SIA, SilkAir team up with Scoot to boost network

Singapore

BUILDING on its portfolio strategy, Singapore Airlines (SIA) and SilkAir are leveraging medium/long-haul budget arm Scoot through an interline partnership for select destinations as the group seeks to capture more passengers in a competitive environment.

Since July, the parent airline and regional wing have been selling onto certain destinations in Scoot's network in China, which is seen as a natural starting point since there is little overlap in the cities served by the budget carrier.

The tie-up enables a passenger from South-east Asia to fly SIA or SilkAir to Singapore, then connect onto the budget carrier to fly onwards to points in China, such as Ningbo. Under the Inter Airline Through Check In trial, baggage will be checked all the way through to the end of the destination, while boarding passes for both sectors can be issued at the original point of departure. The Scoot leg also includes in-flight meals and checked baggage.

"This not only adds convenience for guests, it improves the attractiveness of the Singapore air hub," Scoot's chief executive Campbell Wilson told BT in a recent interview. "We felt it was important to fully leverage on the hub and also to fully leverage the four airlines within the group. By adding the Scoot component to the broader group network, the group can capture passengers that would otherwise be lost (to other airlines)."

Previously, Scoot had a one-way partnership in place, allowing it to connect traffic onto SIA and SilkAir's networks.

SIA spokesman Nicholas Ionides said: "(Interline sales) has long been carried out between SIA and SilkAir, as well as between Scoot and Tigerair as they have expanded their cooperative ties. In recent months, we have also proceeded to expand the approach across other airlines in the group, so as to potentially capture new market segments that SIA may not be able to tap into on our own, and vice versa."

Going forward, SIA - which already has over 100 interline agreements with airlines worldwide - does not rule out interline arrangements with other carriers that it has a stake in. It has joint ventures in India (Vistara) and Thailand (NokScoot).

Still, the move came as a surprise to some industry observers. "For the network, it's a good thing," said an analyst who declined to be named, noting that loads would receive a boost. But at the same time, he questioned whether this could end up diluting the SIA brand, given SIA has built an identity as a premium carrier.

This comes as the SIA seeks to fend off competition in both the premium and budget segments from full-service carriers and budget airlines alike, while overcapacity in South-east Asia continues to put pressure on yields.

Recent initiatives for greater synergies at the group level include introducing the redemption and accrual of Krisflyer miles on Scoot and Tigerair as well as the deepening partnership between the SIA group's two budget subsidiaries. In addition, Scoot announced it would be taking over the Hangzhou service from SilkAir with its widebody 787s, which are seen as a better fit for the route.

Scoot and Tigerair too have been working steadily to forge closer ties and have started to reap the benefits in terms of incremental revenue as well as cost-savings through economies of scale, such as by negotiating better terms in ground-handling contracts. Bilateral revenue stemming from connecting traffic between the two budget carriers has clocked nearly S$20 million since August last year, when the Competition Commission of Singapore granted the two carriers anti-trust immunity.

Meanwhile, the two budget airlines are transitioning towards a joint reservation system by next year for greater seamlessness in sales. Moving forward, a common check-in area could be on the cards.

In the first quarter of the current financial year, Scoot saw an operating loss of S$20 million - narrowing from a loss of S$25 million a year ago - weighed down by flat yields and "a few million" in costs from disposing of its Boeing 777-200s. While it racked up a positive ebitda (earnings before interest, taxes, depreciation and amortisation) for the first time in the previous financial year, it will still take time for the budget carrier - which took to the skies in June 2012 - to achieve profitability.

Progressive quarters should see the benefits of the fuel efficient 787s as Scoot has made the transition to an all Dreamliner fleet, phasing out its B777s. Fuel costs will also come down as fuel hedges wear off.

By end March 2016, Scoot will have 10 Dreamliners. The new aircraft will boost capacity significantly while enabling the budget carrier to expand its network. In addition, the next-generation aircraft can deliver a 20 per cent increase in fuel efficiency for Scoot, which is significant given that fuel accounts for some 40 per cent of total costs for the budget carrier.

"Our unit cost is coming down quite sharply as a result of the 787s and is going to come down even further as a result of the lower fuel prices," Mr Wilson highlighted.

But for now, there will be continued hedging losses - especially if spot prices stay where they are - since the SIA group has hedged 55.4 per cent of its jet fuel needs for July-September at US$104 per barrel. Scoot, which is wholly-owned by SIA, hedges together with the group.

As Scoot continues to take delivery of the rest of its Dreamliners, new destinations are likely to be introduced from January onwards, in existing markets such as China and potentially new markets like India.

Further afield, Thailand-based NokScoot has finally commenced scheduled services to Nanjing, and will be launching flights to Taipei as well. The launch of NokScoot, a joint venture between Thai Airways' budget arm Nok Air and Scoot, was pushed back after Thailand failed a safety audit by UN body International Civil Aviation Organization (ICAO).