Never say never: Cathay Pacific enters budget market

Courtesy AFP

In 2015, Cathay Pacific together with Hong Kong Airlines opposed Qantas’ application to set up Jetstar Hong Kong Airways – co-owned with China Eastern Airlines and billionaire Stanley Ho’s Shun Tak Holdings Ltd. Cathay was particularly vehement about there being no room or need for budget travel in Hong Kong. The authorities were convinced and Jetstar HKG never took off.

Today, Cathay announced its decision to buy Hong Kong’s only budget carrier, Hong Kong Express Airways, for HK$4.93 billion (US$628 million). This expands Cathay’s stable of airlines to three, which includes regional carrier Cathay Dragon. It will boost Cathay’s market share to 50 per cent in Hong Kong.

A Cathay spokesperson said: “We intend to continue to operate Hong Kong Express as a stand-alone airline using the low-cost carrier business model.”

Now what caused Cathay to change its mind?

Cathay is not alone in facing stiff competition in the long-haul and premium market, from not only neighbouring rivals such as Singapore Airlines (SIA) but also Middle east carriers such as Dubai Airlines. Besides, Chinese carriers from mainland China are also fast expanding, flying direct and more services to Europe and North America.

At the same time, Cathay can no longer ignore the encroachment by the flourish of budget carriers in the region, particularly those operating out of mainland China. The Hong Kong authorities too may begin to realise how all this may be reducing Hong Kong International Airport’s hub status, particularly when limited options are resulting in Hong Kong being bypassed.

It could be a matter of timing. In 2017 Cathay reported its first annual net loss in eight years and introduced a three-year transformation program. It was later in that same year that Cathay CEO Rupert Hogg affirmed that Cathay had no plans to start a low-cost carrier. But the debt-ridden HNA Group which owns Hong Kong Express offers a timely opportunity not to be missed even as Cathay posted its first full year profit in 2018 of US$299 million.

The business climate can change fairly quickly, but unfortunately airlines may be slow in catching up with the changes because of the huge investment and lead time to implement many of the changes, apart from a host of other reasons, some of which could be largely circumstantial.

Many legacy airlines pooh-poohed the threat of budget airlines to their traditional market when it was first mooted, and as many of the carriers fell by the wayside before they could assert any impact.

SIA for one came on the scene later than most others, setting up Tigerair jointly with Ryanair, and then Scoot. Its strategy has changed yet again with the merger of Tigerair and Scoot, and now SIA is in the process of assimilating SilkAir into the parent airline.

One wonders if this is the path that Cathay may take should Hong Kong Express and Cathay Dragon find their services overlap as they expand.

Whatever the reading, it would be discreet to never say never. The question is always if so, when?

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Joon’s failure re-validates old lessons

Courtesy Getty Images

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.

After the merger of Scoot and Tigerair, will it be Singapore Airlines and SilkAir next?

Courtesy Wikimedia Commons

Will Singapore Airlines (SIA) and its subsidiary SilkAir take the merger route of Scoot and Tigerair, now that their finance operations are merged, perhaps as a first step in that direction?

While SIA maintains that such initiatives are part of an ongoing programme to be more competitive, the speculation is only to be expected in the oontext of the company embarking on “a comprehensive review that leaves no stone unturned, cutting across all divisions of the company” as stated by its CEO Goh Choon Phong.

SlkAir started in 1975 as Tradewinds Charters which became Tradewinds Airlines in 1989 when scheduled services were introduced. Three years later, it was renamed SilkAir, shedding its leisure image and is often referenced as SIA’s regional arm.

However, in its long history, SilkAir hardly comes into its own, seen as operating in the shadow of parent SIA. Therefore, consolidating operations – finance, for a start – makes sense since some of the routes operated by SilkAir were previously operated by SIA and in light of SIA re-focussing its operations in the region. Besides, as the competition intensifies, a strong SIA brand across the region is imperative. There is no reason why a regional carrier so-called should be viewed as one providing services one notch below, an unfortunate perception that is difficult to shed.

At the height of the budget travel boom in the region, SIA launched Tigerair in 2003. Then there were already questions asked about the continuing operations of SilkAir which the company reiterated is a regional airline and not a budget carrier. Then Scoot came into being in 2012 as a medium haul budget carrier, differentiated from Tigerair’s short haul operations. It soon became clear the SIA Group was having one too many on its plate, resulting in intra-competition. Tigerair and Scoot finally merged under the Scoot brand this year.

Now that the number has been trimmed from four to three, will it be cut down further to two, typically the structure of most global airlines, between full-service and low-cost operations?

SilkAir may be likened to Cathay Dragonair, which Cathay Pacific has also insisted is not a budget but regional airline. But then, Cathay has never believed in adding a budget carrier under its wings. You might say that place is filled by Dragonair. By comparison, however, SilkAir’s status is somewhat ambiguous depending on how SIA delineates the geography as being regional or international.

What would make the new Scoot different?

Singapore Airlines (SIA)’s budget subsidiaires Scoot and Tigerair are now fully merged under one name, i.e. Scoot. Tigerair operated its last flight on July 24.

Why Scoot and not Tigerair? Quite obviously, considering the dotted history of the latter’s operations that ran the gamut of bad publicity from complaints about poor service and flight disruptions to safety infringement that resulted in suspension of its Australian services in 2011.

Adopting the Scoot brand could help distance the new identity from a beleaguered past. Tigerair remained a broken dream for its parent who had named it with the nostalgia of an erstwhile era before SIA broke away from Malaysia-Singapore Airlines to come into its own. Then the airlines was flying the Tiger logo.

Courtesy Scoot

The Scoot/Tigerair merger is marked with a new tagline: Escape the Ordinary. Though not one quite stunning or provocative for a tagline, it is perhaps an ambitious but staid attempt to set itself apart from the pack. Scoot’s original tagline was the somewhat outlandish “Get Outta Here!”

Yet what would make the new Scoot different?

Scoot CEO Lee Lik Hsin said of its new tagline: “It is inspirational to our inner wanderlust, and inspires us to travel and explore the world.”

Given that any and all of the airlines, whether full-service or no-frills, are but a means of transportation, how then will Scoot inspire people to travel with them instead of others? That’s the challenge.

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.

SIA’s KrisFlyer Gold is one big disappointment

sia-krisflyer-goldDo not expect the KrisFlyer Gold Lounge in Terminal 3 of Singapore Changi Airport to be anywhere near an iota of the flavour of Singapore Airlines (SIA)’s very own Silver Kris lounge for its first and business class passengers. This other lounge meant for other entitled travellers, such as non-premium class frequent fliers and guests of partner airlines, is a far cry from the reputed real thing.

Quite inevitably the disappointment stems from the expectations of an SIA brand name association, and all the more if you had on a previous occasion tasted the lavish luxury of the Silver Kris. But even while making generous allowance for this so-called Gold standard to be expectedly or intentionally inferior to that Silver offering, you would not have imagined it to be that wide of a gulf.

Perhaps the receptionist had just had a bad night when I decided to avail myself of the privilege one morning before flying off to Taipei. He looked visibly unhappy at his desk. He was most unwelcoming and quite arrogant as if he thought that was a bearing befitting his job at a supposedly exclusive facility. That didn’t quite bother me, as the facility itself should be enough to compensate for the cold reception.

But alas, it did not. The lounge was cramped with seats but not users. Quite strangely, the chairs were arranged like they were in a classroom. Perhaps there was a teaching class that had just ended. The self-service counter had a limited array of food – very ordinary, I must say – that looked like a buffet spread at some office event. We were not enthused, and left within five minutes without partaking of the pleasures it was supposed to offer. The receptionist didn’t say a word as we stepped out.

You can’t help the brand name association, which may be a good or a bad thing, how it fortifies or dilutes the image. It is understandable when passengers fly Tigerair or Scoot, they expect a little of the SIA rub-off. It is not so much about the tangible product which is clearly of a different tier, but a little if not much of the service culture. All the more so when the line between budget and mainstream airlines begins to blur.

Singapore Airlines’ profit plunges

Courtesy The Straits Times

Courtesy The Straits Times

THE downward trend was to be expected as you followed Singapore Airlines (SIA)’s performance month-to-month for the second quarter (July-September) of its current financial year. The sluggish global economy, according to the airline, was largely to blame.

SIA’s operating profit declined 19.4% from last year’s S$98m (US$71m) to S$79m. Fortunately, the stronger first quarter boosted the result for the first half-year, with operating profit increasing 34.0% from S$206m to S$276m on declining revenue of S$343m and the contraction in passenger carriage by 3.2%. Yield as a consequence came down by 2.9%, and the passenger load factor of 78.1% was a drop of 1.9 percentage points. The saving grace was lower fuel costs by 25.2%.

Regional subsidiary SilkAir too suffered a decline in operating profit for Q2, down 19.0% from S$21m to S$17m.

Budget subsidiaries Scoot and Tigerair however managed to reverse their losses, respectively from a loss of S$2m to S$5m and from a loss of S$10m to S$3m.

Looking ahead, SIA hopes that the improved operating capability and efficiency of its growing Airbus A350 fleet as well as the long anticipated integration of Scoot and Tigerair (see The end draws near fro Tigerair, Nov 6, 2016) would improve its fortune as it continues to be impacted by geopolitical uncertainty and weak global economic conditions and faces the prospect of losing the cushion by lower fuel costs as oil producers cut back on their output.

However, if there’s any consolation, close rival Cathay Pacific too is experiencing a downward trend in profitability (see Cathay Pacific losing grip of China card, September 19, 2016 ).