SIA bets on ‘budget baby’ to fly further: long-haul budget carrier to target new market segment, but some say it’s a gamble
May 26, 2011
By VEN SREENIVASAN
(SINGAPORE) In a move which took many market watchers by surprise, Singapore Airlines (SIA) yesterday announced that it is starting up a wholly-owned long/medium-haul budget carrier.
Mr Goh: ‘Low-fare airlines help stimulate demand for travel, and we expect this will also prove true for longer flights”The new airline is being established following extensive review and analysis,’ the world’s top-rated premium carrier said in a statement. ‘It will enable the SIA Group to serve a largely untapped new market and cater to the growing demand among consumers for low-fare travel.’
The company is applying for an Air Operators License (AOC) and operations are expected to begin within one year. The airline will be wholly owned by SIA, but will be operated independently and managed separately from SIA.
This is not SIA’s first venture into budget flights as it founded Tiger Airways and still owns 34 per cent of the Singapore-based regional low cost carrier.
But several market watchers found its move into medium and long-haul no-frills operations somewhat perplexing.
Brendan Sobie of the Sydney-based Centre for Aviation pointed to the mixed success record for long-haul budget carriers.
‘SIA is only the second full service carrier in the world to establish a long-haul low-cost subsidiary, after Qantas,’ he noted. ‘The long-haul low-cost model has proven to work at Qantas and on a different scale at AirAsia X. But attempts at the model by independent start-ups have so far failed at VivaMacau, Zoom and Oasis Hong Kong. Overall the long-haul low-cost model remains unproven, so this is a bold move by SIA.’
Not surprisingly, AirAsia’s Tony Fernandes had to have a say. In a Twitter posting, he said: ‘Singapore Airlines to set up a long haul low cost carrier. Hahahaha. Deja vu. Airasia staff should be proud that that we have been copied again. Will be same result like tiger.’
But SIA’s new chief executive Goh Choon Phong sounded confident that this is a model will work.
‘As we have observed on short-haul routes within Asia, low-fare airlines help stimulate demand for travel, and we expect this will also prove true for longer flights,’ he said in a statement. ‘We are seeing a new market segment being created and this will provide another growth opportunity for the SIA Group.’
At the same time, he also underscored SIA’s commitment to continue growing the premium airline, offering ‘highest-quality products and services to our customers’.
The move into the long-haul budget segment could also be an aggressive response to the Qantas group’s move to establish a base in Singapore as well as its decision to set up Changi-Singapore as the base for Jetstar’s long haul operations. Qantas-Jetstar is already the second biggest operator in Changi, with almost 10 per cent of seat capacity.
UOB Kay Hian’s K Ajith believes that the decision to set up a no frills medium and long haul airline could pay off for SIA, which is seeing fierce competition from regional carriers, Middle Eastern carriers and even AirAsia X.
‘If they can get the medium and long haul point-to-point formula right, by flying to second tier cities, this could see them making up for the falling economy class loads on SIA,’ he said.
But he also warned of near term execution risks and yield pressures, and the potential for the new product to cannibalise SIA’s coach-class offerings.
However, Mr Sobie reckons that in some instances, cannibalising one’s own market may be a gamble worth taking.
‘There is very little growth at the premium end of the market, so SIA is mitigating its risk by going across to a new market,’ he said. ‘If they don’t, they could lose market-share overall.’
Interestingly, the rapid expansion of the AirAsia, Jetstar and Tiger groups in Singapore, plus the potential launch of a new Qantas Group full-service carrier here, and now a new SIA Group long-haul low-cost carrier, would result in a significant increase in capacity at Changi.
Can all this capacity be absorbed by the market?
‘So far the demand has been there for all the increased LCC capacity, given the region’s huge appetite for low fares and Singapore’s rapid economic growth,’ Mr Sobie noted. ‘SIA, which has seen demand and load factors drop in recent months while low-cost carriers in Singapore continue to expand rapidly and improve their load factors, is clearly enticed by this market. We eagerly await more details from SIA.’
Despite some scepticism, observers agree that if any airline has the wherewithal to pull this off, it is SIA.
The airline has considerable financial resources, fleet and talent. The new airline will be funded entirely by SIA’s balance sheet and is likely to tap its extensive fleet of B777 planes. The airline is the largest operator of this plane-type, with 66 aircraft of both the 777-200 and 777-300 models, which are ideal for medium and long haul operations.
More details will be announced by the new airline’s management team in due course, including its branding, products and services, and route network.