SIA back in hangar for strategic MRO

Singapore

IT'S tough being Singapore Airlines (SIA). Faced with arguably one of its most trying periods yet, SIA has its work cut out to position itself on a stronger footing for the long-haul, and its efforts may take time to bear fruit, analysts say.

The group - which has never turned in a full year loss in over 40 years of operations - faces a new playing field these days, with rival carriers nipping at its heels and budget carriers stealing market share.

Aggressive capacity injection and competitive airfares from other carriers on long-haul routes have turned up the heat, depressing yields which are being sacrificed to fill seats. Meanwhile, short-haul routes in South-east Asia suffer from overcapacity, impacting the group's regional wing SilkAir and associate Tiger Airways. Last Friday, SIA said it will be injecting up to S$140 million to plug Tigerair's haemorrhage, part of a proposed rights issue to raise S$234 million.

Short-term headwinds, such as uncertainties in the global economy, extend to the broader airline industry too. While jet fuel prices have eased of late, they remain high by historical standards. And events such as the disappearance of Malaysia Airlines' MH370 has dampened travel demand out of China, while political upheaval in Thailand have caused some travellers to avoid the market.

"Challenges are not new in the airline business and we have ongoing initiatives to address short, medium- and long-term challenges," said SIA's vice-president (public affairs) Nicholas Ionides. "We address such challenges by continuing to monitor demand trends closely and making appropriate adjustments to capacity deployment, alongside a continued focus on cost discipline."

Under the helm of chief executive Goh Choon Phong, the airline has been building up its network and connectivity via new and expanded codeshare agreements, leaning on partners to help serve secondary points that the airline is unable to. These include carriers such as Turkish Airlines, Air New Zealand, Virgin Australia and JetBlue.

As at Oct 1, the airline had 5,366 weekly codeshare flights operated by other airlines, and Mr Goh has signalled in the past that it will continue to talk to codeshare partners in a bid to deliver seamless connection to passengers via a broader network. Without such partnerships, SIA also runs the risk of rivals gaining market share by sewing up their own codeshare agreements.

And while the amount of revenue generated from codeshare partnerships ultimately depends on the terms of the agreement, SIA is on the right track, noted CAPA analyst Brendan Sobie, adding that he would like to see more large-scale agreements as SIA has lagged behind some other airlines.

Meanwhile, as competition continues to heat up in the premium space, SIA is investing some US$325 million to outfit its Boeing 777-300ERs with its next generation cabins. But other airlines such as the Gulf carriers as well as some European and North American airlines too are closing the gap with new cabin products of their own.

"SIA is hoping for the best and taking steps to improve but so is the competition," pointed out K Ajith, UOB Kay Hian's director of transport research (Asia).

Still, yields could get a slight lift from the introduction of Premium Economy Class seats come H215, prompting some analysts to question why they've waited so long. SIA's management has highlighted that Premium Economy typically works better on medium- to long-haul routes, which may help avoid demand erosion for Business Class.

Another challenge is the cost of operating at Changi Airport, which is higher vis-a-vis other airports in South-east Asia. While Changi has rolled out a S$100 million scheme to help alleviate cost pressures, the limited lifespan of these initiatives makes it hard for airlines to plan for the long-term.

Conrad Clifford, International Air Transport Association's (IATA) regional vice-president, suggests that the airport consider reducing charges permanently, to help airlines, and to grow the Changi hub.

Further afield, SIA has trained its sights on India, where it is establishing joint venture Vistara with Tata, giving the group a foothold in one of aviation's biggest growth markets.

The goal is to operate international services out of India, using Delhi as an alternate hub and capturing some of the traffic out of the Indian sub-continent bound for Europe and even North America, added Mr Ajith. Vistara would do well to wrest market share away from the Gulf carriers which have leveraged their own strategically located hubs in the Middle East to woo premium and economy travellers away from airlines like SIA.

However, this will ultimately hinge on whether India's new government will eradicate the restrictive 5/20 rule (a carrier must be five years old and have at least 20 aircraft before being allowed to fly abroad), which together with high fuel taxes and airport charges have contributed to an onerous operating environment. Moreover, as a fledging carrier, it will take some time for Vistara - which is still awaiting its air operator's permit - to start contributing to the group's bottom line.

Still, as Mr Sobie put it, while the glory days of double-digit profit margins may be over, SIA remains in a stronger position compared to other regional carriers. And its strong balance sheet and a cash pile of some S$5.6 billion provide the buffer for it to get things right.

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