Exit Singapore Airlines, Enter Cathay Pacific

Courtesy Cathay Pacific

Courtesy Cathay Pacific

IN 2004 Singapore Airlines (SIA) made aviation history when it launched the world’s longest commercial long haul flight of 19 hours from Singapore to New York. Nine years later before the end of last year, the 100-seat all-business Airbus A340-500 flight was terminated. SIA continues to offer the alternative through Frankfurt.

Now Cathay Pacific Airways has announced it will introduce non-stop flights from New York to Hong Kong, stepping into the void left by SIA. However, the flight time is shorter at 16 hours. Unlike SIA, Cathay will offer its normal four-class configuration of first, business, premium economy and coach.

While non-stop flights are generally preferred by air travellers, particularly business travellers (the reason that SIA went for an all-business class configuration), Hong Kong may have a growing edge with a large market hinterland compared to Singapore. The competition on transfer traffic between the two rivals has intensified in recent years, with Cathay aggressively promoting Hong Kong as the Asian gateway to destinations in other Asian countries such as India, Myanmar and the Philippines. In particular, India has been a strong market for SIA.

Cathay’s Senior VP Americas Tom Owen said: “We are now the fastest way to get to Southeast Asia.”

Cathay seems well positioned to take advantage of the growing traffic in the region, SIA may be wondering if it has by withdrawing non-stop flights enhanced Cathay’s strength in North America.

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Qantas-Emirates tie-up is no surprise

THERE are several reasons why a Qantas-Emirates tie-up should not come as a surprise.

 

Foremost is the Australian flag carrier’s desperation to revive its loss-making international operations, which, it is expecting will plunge its full-year profit by as much as 90 per cent from US$552 million the previous year. So the airline is looking for opportunities to boost its earnings as it rationalizes its network operations and connections. Qantas has said that alliance deals have always been on the agenda, particularly when such arrangements not only open up new traffic channels but also reduce operating costs.

The Dubai-based Emirates Airlines, its home situated roughly midway on the kangaroo route, makes a veritable partner. Significantly, the airline is profitable and expanding. Besides, Emirates is a keen competitor for the same market. A tie-up would mean a more amicable intra rather than inter-airline competition.

It has also been speculated that Qantas as a consequence would reduce its operations to Europe – retaining only London as a destination and giving up Frankfurt – while it then feeds traffic to other European ports through Emirates. Qantas hopes to also gain access to a wider Middle-East market as well as making inroads into Africa through Emirates.

Not to be ignored is the fact that other Middle-East airlines such as Qatar Airways and Etihad Airways (also an airline of the UAE but based in Abu Dhabi) have also intensified the competition. Etihad has acquired a 10-per-cent stake in Virgin Australia.

But what is likely to unsettle Qantas more is the alliance between key rivals Singapore Airlines (SIA) and Virgin Australia. In the end, a Qantas-Emirates tie-up would look like a counter-move when adversaries join hands to take on a common enemy. There is not much of a choice left really, so to speak, for the self-professed “alliance specialist”.

Analysts who were quick to deduce that Qantas would also shift its operations from Singapore to Dubai have been mistaken. For many years now, Singapore has been Qantas’ major hub outside Australia, and from where it is able to feed transfer traffic to other Asian ports.

While it is convinced that its fortunes lie in the lucrative Asian market, it does not make sense for the flying kangaroo to skip Singapore or make a sizeable reduction in its operations there. After all, Singapore (Changi Airport) is the darling of transit passengers worldwide. An exit would shut Qantas out of growth opportunities – not just in Singapore but in the region – even as Qantas raises the profile of its low-cost Jetstar subsidiary and continues to pursue the dream of staging a separate Asia-based premium carrier.

Qantas chief Alan Joyce has said that Qantas would continue to develop large hub airports or en-route gateways in its network since these hubs, pulling in travellers from all over the world and sending them on to their final destinations, mean “extending our reach while restraining our costs.” However, he admitted: “We have a gap (in Asia), because our current schedule is predicated mainly on travellers transitting through Asia en route to Europe.”

While that might see some shift of such pure transit traffic from Singapore to Dubai, the former remains a premium hub for its infrastructure and connectivity – unless Mr Joyce becomes convinced that its family of hubs in partnerships with Japan Airlines (Narita), China Eastern Airlines and Cathay Pacific Airways (Hong Kong) and possibly Malaysia Airlines in 2013 (Kuala Lumpur) are adequately positioned even with the exclusion of Singapore.

It looks like with the impending incorporation of the Malaysian flag carrier as a new member of the OneWorld alliance, the two airlines may yet again revisit the proposal of a joint-venture regional carrier to be based most likely in Kuala Lumpur. Even then, it would be difficult imagining Qantas skipping Singapore altogether.

However, there have been mixed signals from both Qantas and Emirates on the rumoured alliance.

While admitting that his airline has met with Emirates, Mr Joyce clarified: “We only enter partnerships when we have the right arrangement for the long term. In the current economic environment, taking our time with this part of our agenda will clearly not undermine our broader transformation plan.”

On the other hand, Emirates chairman Sheikh Ahmed bin Saeed al-Maktoum revealed that a code-sharing agreement would likely happen within six months but would not include any revenue-sharing arrangement.

Is that any indication of who is more likely to benefit from the tie-up? You can confidently make your wager, can’t you?

Jetstar Hong Kong stirs up a storm

JETSTAR Hong Kong, a new budget joint venture of equal partnership between Qantas and China Eastern Airlines, is stirring up a storm – and not quite in a tea-cup considering the market potential of 450 million passengers by 2015. The carrier is expected to commence operations in mid-2013.

The announcement drew mixed reaction from aviation analysts. Some of them think Qantas made a strategic move in penetrating the lucrative Asian market, following failed talks with Malaysia Airlines to set up a premium carrier to be based in the region. However, Qantas chief Alan Joyce insisted that it was not the end of the road for that project. “We are still in dialogue with both the Singaporeans and Malaysians but nothing is happening in the short term,” said Mr Joyce. “It’s more of a long-term issue.” By that, he meant a likely delay of two to three years.

The RedQ project got on to a rough start when it was announced a year ago as part of the Qantas restructuring to rescue the Australian flag carrier from further losses – it lost A$200 (US$207) – incurred by its international operations. Qantas flies less than 20% of Australia’s international passengers compared to a market share of 65% for domestic travel. Asia became its Holy Grail. Unfortunately, disruptive labor action in protest for fear of the loss of jobs at home put the brakes on the project. What started with a big bang simmered down to a proposal for a joint-venture instead. Singapore and Kuala Lumpur were identified as the possible Asian base, and Malaysia Airlines – which is also muddling in red ink – the only known interest in the partnership so far.

Mr Joyce explained that the project was put on hold “because the requisite traffic rights couldn’t be secured in Singapore while Malaysian Air (sic) is going through a restructuring plan of its own, so that reaching an accord with Qantas proved too ‘complex’.” It is to be seen as a matter of timing. Interestingly, Mr Joyce mentioned difficulties with Singapore, which is a strong supporter of open skies and where Qantas already enjoys hubbing privileges. While Jetstar Hong Kong – a budget carrier – is not a replacement for RedQ, would Qantas face similar impediments even though it had inked an understanding with China Eastern?

According to aviation consultant Andrew Pyne who had held senior positions at Cathay Pacific, Viva Macau (as CEO) and Avianova (as founding CEO), the deal is far from being final, in case we missed the fine print that reads “subject to regulatory approval”. In his opinion, neither Qantas nor China Eastern which is “controlled in effect from Sydney and from Shanghai can be said to have its principal place of business in Hong Kong” and therefore does not comply with Hong Kong’s Basic Law. This means the law would have to be tweaked to legitimize the union, but with pressure from Beijing, this is not likely to be an insurmountable hurdle.

But if that came about, Mr Pyne opined that two things could happen, both of which undesirable for Hong Kong. First, there would be a long line of other airlines wanting to operate from Hong Kong, which would end up being “a flag of convenience”. A bad thing? That would depend on the Hong Kong administration’s objectives, priorities and vision of growth – it has already given the green light for a third runway to be constructed at the Hong Kong International Airport (HKIA). Uncontrollable? Not quite.

Second, Cathay Pacific would probably look for a new home elsewhere. It could, but would it? Besides, it is unimaginable that the region’s most successful airline should be so ruffled by a new budget carrier on the same turf or be so terrified of the competition it poses that it should shake out of the territory where together with subsidiary Dragonair it has 50% total capacity share compared to 5% for all low cost carriers (LCC) at HKIA. Jetstar Asia on its own manages only 0.5%.

Yet there is suggestion that Cathay Pacific is not quite happy about Jetstar Hong Kong setting up base at HKIA – manifested in renewed speculation that it would withdraw from OneWorld (of which Qantas is a member) and consider joining Star Alliance. But it is really much ado about nothing if you consider that China Eastern is a member of the Sky Team, and not OneWorld.

A more pertinent question to ask is whether Jetstar Hong Kong would do much better than the average LCC at HKIA, and in particular for Qantas whether the new budget joint-venture was strategically the right move in its Asian plan, which looks set to employ the Jetstar branding as the growth vehicle. The Jetstar brand – including services within Australia and New Zealand – already connects eight cities in mainland China in a network of almost 60 destinations served by some 3,000 weekly flights. Besides Jetstar Asia that operates out of Singapore, Jetstar Japan in partnership with Japan Airlines and Mitsubishi Corporation will commence domestic services out of Tokyo’s Narita Airport in July. Jetstar Pacific in joint venture with Vietnam Airlines will follow on a date yet to be finalized.

However, the less optimistic group of analysts doubt that the Jetstar Hong Kong would work as hyped for Qantas (and China Eastern). They think that Hong Kong is just not the right market for budget travel. The volume out of HKIA is much too small and the yield very low especially if the target is the leisure market. For now, the options seem limited as destination rights are strictly rationed by the Chinese authorities. Cathay Pacific has said it would not follow in the footsteps of regional rivals such as Singapore Airlines and Japan Airlines in setting up budget offshoots. It is already complemented by subsidiary Dragonair that operates shorter regional routes. But Qantas chief Joyce had this to say: “Cathay will always be talking down (LCC opportunities) because it is in its interests to do so.”

Both Qantas and China Eastern are confident that Jetstar Hong Kong – which is eyeing the market beyond Hong Kong – would turn in a profit within three years. China Eastern chairman Liu Shaoyong estimated a market share of 6 to 7%. All this despite high fuel costs that have increasingly become the bane of LCC operations. Mr Liu said the costs would be offset by high aircraft utilisation and through surcharges. That, of course, would be premised upon a growing market and the elasticity of the demand vis-a-vis costs.

Jetstar CEO Bruce Buchanan said costs would be kept low, as much as 50% compared to full-service airlines, and fares would similarly be as much as 50% below what the latter are charging. By charging low fares, Mr Bachman has latched on to the promise of the theoretical economic model that it will generate new demand – the first principle of the budget business. Ceteris paribus, you may add, and given that the economy will fully recover and strengthen then on. He has also placed his bet on compensation by ancillary revenue, a new and convenient source of income that many airlines have begun to adopt. Jetstar is said to be amongst the cohort of high ancillary revenue earners.

Mr Joyce said Hong Kong Jetstar would enjoy “first-mover” advantage, but sceptics are apt to cite how two other airlines namely Hong Kong Airlines and Hong Kong Express are still struggling with a 60% load factor despite charging fares that are said to be 50% lower compared to full-service airlines. Both airlines are backed by Chinese conglomerate HNA Group and garner a combined 5% market share. Besides fuel costs, operations at HKIA do not come cheap for LCCs, particularly in the absence of a low-cost budget terminal.

Whatever the outcome, the storm stirred up by Jetstar Hong Kong has surfaced a few hard realities. First, Qantas is determined – almost desperate – to spread its wings far and wide over Asia, eyeing in particular the huge potential of China. Jetstar Hong Kong may not have been ideally timed, but it is a significant stepping stone if its sceptics are proven wrong. Mr Joyce is waiting in the wings to celebrate the fortune that China’s “booming middle class” would bring when the floodgates finally open fully, a key part of his bruised five-year plan to restructure Qantas. The Australian carrier badly needs a new lease of life.

Second, while still commanding a very strong presence in Hong Kong – and no reason to believe this would change any time soon – Cathay Pacific may have to brace itself to have to fight even more tenaciously to uphold its dominance. Elsewhere in the region, a visible shift in the market is taking place. In Singapore, LCCs have increased their market share to 27% and are continuing to grow, while flag carrier Singapore Airlines has seen its share reduced to 33%. In Australia, LLCs have a market share of 43% compared to Qantas’ share of 37%. The competition has broken down the barriers of segmentation. No doubt, the competition will intensify.

Third, Hong Kong may be undergoing policy changes in the wider China context. Past encumbrances may make way for new opportunities. Things can change.

And, lastly, the jury is still out on which way the wind will blow.

Why Singapore’s failed takeover of Australian Securities Exchange does not augur well for Singapaore Airlines

WHAT has the proposed merger between the Singapore Stock Exchange (SGX) and Australian Securities Exchange (ASX) to do with Singapore Airlines (SIA)? Now that it is known the Singapore bid for the Australian bourse has failed, what does it mean for SIA?

You can bet SIA enthusiasts have been watching closely the development of the proposed merger since its announcement in October last year. In some way, SGX is treading where SIA had been. Back in 2005 amidst the frenzy of airline mergers as a way to combat rising fuel costs and to better compete with discount carriers, Australia’s then Prime Minister John Howard raised the possibility of a similar union between Qantas and SIA after rejecting the latter’s request to fly trans-Pacific from Australia to the United States.

Earlier, British Airways (BA) had relinquished its 18.25 per cent stake in Qantas, ending an 11-year partnership, and SIA had been mentioned as a potential buyer to fill the void left by BA. But that never happened. Clearly still nursing its wound from the rejection to extend its wings across the Pacific, SIA declared it was not interested in such a deal. Then SIA chief Chew Choon Seng said: “It’s what the banks and other industries are doing.”

The merger would have created one of the world’s most formidable competitors, but pride aside, SIA smelled a red herring to stall the negotiations. A subsequent failed takeover bid by a consortium led by United States private equity firm Texas Pacific (that included Australia’s Macquarie Bank) of the flying kangaroo in 2006 only affirmed how Australia was not ready to embrace foreign ownership. That, in spite of Mr Howard’s pledge, that the Australian government would not block the sale, as he had said: “We can’t expect the world to be Australia’s oyster yet resent when foreigners buy into Australian assets.”

Forward to the present, the Australian government’s veto of Singapore’s takeover bid for its bourse because in its opinion the deal is contrary to national interest therefore rings all too familiar. Australian treasurer Wayne Swan said: “It’s not the right deal for Australia if we want to grow our role as a financial services hub in Asia.”

Yet such a move would have similarly created one of Asia’s leading stock markets. Recognizably, more often than not, it is difficult for giants to share the same bed. If there were any lesson that SGX could draw from SIA’s previous abortive attempts to push the open skies agenda, it was that of not fully understanding the approach from a position of strength that intimidates more than it appeals. Some observers felt SGX had come on too strongly, too boldly and too voraciously.

Had SGX been successful in merging with ASX, it would have signalled to SIA it was time to revive efforts to re-assert its push for more liberal Australian open skies. That’s not necessarily about buying into Qantas – which by now may have become a non-issue – but reviving the agenda to fly the trans-Pacific corridor from Australia to the United States. Unless SIA has given up that dream, it has been a long five over years since its last pitch.

SIA had argued strongly in the past how the increased competition would benefit Australia, raising tourist arrivals and how the benefits would cascade down the line to related industries, while Qantas fought on concerns of excess capacity and the fear of Australians losing jobs as a result of the airline downsizing from the competition.

Such arguments are the grind of the mill, and are as valid as you choose them to be. The breaking point hinges on timing. The early days of the proposed SGX-ASX merger had showed promise of an Australian change of heart to objectively stake its economic future in Asia, only to be scuttled by concerns that the Australian identity might be subverted by a stronger partner. Mr Swan recognizes Australia’s need to grow in Asia, where it belongs geographically, but he is not prepared to swap his old garb for something new, even if it looks more durable.

As for SIA, analysts may argue this is not the right time to resurface an old sensitive issue even if the ASX bid by SGX materialized. The turmoil in Africa and the Middle East, recent floods in Australia, and the tsunami and nuclear disasters in Japan are beginning to slow down the much hoped-for recovery that airlines have started to experience as the global economic recession recedes at the turn of the new year. There are fresh concerns about the price of jet fuel soaring to new heights, and airlines, particularly Asia-Pacific carriers, are facing a crunch on travel into and out of Japan. Under the circumstances, airlines are adverse to increasing capacity.

Yet the irony of such times is the dire need for airlines to generate new excitement to sustain the momentum. Analysts may also point out that the game for SGX is markedly different from that for SIA. While SGX’s mission is to help ASX grow, SIA’s foray into Qantas territory poses more the threat of competition. However, through code shares, alliances and mergers, the airline business is becoming increasingly more collaborative in recent times across competitive lines. It is cooperation through pooled resources that will shore up the fragile industry in these uncertain times.

Navigating through the dark clouds of the global financial meltdown, airlines have learnt the importance of being nimble, to be able to quickly shift resources and excess capacity to more viable alternatives. SIA and Qantas will do well to tap into unexplored or hitherto limited opportunities. For SIA, the Australian gateway to the United States is its holy grail.

Unfortunately, the failed ASX bid by SGX does not augur well for SIA in this connection. What is needed is an Australian change of attitude towards competition and foreign ownership. Critics of Mr Swan’s decision are concerned about Australia’s self-induced isolation that would gradually whittle away its economic strength. Given today’s aviation climate, and contrary to general expectations, there cannot be a better time for like-minded airlines to re-examine ways to jointly grow the pie than be concerned with the threat of unfair competition.