Singapore Girl is facing a bumpy ride; Competition between low-cost carriers has driven down fares

October 8, 2013 5:25 pm

Singapore Girl is facing a bumpy ride

By Jeremy Grant

Competition between low-cost carriers has driven down fares

Singapore Girl is flying into turbulence.

For years the advertising icon of Singapore Airlines – a stewardess dressed in a sarong designed by a Parisian couturier – has projected an image of unimpeachable reliability and graceful Asian hospitality. That has helped to create one of the most recognisable and trusted brands in the global airline business. It has also helped to underpin one of its most financially successful. Singapore Airlines (SIA) has never in its 28 years as a listed company recorded a loss in any full financial year – a feat virtually unheard of in an industry that has bled red ink ever since commercial jet flight began in the 1950s. But the winds of change are blowing in the Asian airline industry as low-cost carriers such as AirAsia, owned by Malaysian entrepreneur Tony Fernandes, have steadily eaten away at the market share of established carriers such as SIA and Cathay Pacific.They are benefiting from the airborne ambitions of a rising middle class in the region, where millions of people can now afford airline tickets for the first time.

Competition between the low-cost airlines themselves has driven down fares to rock-bottom levels, with return tickets on low-cost operators such as Lion Air or AirAsia available in Indonesia for as little as Rp800,000 ($72).

One measure of how quickly low-cost carriers have achieved their status is that in the decade since they emerged as a force in southeast Asia they now account for over about half of seats available in the region, according to the Centre for Aviation, an Australia-based research company.

By contrast the likes of easyJet and Ryanair account for 40 per cent of that market in the European Union. Yet low-cost players have been around in Europe for at least twice as long as their peers in Asia.

As if that were not bad enough for SIA, the airline also faces headwinds from some structural changes in the market. First, airlines based in the Middle East – such as Emirates, Qatar Airways and Etihad – have been making inroads into Asia.

The much-vaunted “Kangaroo route” to Australia is a vital hinterland for SIA since it and the wider South Pacific region accounts for 18 per cent of passenger revenue. But others are muscling in, including Malaysian Airlines, which plans to start flying to Darwin shortly.

The Singapore flag carrier is not standing still and has been working on bolstering its position in Asia over the past three years.

Last year, it launched Scoot, a no-frills subsidiary painted in jaunty yellow livery. Pitched partly to a younger set, it flies popular short-break holiday routes to the Gold Coast in Australia and to Taipei.

A tie-up with Virgin Australia in 2011 is helping, by allowing SIA to add another 26 “feed points” into its routes on top of the six destinations already in the country.

India is the latest – and most intriguing – idea. SIA plans to set up a new Indian carrier with Tata group, the tea-to-telecoms conglomerate. That raised some eyebrows when it was announced last month since Tata already has a tie-up with Mr Fernandes.

But the idea is not only to launch a full-service domestic airline but to capture westbound passenger traffic to the Middle East and beyond. That should take the fight back to the Gulf carriers on nonstop flights westwards from the subcontinent.

It is too early to say how this pans out. SIA invested S$283m in Scoot, and there is no word yet on when break-even, let alone profits, will come.

SIA acknowledges that the low-cost carriers have had an impact but insists that by operating across the premium and no-frills spectrum it is hedged. It is also expanding with 200 firm orders in hand from Airbus and Boeing, 20 of which are for Scoot. Yet Saj Ahmad of StrategicAeroResearch.com, a consultancy, argues that the Gulf airlines do not have as many older jets to replace and can therefore be more aggressive.

Unfortunately, the world economy is not helping. Prospects for the airline business in Asia will be hit by a general downgrading of growth projections for the region. The International Air Transport Association last month downgraded the outlook for the profitability of Asia-Pacific airlines this year by $1.5bn to $3.1bn, largely on slower growth in emerging economies.

SIA is doing many of the right things. But relative to Datastream’s world airlines index SIA has underperformed by 23 per cent since the start of the year. Shareholders will need stronger constitutions if they are to keep the faith with Singapore Girl.