And then there are three

From four to three (if you exclude SIA Cargo which will be absorbed as a division of the parent airline in 2018), Singapore Airlines (SIA) will now have three carriers in its stable as sister budget subsidiaries Scoot and Tigerair announced the completion of their merger come July 25, 2017. SilkAir, defined as a regional carrier, makes up the trio.

Both Scoot and Tigerair will henceforth operate under the Scoot brand. It seems logical, considering the poor reputation of Tigerair and the plans to expand Scoot into the long-haul. Unlike Tigerair, Scoot was launched as a medium-haul budget carrier.

The merger was long anticipated as the operations of the two carriers began to overlap with Scoot operating the short-haul as well. At the same time, loss-making Tigerair’s days were numbered as it struggled through a period of difficult times both financially and operationally, scarred with customer complaints of poor service.

While it certainly makes sense for the two carriers to eliminate intra-competition and pool their resources, it also opens the field for Scoot to expand its network. Already it is trailing behind Malaysian budget carrier AirAsia, whose chief Tony Fernandes is known to be testing new boundaries beyond the four-to-five hour limitation of the budget model. While AirAsia is not always guaranteed success, it has enjoyed headstart advantages.

Courtesy AirAsia

Scoot has announced a service to Honolulu by the end of the year, six months after AirAsia launches its service from Kuala Lumpur. Both carriers will operate via Osaka. It will be interesting to see how the competition plays out.

Scoot may be advantaged by its hub connections at Changi Airport while AirAsia will rely on its wide regional network to take advantage of Kuala Lumpur International Airport’s lower costs in a price-sensitive leisure market.

Scoot will benefit from the reputation of the SIA brand association, but somehow that has not rubbed off on the beleaguered Tigerair.

The competition is set to redefine the budget game as Scoot and AirAsia battle it out to be the region’s leading carrier not only for the short-haul but also beyond.

Cathay Pacific axes 800 jobs: Is this the answer?

TIMES are hard for legacy airlines, it seems, when major airlines such as Singapore Airlines (SIA) and Cathay Pacific are beset with economic woes.

Courtesy Cathay Pacific

SIA announced a plan to transform the airline after reporting a last quarter loss of $S41 million (US$ 29 million) (see SIA’s transformation is long overdue, 27 May 2017). Cathay, losing HK$585 million (US$103 million) in 2016 – its first annual loss in eight years – is set to cut 800 jobs. Both airlines cited intense competition, mainly from the big three Middle East carriers of Emirates Airlines, Etihad Airways and Qatar Airways, and carriers from China. Cathay additionally suffer substantial fuel hedging losses.

Invariably cost cutting is almost every airline’s clarion call to try to get back into the black. It helps, of course, and such an exercise can eliminate wastage and improve productivity when in good times the airline has lost the discipline. However, more may be needed to be done if the issues are structural and operational. It calls for a deeper review of product, procedures and processes, and marketing strategies against a changing aviation landscape that renders old successes irrelevant and demands new innovative approaches.

Like SIA, Cathay is caught in a price-sensitive market where competitors have been able to provide comparable services at lower fare, and that’s not talking about low-cost carriers (LCCs) alone. Cathay risks losing its position as the gateway airline at the door of the huge China market as more carriers from the mainland commence direct services to destinations beyond China and offer connections out of Shanghai and Beijing. Also, partnerships between China carriers and other airlines are also threaten to cut Cathay out of the game.

Some analysts think Cathay is disadvantaged by the absence of budget arms, unlike SIA which is supported by Scoot and Tigerair. The solution really is not for Cathay to go budget, but to make that difference between flying low-cost and flying full-service in its favour.

SIA’s transformation is long overdue

Courtesy Bloomberg

Singapore Airlines (SIA) announced it will be taking “bold radical measures” in a major business transformation plan after the parent airline incurred a fourth-quarter operating loss of S$41 million (US$30 million). SilkAir and Budget Aviation Holdings (Scoot and Tiger Airways) reported lower profits for the same quarter: the former down 19 per cent to S$27 million and the latter more than 50 per cent to S$22 million.

Full-year operating profit for SIA was S$386 million, a decline of S$99 million or 20 per cent year-on-year. For SilkAir it was a fall of 11 per cent and for Scoot and Tiger a combined drop of 60 per cent.

SIA chief executive officer Goh Choon Phong said: “The transformation is not just about how we can cut cost but also how we can generate more revenue for the group, how we can improve our processes more efficiently, …so that we can be lot more competitive going forward.”

If anyone is surprised at all, it is not because it is happening but that it has taken so long coming. The writing has been on the wall since the global financial crisis when the airline suffered a loss of S$38.6 million in FY 2008/09, and from then onward the margin has averaged less than three per cent compared to seven per cent in the five years leading to it.

SIA cited intense competition that is affecting its fortune. Lower fuel costs that contracted by S$780 million (down 17.2 per cent) didn’t help. Capacity reduction trailed the reduction in passenger carriage, and passenger load factor as a result dipped lower to 79.0 per cent.

While details of the transformation are yet to be announced, it will do SIA well to recognise that the aviation landscape has changed dramatically over the years and will continue to shift. Competition in the business is a given, and we cannot help but recall how the fledgling airline from a tiny nation leapfrogged its more experienced rivals in its early days to become the world’s best airline and one of the most profitable in the industry. No doubt the competition has intensified, but the salient point here is that it can never be business as usual.

What then has changed?

Low-cost carriers are growing at a faster rate than full-service airlines and are now competing in the same market, and while SIA may have answered that threat with setting up its own budget subsidiaries, the parent airline is not guaranteed it is spared. Until the merger of Scoot and Tiger under one umbrella, there had been much intra-competition. And while the subsidiaries compete with other low-cost carriers, the concern should be that they are not growing at the expense of the parent airline. That calls for clearly defined product and route differentiation such that they are not substitutes at lower fares.

Low-cost carriers are also venturing into the long-haul, aided by the current low fuel price and technologically advanced and more fuel-efficient aircraft. The launch of Norwegian Air Shuttle’s service between Singapore and London in October at drastically lower fares poses a challenge to SIA on one of its most lucrative routes.

The market is becoming increasingly more price sensitive since the global financial crisis, and that favours the low-cost model of paying for only what a passenger needs. Dwindling may be the days when one is more willing to pay a higher fare for SIA’s reputable in-flight service as other carriers improve their products and services, often the reason cited for the competition laid on by the big three Middle East airlines of Emirates Airlines, Etihad Airways and Qatar Airways.

These rivals are also offering a slew of connections out of their home bases and reduced layover times which are the forte of the SIA network. The growing importance of airports such as Dubai and Hong Kong as regional gateways may disadvantage not only Changi Airport but also SIA in the competition against airlines such as Emirates and Cathay Pacific. In 2013, Qantas shifted its hub on the Kangaroo Route from Singapore to Dubai, and is now planning to build a hub out of Perth for the same route. SIA will have to heed the geographical shift that may affect the air traveller’s preference for an alternative route.

Along with this is also the increased number of non-stop services between destinations, particularly out of the huge, growing Chinese market. This may eliminate the need for travellers to fly SIA to connect out of Singapore, say from Shanghai to Sydney when there are direct alternatives offered by Qantas and China Eastern Airlines. It has thus become all the more imperative for SIA and Changi to work even closer together.

Well and good that SIA is constantly looking at improving cost efficiency and productivity. But more has to be done. As Mr Goh had said, it calls for a “comprehensive review on whatever we are doing and how we can better position ourselves for growth.”

The key word is “transformation”, in the same way that Qantas chief executive Alan Joyce went about restructuring the Australian flag carrier following the airline’s hefty losses four years ago. Drastic measures were introduced that include the split between international and domestic operations for greater autonomy and accountability, and concrete targets were set over a specific timeline. The continuing programme seems to have worked for Qantas as it bucks the trend reporting record profits while other airlines such as Cathay are hurting.

SIA will have to look beyond its own strengths at the strengths of others. It has thrived on the reputation of its premium product, but that has taken a toll as business travellers downgrade to cheaper options. Although that business segment is slowly recovering, other airlines have moved ahead to introduce innovative options, such as the premium economy which Cathay revitalised as a class of its own and which SIA was slow in embracing, reminiscent of how SIA too did not foresee the increased competition posed by low-cost carriers. It is a pity that SIA, once a leader in innovation, has lost much of that edge.

Timing is everything in this business to cash in on early bird advantages, but this is not made easy by abrupt geopolitical changes and new aviation rules and the long lead time in product innovation and implementation. All said, SIA may begin by looking at what worked for it in the past and ask why it is no longer relevant.

SIA re-incorporates fuel surcharge in base fare

sia-silkairSingapore Airlines (SIA) announced that fuel surcharges will from the end of March be incorporated in the base airfares. The policy, which also covers insurance surcharges, will apply to SilkAir as well.

As the global pressure to protect consumer rights mounts, aviation authorities are exhorting airlines to publish full fares so as not to mislead consumers and make it difficult for them to compare prices and arrive at an informed decision. Some airlines have been fined for misleading customers stating only the base fares. SIA said it is already advertising the full fares.

Virgin Australia was among the first very few airlines to announce it would not show the fuel surcharge as a separate cost but build it into the airfare way back in January 2015, at a time when the cost of oil was falling and there was public demand for airlines to similarly reduce the fuel surcharge. (See A conscionable call as oil price plummets: Will airlines reduce airfares? Jan 26, 2015)

The full surcharge was introduced as a way to pass on the cost to the consumer in the wake of rising oil prices, and falling fuel prices have made it quite unnecessary, even cumbersome. One wonders if this, having come a full circle, will change yet again when fuel prices rebound.

Budget and transatlantic competition heat up

Courtesy Vueling Airlines

Courtesy Vueling Airlines

International Airlines Group (IAG) announced plans to commence low-cost transatlantic flights from Barcelona to the United States by budget carrier Vueling. IAG also owns British Airways (BA), Iberia and Aer Lingus.

Legacy airlines (and airline groups) are increasingly recognizing the competition posed by budget carriers, and it is not new that some of them have set up budget operations such as Lufthansa’s Eurowings, Qantas’ Jetstar, and Singapore Airlines’ Scoot. In the US, the Big Three airlines of American, United and Delta are introducing no-frills fares on normal services to compete with low-cost counterparts such as Southwest, JetBlue and Frontier.

Where the competition is most felt is the transatlantic sector, which has seen a surge of cheap fares offered by operators such as Norwegian Air Shuttle and Iceland’s WOW Air, discomforting both US and European counterparts.

WOW Air is well-known for its $99 fare for travel between the US and Europe – destinations such as Copenhagen, Stockholm, Edinburgh and Bristol – with a free stopover in Reykjavik. It has begun enticing US Westcoasters with fares as low as $65.

Norwegian also offers $99 fares with promotional offers as low as $69.

Budget doyen Ryanair has long announced its ambition to also ply the transatlantic routes.

While home-based US airlines are protesting the entry of Norwegian, European airlines are taking a more active approach to compete head-on. IAG will be able to advantage Vueling with the network of partner airlines. Eurowings is already operating nonstop from Cologne and Bonn to the US, and it has plans to add more destinations.

In a price-sensitive market for as long as the current situation holds, budget carriers may be driving the trend. Legacy airlines will be challenged to make their advertised difference in product worth the additional dollars in fares, at the same time keeping their budget rivals at bay in a two-prong approach to the competition.

Is Singapore Airlines liable for misconnections?

sia-logoamericanemirates-logoetihad-logoturkish-airliens-logoSingapore Airlines (SIA) is among five major carriers taken to task by the British Civil Aviation Authority (BCAA) for not compensating their customers for flight delays that resulted in missed connections. Emirates Airlines is said to be the worst offender. The other three carriers are American Airlines, Etihad Airways and Turkish Airlines.

According to BCAA Director of Consumers and Markets, Richard Moriarty, the five carriers have “systematically” denied the passengers their rights. He said: “Airlines’ first responsibility should be looking after their passengers, not finding ways in which they can prevent passengers upholding their rights. So it’s disappointing to see a small number of airlines continuing to let a number of their passengers down by refusing to pay them the compensation they are entitled to.”

Under EU regulations, which apply to airlines even if they are not based in the EU, a delay of more than three hours becomes compensable, unless caused by “extraordinary circumstances”. An airline is off the hook if the delay is caused by factors outside their control, such as inclement weather, but not if it is due to poor performance resulting from, say, the lack of maintenance, procedural hiccups or staff negligence.

This is not the first time an airline has been charged with not giving their customers their dues. Protecting air passengers’ rights has been a long running battle between regulators and the airlines, and the matter is far from being satisfactorily concluded. Nor is it as widely pursued as in the EU, United States and Canada. Even then, monitoring is not an easy task, and as arduous is the arbitration to decide if an airline should be held accountable. Ever since the EU ruling came into force, many airlines have been fighting the cases in court, and this can mean unduly long delays of compensatory payments if ever they are ruled in favour of the passengers.

Singapore airlines is putting compensation claims “on hold” if they involve connecting flights. This is a contentious issue as the delivering carrier has no control over a passenger’s choice of onward journey if he or she makes separate bookings. The question hinges on what is considered a reasonable connecting time. If an airline arranges the entire journey including the connection, it is usually obliged to look after the passenger who misses the connection as a result of a flight delay. This may cover a stopover stay at a hotel, meals, rebooking on the next flight or an alternative flight, and other related expenses. Some airlines have leveraged on short-connecting times as a marketing strength.

Following the US Department of Transportation final ruling on protecting passengers’ rights, SIA published a customer service plan for tickets purchased in the US for flights to and from that country. The plan stipulates: “In the event that Singapore Airlines cancels, diverts or delays a flight, Singapore Airlines will, to the best of our ability, provide meals, accommodation, assistance in rebooking and transportation to the accommodation to mitigate inconveniences experienced by passengers resulting from such flight cancellations, delays and misconnections. Singapore Airlines will not be liable to carry out these mitigating efforts in cases where the flight cancellations, delays and misconnections arise due to factors beyond the airline’s control, for example, acts of God, acts of war, terrorism etc., but will do so on a best effort basis.”

While an airline like SIA is unlikely to put its reputation on the line (the airline has often been commended by its customers for going the extra mile), there is always the caveat that it can only do so much to the best of its ability and on a best effort basis. In response to BCAA, SIA pointed out “a lack of clarity in the law” which it hoped would be resolved in the ongoing discussion with the British authority.

Ultra-long flights: The competition heats up

Courtesy Qatar Airways

Courtesy Qatar Airways

Qatar Airways has clinched the honour of operating the longest non-stop commercial flight when it commenced operations from Doha to Auckland on February 6. The inaugural flight, using a Boeing 777-200LR aircraft, clocked 16 hours and 23 minutes for a distance of 14,535 km.

Qatar edged out rival Emirates Airlines which also operates to Auckland but from Dubai, and Air India which interestingly flew over a longer distance of 15,127 km from New Delhi to San Francisco across the Pacific (rather than the Atlantic) but advantaged by tailwinds clocked a shorter flying time.

Ultra-long flights are a boon to travellers, particularly corporate executives, who want to skip long transit stopovers or the hassle of connections. But there are others who prefer an intermediate stop to stretch their legs. They work excellently for end-to-end traffic where there is demand between these destinations. But airlines will find it does not make economic sense to connect two points for the sake of flying the distance. One may ask, in the case of Qatar’s new launch, is there adequate traffic between Doha and Auckland – the same question that would have been posed to Emirates?

Clearly Qatar is thinking network connections – not catering to just traffic from Auckland but to encourage travel beyond Doha to Africa, Europe and the Americas, in much the same way that Emirates has built a viable Dubai hub for connecting traffic challenging long-standing hubs such as Singapore Changi. Qantas, which has traditionally used Changi as the hop from Australia to Europe vv has contributed to the growth of Dubai to which it has shifted its hub operations. Now Qantas is rethinking its strategy to make Perth the hub when new technology enables the flying kangaroo to one-hop from London to Perth vv.

The competition has heated up in recent years with more airlines mounting such ultra-long flights. The strategy goes beyond tapping end-point, particularly home, markets, pointing to the importance of developing strong home and secondary hubs, and onward network connections. The squeeze on the competition may ironically persuade more airlines to intercross their networks to make ends meet.