Joon’s failure re-validates old lessons

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In just a year after its launch, Air France is shutting down its low-cost subsidiary airline Joon which promised to carve out a new niche market among millennials. The reason, said Air France, is because the brand had been “difficult to understand from the outset.”

Strange as that may sound, it shows how a major player like Air France itself has failed to understand the market forces at play. Or, an ill-timed miscalculation of the market trend.

A little history is appropriate here. When budget travel first emerged on the scene, legacy airlines were inclined to dismiss the upstarts as unlikely competitors, believing their markets to be markedly different. The established carriers, so to speak, were not interested in the budget market and were quite happy to let low-cost operators be.

The failure of many an ambitious budget carrier supported that view, particularly at a time when the volatile fuel price moved like a yo-yo but largely trending upwards. That hit the budget carriers hard since fuel is a significant component of their cost, and cost is all that budget travel is about.

But some like Ryanair and easyJet survived the storm and made good progress. That was when the big boys decided they too wanted in on a flourishing market. A number of them set up their own budget arms, such as United Airlines’ Ted and Delta Air Lines’ Song. They didn’t last long.

As the line of competition began to blur with low-cost carriers soon attracting business away from the traditional sources, more legacy airlines carried the battle cry into the fray. Among them, British Airways which started Go, which it later sold; Singapore Airlines (SIA) which went into partnership with Ryanair to start Tigerair; and Qantas which set up Jetstar.

The budget threat heightened with low-cost carriers venturing into the long-haul. There were casualties along the way, a notable one being Oasis Airlines which flew from Hong Kong to London as well as Vancouver. Hailed as a trail blazer for good service on a shoe-string budget, it could not survive the barrage of rising costs.

But that didn’t stop others to boldly go into a domain dominated by full-service airlines, a move which many observers thought was foolhardy. Today, low-cost carriers such as Norwegian Air Shuttles, Wow! Air and AirAsia continue to rattle the hitherto safe market of the Goliaths.

It seems independent low-cost carriers are more successful than budget offshoots of legacy airlines with few exceptions such as Jetstar. Why so is this? The failure of Joon only serves to revalidate the lessons of past failures.

The overall market has shifted from one distinct full-service vs budget scenario to a common market for all airlines. For many travellers, it is a conscious choice between legacy and budget carriers, the consideration not so much in name as in value for what it costs. For many travellers, the comfort and convenience of full-service still outweigh the savings of flying budget, particularly for the long haul. But for a growing number too, despite the higher risk of flight disruptions by low-cost carriers, why not?

Studies have shown that millennials have different priorities, and the budget model of paying for only what you want may have some appeal as it means control over how you spend your money. The new and younger travellers are more adventurous and not averse to taking chances.

The shift in the market is becoming more evident in how legacy airlines are in fact no longer completely full-service as they used to be, adopting increasingly the budget pricing model in charging for ancillary services what used to be part of the package deal, such as seat selection, priority boarding, and checked baggage.

It is not a given that a successful legacy airline will be as successful in operating a budget subsidiary. On the contrary, it faces the challenge of separating the two entities to operate them on their own terms. Too often this may be compromised with the parent airline subsidising the struggling offshoot. At the same time, the parent’s product may be diluted.

Much as the parent airline likes to maintain its distance and many of them have declared that their budget offshoots are running on their own steam, the reality is far from being so. Their influence is inevitable, however indirect and unintended. That may lead to tweaking the low-cost model to be less budget and more a copy of the old block, resulting in higher costs.

This is also not helped by the expectations of the customer when the budget offshoot carries the association with the reputable parent’s brand name. For example, while SIA has earned the reputation of being one of the world’s best airline, the same could not be said of Tigerair whose customers were sadly disappointed when the carrier ran into frequent bad patches.

What can be worse is when the budget subsidiary begins to compete with the parent company for the same low-end business.

American carriers however have found a solution to that: instead of operating separate budget offshoots to compete with independent low-cost carriers, they have introduced basic economy fares with similar terms to be accommodated within the same aircraft. The practice of offering different fare types even within the same class of travel is not new, but basic economy is aimed at keeping customers who may switch to budget carriers. And the model is gaining popularity across the industry.

Some observers may think Air France’s decision to shut down Joon premature as it has not allowed the latter time to grow. But not being clear about the product or the direction it is heading, it would be a hazy road ahead. It might as well nip the problem in the bud.

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Scoot by Singapore Airlines: What’s in a name?

WHAT came to mind when Singapore Airlines (SIA) announced the name of its new budget carrier: Scoot?

For me, it was the two-wheel scooter that was ubiquitous on many urban roads in large cities after World War II. More notably, I think of the Italian brand Vespa, and Audrey Hepburn side-saddling Gregory Peck on a ride through Rome in the 1952 movie ‘Roman Holiday’ – a scene that evoked an aura of romanticism and resulting in a sale of more than 100,000 units for manufacturer Piaggio & Co. The Vespa soon became a symbol of freedom and imagination.

Will Scoot be able to similarly revive the romance of air travel, providing that badly needed spark in an embattled industry?

You bet, if you believe what SIA said that Scoot “won’t be your usual airline.” For starters, CEO Campbell Wilson took pains to explain the deliberateness of not using the descriptive “airline” (or its variations) moniker in the conventional nomenclature, to suggest that the new upstart is different and trendy. But what SIA has done is merely following in the tradition of United Airlines and others of naming budget offshoots short and sweet, names such as TED, Go, Song and Zip that have already dotted the skies.

However, SIA’s hope is that Scoot, promoted as “an airline with attitude”, will distinguish itself from the rest by its “scootitude” – cleverly coined, whatever that entails or embraces. Scoot CEO Campbell Wilson said of the name: “It conveys spontaneity, movement, informality and a touch of quirkiness.”

That too has a familiar ring if you remember another SIA subsidiary by the name of Tradewinds which commenced scheduled services in 1989 before it changed its name to SilkAir in 1992.

Tradewinds was marketed as a regional airline for leisure travel, operating to largely vacation destinations such as Pattaya, Phuket and Hat Yai in Thailand. The service was supposed to be themed on the informality that Mr Wilson would want for Scoot, suggesting casualness and fun from the atmosphere to even the crew uniform. But, to be excused by the inhibitions of its Asian culture, Tradewinds might not have been quirky enough. Here, SIA may be looking to Southwest Airlines of the Untied States for some tips.

All said, it appears that SIA may be looking to replicate in Scoot a budget carrier ambition that for Tradewinds arrived ahead of its time.

Interestingly, SIA may not have known of a motor dealer – marketing, but of course, scooters – in Canada whose advertisement encapsulates the Scoot spirit: “Scooter King can show a way to travel fast and light, keep your money in your pocket, and join the other countries around the world that have been enjoying this pleasurable way of life and stress-free motoring for many, many years.”

What’s in a name, anyway? The real test of the pudding is in the eating.

From all that has been said, one begins to wonder if Scoot is meant to be a true budget carrier, the way that Ryanair continues to do away with conventional procedures such as airport counter check-in to reduce cost, and hopefully that the savings will be passed back to the customer. Several budget carriers are already not accepting checked baggage unless passengers are prepared to pay a premium for the carriage. While Scoot promises “great value airfares up to 40 per cent less than legacy carriers”, the consumer is far from being assured of its value until the numbers are published, and he or she would be more interested to know how Scoot compares with other notable budget carriers than the mainstream airlines.

Yet “value” is not something that can be easily measured in dollars and cents. Scoot may be able to offer an experience that so outclasses its rivals that consumers will be willing to pay more for the difference. Herein lies will a bit challenge for Scoot when the consumer can demand more than just a smile and friendly greetings and where the scope for differentiation in the low-cost sector may be restricted by costs. But SIA knows from its experience that “attitude” holds the key to success in the business, the way that it has excelled in customer service amongst other things. Scoot looks set to be the SIA of budget carriers.

The challenge for Scoot is building up a loyal clan of customers with “scootitude” for whatever price it charges the way that Ryanair relies on a market segment whose consumers will continue to fly between European ports for as low as US$20 even as they complain about the lack of service.

Scoot is expected to commence operations in 2012, beginning with destinations in China and Australasia. After the excitement of the much anticipated christening, analysts are probably now mulling over the fate of SIA’s other budget carrier, Tiger Airways, in which it has a 32.8-per-cent stake. It looks like Tiger’s days are numbered. Or is it part of the big plan?

What could be ailing Singapore Airlines?

Singapore Airlines (SIA) Group’s profit for Apr to Jun tumbled 82 per cent year-on-year, from S$253 million to S$45 million – what analysts described as “shocking” results. SIA the airline did worse, incurring an operating loss of S$36 million in contrast to a profit of S$136 million previously, although the first quarter of its financial year is generally the weakest.

SIA blamed high fuel prices in spite of hedging gains, economic uncertainties and a market affected by the Japanese earthquake and tsunami as well as political unrest in the Middle East. According to SIA, average jet fuel prices jumped 46 per cent, contributing largely to an expenditure increase of 11 per cent that outpaced revenue growth at only five per cent.

However, if that is any indication of the trend, SIA’s closest rivals in the region – Australian Qantas and Hong Kong’s Cathay Pacific Airways – seem to be bucking it. It is likely the volatile fuel price, if it continues to soar, will weigh heavily on these airlines as well, but the question is whether it is to the same extent.

Qantas, which will be announcing its results later this month, expects to post better-than-expected pre-tax profit of between A$500 million and A$550 million for the year ending Jun 30 2011, which covers the dismal quarter reported by SIA. This is boosted by a windfall of A$95 million as compensation from engine-maker Rolls Royce over a mid-air blast incident that led to the grounding of the Qantas A380 fleet. Note that Qantas too has its share of flight disruptions from a string of natural disasters; besides the earthquake and tsunami in Japan, there were the floods in Australia, earthquake in New Zealand and more recently Chilean volcanic eruption.

Qantas chief executive Alan Joyce said in a pre-emptive statement: “Considering the challenges facing the aviation industry, this is a very good result.”

Cathay posted record profits last year, overtaking SIA as the world’s most profitable airline. The Cathay Group recorded an attributable profit of HK$14,048 million for 2010, up from HK$4,694b million the previous year. At the time of the announcement in Mar this year, Cathay chairman Christopher Pratt said: “Demand is expected to remain strong in 2011, but this expectation could be undermined if the current (or any higher) level of oil prices were to reduce global economic activity.” It is to be seen if Cathay would suffer as much the same downturn as SIA.

In any case, what could be ailing SIA much worse than its rivals?

For one, the downgrading of air travel and slow recovery in premium travel continue to impact SIA. In the heyday of booming business, SIA was the doyen of premium travel. While that is gradually returning, the spread seems to be thinning out among the competition. At the same time, economy class travel has become highly price-sensitive, enabling the encroachment of budget carriers on the turf of full-service airlines. That has driven SIA to finally decide to set up its fully-owned budget subsidiary – in addition to Tiger Airways of which it already has a 32.9 per cent stake – to commence operations within a year.

Here again, SIA`s decision may have come late, losing out on time that had helped Qantas push the Jetstar advantage across the region. There is already a slew of other budget carriers, including Asia’s largest operator AirAsia which has also ventured into the long haul under the AirAsia X banner. Cathay has said it would not follow in the footstep of SIA but would instead introduce a premium economy class to cater to downgraders. Yet, perhaps, better late than never.

Then again, while SIA has assured its customers it will not happen, will it lose focus in its effort to manage a stable of four diverse airlines – SIA itself, SilkAir, Tiger and the new budget subsidiary – offering different products and service levels?

Full-service airlines that have sired budget subsidiaries – United Airlines and TED, Delta Airlines and Song, Continental Airlines and Lite, Air Canada and Zip, British Airways and GO, Scandinavian Airlines and Snowflake, to name a few – hardly succeed as ultimate champions on both fronts. With a veritable record of excellence, can SIA prove its prowess otherwise?

SIA’s growth appears to be hampered by the maturity of its traditional markets while Cathay continues to enjoy its gateway advantage to the vast Chinese market. Airlines such as Emirates, Etihad and Qatar Airways have intensified the competition in the Middle East. Qantas is pushing into growth areas beyond the Australian borders, through Jetstar and its intention to further utilize Singapore (which it has been doing for many years) as its base to extend its network.

SIA may find the competition becoming increasingly more challenging in the context of Singapore’s liberal open skies policy that has Changi Airport as its priority – SIA’s growth in recent years has been far below that of the airport.

The SIA management knows very well it is under pressure to find new initiatives to support its growth. The new budget subsidiary is first turf protection; growth may come after. With new leaders at the helm, can we expect more of the magic that has so successfully set SIA apart from the competition?

If it is any consolation, analysts who did not expect the steep decline in SIA’s 2011/12 first quarter’s profit are optimistic it must get better the next quarter. That sentiment speaks a lot about the confidence the industry has in the airline.

Budget carriers drive the competition

IT looks like the way to fly in the present climate – to take advantage of the growing popularity of budget air travel, as evidenced by the major airlines in the Asia-Pacific region scrambling to set up budget carriers under their wings.

Qantas has ambitious plans to grow Jetstar as a long-haul budget carrier. Chief executive Alan Joyce of the Australian flag carrier hoped “to successfully expand our footprint to new markets throughout Asia.”

Singapore Airlines (SIA) is a major shareholder of Tiger Airways, which is actively increasing its presence beyond Southeast Asia in Australia, India and China.

Thai Airways International, which already owns a budget carrier – Nok Air, which flies domestic services – has entered into an alliance with Tiger Airways to set up a second budget carrier. The new carrier, Thai Tiger Airways, will operate regional routes out of Bangkok. Thai Airways president Piyasavasti Amranand said: “If we don’t do anything, our market share will decline further.”

Following on the heel of the Thai Tiger announcement, All Nippon Airways said it would like to set up a budget carrier jointly with a foreign partner.

Not to be left out of the game, rival Japan Airlines now announced it would also set up a budget carrier.

The motivation is not so much the apparent pull of profitability of the no-frill business as the push to preserve one’s market share, as recognized by Mr Piyasavasti. Budget carriers are beginning to present a real threat to the major carriers as the market shifts downward in a price-sensitive economy following the recent global recession.

Full-service airlines can no longer boast they are catering to a different market and are forced to recognize that there is but only one market that is offering the customers more choices, and that this same market is susceptible to the temptations of much lower fares. Thus, setting up a budget carrier under their wings is a simple strategy of retaining the business within the family.

It is, however, not something new. Other airlines in Europe and America have tried and given up – Go by British Airways, Ted by United Airlines and Song by Delta Airways as some examples. This being the experience, the question is: Is this strategy sustainable in the Asia-Pacific region?

There are positive indicators that the budget air travel business will continue to grow – the huge potential presented by Chinese and Indian markets, more liberal regional aviation policies with full implementation of Asean Open Skies by 2015, and new destinations yet to be adequately linked.

Budget carriers backed by strong parent airlines are likely to grow while independent budget carriers may face stiffer competition. There will be hurdles – the continuing uncertainty of the global economy, concerns about rising fuel costs, pilot shortages and market saturation despite the optimistic growth forecasts as more carriers enter the arena. Some budget carriers may grow beyond their capability and become victims of their success. In the end, a few of them will emerge larger and stronger while others fall out.

However, while parent airlines celebrate the success of their budget offshoots, the strategy may yet deliver an ironic twist. The budget offshoot may turn out to be the monster baby that grows at the expense of the parent airline, which, by actively driving the competition in the wings, may well be perpetuating the market downshift from premium to budget instead of working at market recovery.

Much also depends on how the parent airlines and their budget offshoots complement or compete with each other. Some experts have questioned the wisdom of Qantas and Jetstar competing with each other on some routes as it does not necessarily work out to an additional slice of the pie.

Interestingly, Cathay Pacific Airways – one of the region’s key players – has not announced any plan of setting up a budget carrier. It is, however, supported by subsidiary airline Dragon Air with spokes from Hong Kong into the lucrative China market. Really, does it even need to include a budget carrier in its strategy? Besides, it has seen the failure of compatriot Oasis Airlines and neighbor Macau’s Viva Macau Airlines. An added risk is that going budget on the long-haul is still an untested ground.  

Besides budget carrier Tiger Airways, SIA is also supported by subsidiary airline SilkAir, which started operations as Tradewinds to destinations outside the SIA network, then competed with the parent as it grew, and has since switched back to the complementary mode.

Like most things in life, the aviation business is apt to move in circles. The day is already in sight when we are back to where we began – it does not matter if it goes by the name “budget” or “full-service”, it is the best bang for the buck that will seal the deal.

Also published in Airways Aviation News.