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MERGER

SIA to drop SilkAir brand; bring it under its wing

The merger is not 'a consolidation exercise', says airline CEO; analysts expect the group to reap some cost-savings

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SIA will spend over S$100 million to overhaul SilkAir's cabins from 2020, to narrow the onboard product gap between the parent airline and regional carrier ahead of an eventual merger.

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On Friday, the group held a roadshow to present SIA's new products rolled out recently on its Airbus A380 and Boeing 787-10 aircraft.

Singapore

SINGAPORE Airlines (SIA) will spend over S$100 million overhauling SilkAir's cabins from 2020 as it seeks to narrow the gap between the products onboard its parent airline and regional carrier ahead of an eventual merger.

This will effectively leave SIA with two airline brands - the premium flagship airline and budget airline Scoot - after it folded Tigerair under Scoot last year.

Regional wing SilkAir is set to receive new lie-flat seats in Business Class, while seat-back, in-flight entertainment (IFE) systems will be rolled out in both Business and Economy classes for greater product consistency across the group's full-service fleet.

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News of a merger came as little surprise since some analysts have suggested previously that absorbing SilkAir into the parent airline would prove more practical. This move comes amid intense competition in South-east Asia owing to the proliferation of low-cost carriers, causing full-service SilkAir to post an 11.4 per cent slide in yield in the most recently reported financial quarter.

As it merges the two airlines, SIA said it will continue to transfer routes and aircraft across the group to use the most suitable vehicle. For instance, it has already previously transferred certain routes from SilkAir's network to Scoot, which can compete more effectively against regional budget carriers such as AirAsia.

Speaking at a results briefing on Friday morning, SIA chief Goh Choon Phong said: "There's still a lot of demand for a SilkAir type of service, especially on the bigger destinations in South-east Asia. We're still seeing very healthy (Business) class demand on SilkAir."

But even as some 40 per cent of SilkAir passengers connect onto SIA flights, the regional wing is not as familiar a brand to customers in markets outside of Asia, such as Europe and the United States.

Ahead of the announcement, CEO Corrine Png of research firm Crucial Perspective, advocated for a merger, emphasising that too many airline brands under the group created confusion for consumers. "SilkAir is in no-man's land. It has a high cost structure and yet its product and service is inferior to SIA's mainline business," she said in a report on Thursday.

Cabin upgrades will start in 2020 due to the lead time required by seat suppliers, which will include the certification processes, while the merger will take place only after a "sufficient" number of aircraft have been fitted with the new cabin products, SIA said. It has already integrated SilkAir's finance and revenue management functions in the past year, with plans to transfer over other areas where there are synergies over the next year.

In response to questions on whether there might be redundancies post-merger, Mr Goh said the merger is not "a consolidation exercise". He added: "With the combined entity, it should offer more opportunities for our staff to grow and take on different responsibilities. To the extent there will be overlaps, affected staff will be given opportunities to look at redeployment and retraining." SilkAir staff are expected to be extended the same terms and conditions of SIA staff when they join the parent airline.

Some analysts that BT spoke to said it was difficult to ascertain at this point how the merger might affect revenue at the parent airline. Still, an improved premium cabin on the narrow-body planes could help to bolster yields on those routes.

SilkAir currently operates an all-narrow body fleet of 11 Airbus A320-family aircraft and 22 Boeing 737-800 and 737 MAX 8 aircraft. It was launched in 1989 as Tradewinds Airline serving holiday destinations in South-east Asia, and was rebranded as SilkAir in 1992 as it expanded to become a fully-fledged regional carrier.

Jochen Wirtz, professor of marketing at NUS Business School, noted that the group should be able to reap some cost-savings from the merger in terms of marketing, branding, and other operations. He went on to suggest: "However, it may be a challenge to keep the overall SilkAir operations as cost efficient under the SIA brand and, at the same time, to have service quality match SIA's brand promise."

SIA, which released its fourth quarter on Thursday, surprised on the upside as it posted a net profit of S$181.8 million with stronger passenger and cargo revenues acting as tailwinds. This is compared to a loss of S$138.3 million a year ago. For the full year ended March 31, 2018, net profit soared to S$892.9 million, up from S$360.4 million in the previous fiscal year.

Group capital expenditure on aircraft - which came in at S$5.7 billion for FY18/19 - is expected to clock S$5.9 billion for FY19/20 and S$5.8 billion for FY20/21. Going forward, it said that there are no plans to raise equity from the market, but that it will raise more funds through debt.

At Friday's briefing, SIA's management also highlighted that yield decline had bottomed out, with a 1 per cent uptick in passenger yield for the parent airline in Q4FY17/18, on the back of improving corporate demand as well as initiatives under the airline's ongoing three-year transformation programme. It kicked off the transformation programme last year to boost revenues and streamline costs amid intensifying competition from rivals such as the Gulf and Chinese carriers.

The counter closed at S$11.56 on Friday, up 42 cents.

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