Air Canada and WestJet shake up Canadian skies

THE usual lack of excitement in the Canadian aviation scene is about to change.

Air Canada launches budget carrier Rouge

Courtesy Air Canada

Courtesy Air Canada

Air Canada’s new low-cost carrier Rouge will take to the skies in July next year. It will start with two Boeing 767s and two Airbus A319s, flying initially from Toronto and Montreal to leisure destinations in Europe and the Caribbean, with plans to expand the fleet to 50 aircraft eventually and to also fly to destinations in Asia.

In a way, Air Canada is re-attempting to do what it failed to achieve with previous budget projects Tango and Zip. The appointment of former chief executive of Thomas Cook North America Michael Friisdahl with expertise in the leisure industry to head the new carrier may be a plus.

Cost is obviously the key driver of the strategy, and Air Canada expects cost savings to be derived 50/50 from lower wages and staff benefits and from the high-density aircraft configuration. Having an independent budget offshoot makes it easier to start with a lower base of staff costs and focus on the price-sensitive niche leisure market. There will be 20 per cent more seats on Rouge than the normal configuration.

For some time now, Air Canada has been struggling with costs and red ink. It faces stiff competition from key rival WestJet and other leisure operators such as Transat A.T. and Sunwing that offer much lower fares. Increasingly, airlines are ditching a one-size-fits-all modus operandi for a separate and more focused niche market strategy.

WestJet launches regional carrier WestJet Encore

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

WestJet for one is launching a new regional carrier WestJet Encore in the second half next year. The new carrier will offer fares up to 50 per cent lower than normal for short hauls, in direct competition with Air Canada Express. WestJet CEO Gregg Saresky does not anticipate a price war, as he prefers to call it a process of “rational pricing”. It is ironical that short haul flights should cost as much as they are now. Mr Gregg told analysts at a recent briefing: “If you’ve ever tried to buy tickets for a short-haul journey in Canada, you’ve had to open your wallet and dig deep. Short-haul fares in Canada are very, very high.”

Apparently Air Canada president Calin Rovinescu had anticipated WestJet’s regional initiative. A price war it is that has begun and is expected to intensify. Both airlines are looking to expand their network to cover outlying business communities, for example, in the oil exploration region.

WestJet Saresky hoped that by lowering fares, travellers would fly more often and there would be new customers. He said: “When we lower the fares, it’s not carrying the same people at lower fares. It’s lowering the fares so that we can make the market expand.”

WestJet reported a stellar Q3 performance with profit increasing 80 per cent to C$70.6m (US$71.2m). Higher load factors more than made up for the rise in fuel prices. According to Mr Saresky, fuel makes up a third of WestJet’s operating expenses.

Air Canada WestJet plan premium economy

The premium economy concept has been somewhat of an uncertain development in the industry. Not many airlines are quick to embrace it, and Canadian carrers may be said to be latecomers in the game. But really the increased segmentation within the legacy configuration is a reflection of the uncertain demand for premium seats. Is the premium economy an enticement for upgrading, or a safety net to catch any fallout from the upper class – whether intra or inter-airline? At worst, it may be deemed hedging in an uncertain market; at best, a competitive edge in offering options and alternatives amidst the uncertainty.

Air Canada plans to introduce the new in-between class on its new Boeing 777s next year and on its 787 Dreamliners which are expected to join its fleet in 2014.Its Asian competitors such as Cathay Pacific Airways and EVA Air are already in the game. WestJet also has plans to introduce its version of the premium economy next year. Both Canadian airlines are eyeing the growing Canadian business travel market.

Travellers should benefit from an active competition between Air Canada and WestJet, but do not expect drastic differences. The two airlines are apt to stay close to each other’s range. The real competition will play out beyond Canadian borders when Air Canada commences Rouge operations. Budget long haul is not a tested concept although one-hop sun destinations are likely to prove popular. The good news is that analysts are optimistic about Rouge turning in a profit even in its first year. But will this be at the expense of the parent airline’s performance?

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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.