Indonesia (7th), Asiana Airlines (8th), Etihad Airways (9th) and Lufthansa (10th). No American carrier was placed.

Are those really the world’s best airlines?

The winning airlines are unlikely to question the validity of any survey, as you can see how many of them are listing awards from all and sundry like a laundry list as endorsement of their good reputation. The corollary must be that if you accept the accolade willy nilly, so must you recognize one and all sideswipes.

Which leads to the next question: Is Skytrax the standard?

Skytrax claims its World Airline Awards to be “the global benchmarks of airline excellence”. The winners are decided by 18.85 million travellers from over 160 countries, and that should take care of any misgiving about the survey having an inadequate population and most importantly, the bias factor or its susceptibility to political influence.

Cathay CEO Ivan Chiu said: “The World’s Best Airline award is particularly important to us because it was decided by the votes of close to 19 million travellers from around the world.” Cathay was placed sixth last year and has won the award four times, previously in 2003, 2005 and 2009.

Emirates president Tim Clark said: “These awards are widely regarded as the industry’s benchmark for excellence. To be voted ‘World’s Best Airline’ by millions of discerning travellers is something… to be proud of.”

Qatar CEO Akbar Al Baker said: “These awards are highly rewarding as they are judiciously voted by passengers a true account of the overall experience felt by customers who have travelled with the airline.” Qatar won in 2011 and 2012.

Courtesy Etihad Airways

Courtesy Etihad Airways


However, Etihad’s withdrawal from participation apparently over differences in the methodology may tell a different story. Although it had never won, Etihad was consistently placed in the top ten in the past five years, ahead of Emirates in some years. Despite its withdrawal, Etihad was still ranked in this year’s survey because according to Skytrax, “an airline cannot be withdrawn from the World Airline Awards since these results are directly decided by customers.” That statement should add to the survey’s credibility, yet without taking sides and arguing the toss about fairness, one can only suspect and understand that the subjective nature of the survey (and of any survey) is naturally exposed to dissatisfaction, whether baseless or with reasons which may well be valid, the way that the Oscars results do not sit as squarely with a lot of people. Now and then you get an outstanding actor declaring his or her disinterest in the awards.

The issue is usually one of weightage and relevance of selection. However designed, the respondents may to some degree be steered by what is being asked. Take, as matter of curiosity, the 2014 Skytrax survey readings for the top ten. SIA is ranked ahead of Cathay for inflight entertainment, cabin cleanliness, First Class amenities, First Class cabin overall, seats in First, Business and Economy, and First Class meals; but close behind Cathay in other areas except for its noted absence for airport services, Business Class amenities and Business Class meals. Yet Cathay takes the cake.

It is encouraging to see breakthroughs by airlines such as Turkish and Garuda in a game dominated by the familiar big names. Interestingly, Turkish ranks above everyone else except Emirates and SIA for inflight entertainment. It is no surprise that Garuda tops for cabin crew, the epitome of Asian service culture, in a category swept by Qatar (6th) and nine other Asian carriers: Cathay (2nd), SIA (3rd), Asiana (4th), Malaysia Airlines (5th), EVA Air (7th), ANA (8th), Thai Airways (9th) and Hainan Airlines (10th). In like fashion, with the exception of KLM (8th) and Qantas (9th), the airport services category belonged to Asian carriers: ANA (1st), EVA (2nd), Thai (3rd), Asiana (4th), Cathay (5th), Korean Air (6th), Garuda (7th) and Dragonair (10th).

Yet, giving credit where it is due, one may question the appropriateness of comparing a carrier having limited global presence with others that are more exposed in the global arena, and how a population of largely local respondents compares with the wider global population. Hence it may be more meaningful to look at niche rankings, but we all love the sweeping titles of the best overall, don’t we? Even regionalized readings must be viewed in their proper context. The Qantas Group went ga-ga over Jetstar Airways’ win as best low-cost airlines in Australia/Pacific over AirAsia X (2nd), Scoot (3rd) and Tiger Airways (4th), but the world’s best is AirAsia followed by AirAsia X in second place ahead of Jetstar Airways (4th). Note how the preferences change when the population mix changes.

Who then really is the best overall? It may be difficult to say for sure one definite airline, and under the circumstances a wider reading of the top three or five or up to ten may be a more sensible assessment. The contest is to get into that magic circle of the elite.

Courtesy TODAY

Courtesy TODAY


Equally significant is the consistency over time. Airlines such as Cathay, Emirates, Qatar and SIA may pat themselves on the back for being there long enough to deserve their stripes. Narrow that down further, and you will see that only two airlines – Qatar and SIA – have been consistently placed in the top three in the past five years. Asiana had a good run from 2010 to 2012. Cathay was just outside in 4th place until it tumbled to 6th last year and bounced back to be this year’s winner. The wider reading should lead some airlines such as Qantas to ask why it has dropped out of the respectable club.

One survey alone cannot be definitive, hence winning across notable surveys may strengthen the reading. Compare the Skytrax results with Conde Nast Traveler’s assessment by its readers – based on the same principle of uninfluenced feedback – and you will begin to understand why. In its ranking for foreign carriers (outside America), Etihad is placed 4th behind Emirates (2nd) and ahead of Qatar (7th). Cathay is 7th, and the winner is SIA. Korean Air (8th) did better than rival Asiana (18th), and so did Japan Airlines (16th) over ANA (21st). The Conde Nast top ten includes Virgin Atlantic (3rd), Air New Zealand (5th) and Swiss International (10th).

Then there is the annual Airline of the Year award given by the Air Transport World (ATW) magazine. The criteria take into consideration financial performance (which debunks the myth that the world’s favourite airline is not necessarily the most profitable or even profitable) and visible leaps forward in services. However, naming only one winner can often lead to suspicions of political influence (the way that some beauty pageants are said to be when a winner is crowned) and the tendency to pass the honour around although airlines such as ANA (2007 and 2013) and Air New Zealand (2010 and 2012) had been named twice. Cathay (2006), SIA (2008) and Asiana (2009) had all had their turns. Delta Air Lines is ATW’s Airline of the Year 2014.

Several other magazines also dish out their own annual awards, which may be based on their readers’ feedback, or assessed by a panel of judges or arrived at combining the two methods. Some of them target niche markets such as awards that recognize the best airline for business travel. That in a way avoids spillover or halo effects and sectarian prejudices as, for example, an airline that impresses in First and Business Class may pay scant attention to what happens in Economy.

Nevertheless, surveys are useful tools in maintaining competition. Everyone loves to win, unless you do not give a hoot about how the world sees it and how that may affect your bottom line. So too, everybody loves a winner; but that is no guarantee that the traveller will necessarily fly with the named best airline. Without downplaying their influence on the market, such awards probably mean more to the airlines than the travellers.

This article was first published in Aspire Aviation.

Qantas’ Chinese connections

EVERY airline looking east (or westwards or northwards depending on where they are based) wants a foothold in China, that huge market with a growing population of air travellers.

Three years or so ago when Australian flag carrier Qantas announced a transformation program, chief executive Alan Joyce identified Asia, in particular China, as the answer to the airline’s woes in the international arena. The rising wealth of Asia’s most populous country makes good reason for Qantas to consider an Asia-based premium carrier near enough to tap into that market, and to set up a budget carrier in Hong Kong, the gateway to China, jointly with China Eastern Airlines and a local conglomerate owned by casino magnate Stanley Ho. While the former proposal was aborted, the latter is awaiting regulatory approval – against the wishes of Cathay Pacific – with ordered planes parked at the Airbus factory awaiting delivery. That, Mr Joyce had said, was not unusual for start-up airlines.

Courtesy Qantas

Courtesy Qantas

All that did not stop Qantas from building up its Chinese connect ions through codeshare services. In a recent agreement with China Southern Airlines, Qantas customers can gain direct access to four destinations within China including Guangzhou from Sydney, Melbourne, Brisbane and Perth. China Southern customers will similarly gain access to domestic destinations across Australia as well as beign able to fly between Sydney and Auckland.

Qantas International CEO Simon Hickey said: “Partnerships are at the core of our strategy in Asia and together with our airline partners, we’re pleased to now offer customers access to 179 flights to 12 cities in Asia each week, with fares available to over 120 additional Asian cities.” He added: “The Qantas Group has never had a stronger presence in Asia. More than one sixth of our total revenue now comes from flights to and within the region, and we plan to keep opening up new travel opportunities.”

This can only mean high alert for rival airlines, particularly those which by fifth and six freedom rights have been routing travellers through their home bases.

Qantas already has a codeshare arrangement with China Eastern Airlines between Australia and China via Singapore.

None of the mainland China-based airlines are members of the OneWorld alliance to which Qantas belongs. That may be of little consequence, considering that codeshare partners Chna eastern and China Southern are both SkyTeam members. Air China and Shenzhen Airlines are members of the Star Alliance. Out of Hong Kong, Qantas` Jetstar may face stiff competition from Hong Kong Airlines and Hong Kong Express, both carriers owned by the Hainan Airlines Group, besides Cathay’s Dragonair. Note however that Hong Kong Airlines and Dragonair are by definition regional and not budget carriers.

If there is any indication of China’s growing demand for air travel, it is Shandong Airlines’ recent order of 50 Boeing 737 aircraft to the tune of US$4.6 billion. At the same time, however, Air China warned that its first quarter profits would be 65 per cent lower compared with that last year because of the falling yuan. A statement issued by the airline said: “The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses.” Fellow competitor China Southern issued a similar warning on falling profits. These are but minor blips that will not deter foreign airlines from connecting with the China market.

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.”

HK Express expands as Cathay fumes over Jetstar Hong Kong

Who says Hong Kong is no place for low cost carriers? If it works for Singapore, it should also work for Hong Kong, which is situated at the doorstep of the large China market.

300px-Hong_Kong_Express_Airways_Logo.svgSo while Cathay Pacific Airways rallies to stop Jetstar Hong Kong – a consortium of Qantas, China Eastern Airlines and a local investor – in its track, Hong Kong Express is not wasting time to expand its network. (See Ryanair and Cathay Pacific face the same woe: Competition, Sep 12, 2013) The low cost carrier will commence daily operations in October to Kunming in mainland China, Taichung in Taiwan, Tokyo (Haneda) and Osaka (Kansai) in Japan, Chiang Mai and Phuket in Thailand, and Kota Kinabalu in Sabah, Malaysia.

Cathay probably finds less ground to oppose HK Express, whose parent is Hainan Airlines, than Jetstar Hong Kong, whose main driver is Qantas, a foreign entity. Besides, Hong Kong Express is already headquartered in Hong Kong before its transition into a low cost carrier. Ultimately it is about competition. However, the competition is likely to be more direct between HK Express and Jetstar Hong Kong. Of course, Dragonair – the regional arm of Cathay – may too feel the pinch.

Take a leaf from HK Express deputy chief executive officer Andrew Cowen, who said: “Competition is not an issue for us. We welcome competitions and though there are issues slots and airport constraints, we have no issue with that.”