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Launch of new SIA subsidiary Scoot shakes up the LCC market

4-Jun-2012

Singapore Airlines' (SIA) new long-haul low-cost subsidiary Scoot launches services on 04-Jun-2012, shaking up Singapore’s already highly competitive LCC market. Scoot becomes the third carrier in Asia’s fast-growing long-haul low-cost sector, joining Jetstar and AirAsia X. Scoot also becomes the fourth brand in the SIA Group portfolio, complementing short-haul low-cost carrier Tiger Airways (partially owned by SIA), short-haul full service carrier SilkAir (fully owned by SIA) and the mainline Singapore Airlines full service brand. SIA itself now primarily operates medium and long-haul routes, having handed over in recent years several of its short-haul routes to SilkAir as competition increased with LCCs.

LCCs now account for over 25% of passenger traffic at Singapore Changi Airport. LCCs have driven nearly all the growth at Changi since Tiger, Jetstar Asia and Valuair launched services in 2004 (Valuair was subsequently acquired by Jetstar Asia). The launch of Scoot and the expected expansion of Jetstar’s Singapore-based long-haul operation, which currently consists of only three aircraft, should ensure continued growth in Changi LCC traffic even as the country’s short-haul LCC market starts to approach saturation after several years of rapid growth.

While nearly all major short-haul routes from Changi are now well served by multiple LCCs, there are still huge opportunities for LCCs to stimulate demand on routes of 5hrs and longer. Scoot launches on 04-Jun-2012 with a daily Boeing 777-200 flight to Sydney, a huge market which was previously not served by LCCs. The entrance of Scoot provides Singapore-Sydney passengers with a new low-fare option and breaks the duopoly enjoyed by Qantas and SIA (British Airways also serves Singapore-Sydney but effectively there are only two full service players on the route because the BA flight is part of a joint service agreement with Qantas).

See related article: In selecting Sydney as its first route Scoot favours a low risk market with little competition

So far Qantas and SIA have not significantly cut fares on the Singapore-Sydney route in response to Scoot’s entrance. But Qantas could end up responding to the new threat posed by Scoot by deciding to use its Jetstar subsidiary to launch separate low-cost flights on the route. Jetstar already links Singapore with Melbourne, a route which until now had lower fares than Singapore-Sydney due to the more intense competition (SIA, Qantas, Jetstar and Emirates serve Singapore-Melbourne).

Jetstar currently operates three long-haul routes from Changi with three A330-200s. In addition to Melbourne, the carrier operates a daily service to Beijing and four weekly flights to Auckland.

Scoot to operate four routes by the end of Aug-2012

Scoot will very quickly surpass Jetstar as Singapore’s largest long-haul LCC as Scoot has already announced three routes in addition to Sydney. A five times weekly service to Australia’s Gold Coast will launch on 12-Jun-2012, followed by a daily flight to Bangkok on 05-Jul-2012 and four weekly flights to Tianjin on 23-Aug-2012.

Scoot’s Tianjin flight will compete against Jetstar’s Beijing flight as Tianjin is positioned as an alternative airport to Beijing with a high-speed rail line linking the two nearby cities. Bangkok was an unexpected exception to Scoot’s initially stated strategy of sticking to medium and long-haul routes but Scoot sees as an opportunity to tap one of Asia’s biggest routes and offer potentially lucrative connections in the Australia-Bangkok market. Australia-Bangkok is a huge leisure market that lacks non-stop LCC options but has become a big one-stop market for AirAsia X via Kuala Lumpur and Jetstar via Singapore.

See related articles:

Thai Airways has also taken note and is now one of several Asian airline groups currently looking at joining SIA in launching a long-haul low-cost subsidiary. The PhilippinesCebu Pacific is already slated to become the fourth Asian airline group with a long-haul low-cost operation, when it launches A330 flights in 3Q2013, likely to the Middle East and Australia. It is virtually certain there will be more new entrants – possibly several – in Asia’s exciting long-haul low-cost sector as competitive forces and the huge opportunities to stimulate demand on some of the longer routes within the region persuade more airline groups to join the party.

See related article: New Cebu Pacific long-haul operation could push out Philippine Airlines but may require hybrid model

Scoot also decided to launch Bangkok, which is already served with multiple daily A320 frequencies by LCCs Tiger, Jetstar Asia and Thai AirAsia, to drive up aircraft utilisation rates. High aircraft utilisation is an important component of the LCC model and Scoot has gone out of its way to get the most out of its initial fleet of 777-200s, which have been configured with 370 economy class seats in 3-4-3 configuration and 32 recliner-style premium seats in a 2-4-2 configuration. Notably, Scoot will squeeze more flying out of its initial fleet of three 777-200s than Jetstar has with its three Singapore-based A330s.

Scoot to achieve higher aircraft higher utilisation rate than Jetstar

Based on its current schedule, Scoot will achieve an average utilisation rate of 14.45hrs per day (based on block hours) with its first three aircraft. This will increase further as the Tianjin route is only operating four days per week and the Gold Coast route five days per week, allowing Scoot to potentially launch another non-daily route before taking its fourth 777-200.

Jetstar currently only achieves an average utilisation rate of 13.59hrs per day with its three Singapore-based A330-300s. These aircraft now operate a total of 18 weekly round-trip flights while Scoot will initially operate 23 weekly round-trip flights with its initial three 777-200s. From a seat capacity perspective, Scoot will initially offer about 9000 seats per week compared to about 5500 seats for Jetstar’s Singapore-based A330 operation. (Jetstar configures its A330-200s with 265 economy class seats in 2-4-2 configuration and 38 recliner-style business class seats in 2-3-2 configuration.)

Scoot and Jetstar A330 schedules from Singapore, based on three aircraft for each carrier

Carrier  Destination   Frequency Effective Round-trip block time  Total block time per week
Jetstar Melbourne         Daily Already launched 15hrs 35min       109hrs 05min
Jetstar Auckland          4x weekly Already launched 21hrs 10min 84hrs 40min
Jetstar   Beijing         Daily Already launched 13hrs 05min 91hrs 35min
Scoot   Sydney          Daily Already launched 15hrs 40min               109hrs 40min
Scoot    Gold Coast      5x weekly 12-Jun-2012 15hrs 23min 77hrs 05min
Scoot    Bangkok         Daily 05-Jul-2012 4hrs 40min 32hrs40min
Scoot    Tianjin         4x weekly 23-Aug-2012 12hrs 00min 48hrs 00m

Scoot will further widen the gap between it and Jetstar from a capacity perspective as its fourth 777-200 is slated to be placed into service by the end of 3Q2012. Scoot is planning to announce within the next few weeks additional routes that will be operated with this fourth aircraft. More medium-haul flights to mainland China and/or other North Asian countries are the most likely option. A second short-haul route is also a possibility to ensure Scoot’s average utilisation rate across its fleet stays above 14hrs per day.

Scoot is also expected to launch several additional routes in 2013 as it takes two more 777-200s. Scoot is acquiring all of its 777-200s from SIA. The SIA Group is now planning to hand Scoot another two 777-200s in 2014 followed by three in 2015 and three in 2016, giving it a fleet of 14 777-200s by the end of 2016.

See related article: SIA’s new long-haul LCC plans 16-aircraft fleet within four years

Scoot may consider Dalian, Taipei and Tokyo as Korea remains restricted

Scoot is evaluating services to Dalian, Taipei and Tokyo, according to local reports. Dalian, in northeast China, is a city of six million and is 380km from Shenyang, a city of eight million (China's high-speed rail links the two cities). Scoot would be the first airline outside of North Asia to serve Dalian, which has seen an increase in services, as with Shenyang, but the route would be surprising as Scoot would first have to pass over potentially more viable mainland destinations, such as Hangzhou, which is a large tourist site and can also serve as an alternative to Shanghai. AirAsia X serves Hangzhou with a daily service while Jetstar is understood to be interested in Shanghai.

Taipei and Tokyo, it has been reported, would be served jointly, with a flight routing Singapore-Taipei-Tokyo, similar to Jetstar's Singapore-Taipei-Osaka A320 service. Singapore has fifth freedom rights between Japan and Taiwan. This one-stop service to Japan may distance Scoot's Tokyo service from SIA and reduce chances of cannibalisation. Singapore-Taipei services are in demand while fares are high between Taipei and Japan, making the sectors a viable pairing. While Singapore and Japan have signed an open skies agreement, open skies does not take effect on Singapore-Tokyo until mid-2013 when additional slots at Narita become available, although there is provision for interim granting of slots if they become available.

Singaporean carriers have the rights for four daily Tokyo Haneda slots. Singapore's slots, like those from most other countries, are for services late at night or early in the morning. SIA uses two pairs, with one service arriving at Haneda late at night and the other in the morning. There is little room for Scoot not to overlap with SIA on a direct service. SIA also serves Tokyo Narita twice a day. AirAsia X serves Tokyo Haneda six times a week using available late night slots.

South Korea, the remaining viable North Asian country for Scoot in the medium term, remains highly restricted. SIA has nearly utilised its full allotment of services under the bilateral agreement that Singapore has tried on numerous occasions to expand but to no avail from the South Korean Government. When SIA operates seasonal services to Busan, it fully utilises available capacity. SIA would need to drop its Busan services to allow Scoot to enter, although even then Scoot would only be able to operate a maximum of three weekly flights. Scoot could only operate more services if SIA reduces its operation of four daily flights, which it is unlikely to do as the services feed into its key departure banks. Korea could become a transit point for Scoot's medium-term plan for services to North America. Scoot could consider Vancouver, which SIA served thrice weekly from Seoul but suspended in 2009 due to economic conditions making the route unsustainable.

Jetstar delays plans to expand Singapore-based A330 fleet

The rate of expansion of Jetstar’s Singapore-based long-haul operation, meanwhile, remains uncertain. Jetstar previously said the Singapore A330 base would grow from two to four aircraft in 4Q2011. But while Jetstar moved a third A330 to Singapore in 4Q2011 to launch the Beijing service, the carrier has not yet moved the anticipated fourth A330 to Singapore. It is believed this expansion was delayed after Jetstar was unable to secure slots at a new Chinese destination. Jetstar tells CAPA that for now there is no date set for expanding the Singapore-based A330 fleet. The fourth A330 was to be the last long-haul expansion until the arrival of 787s.

Jetstar could potentially wait to expand the Singapore-based widebody fleet until 787 deliveries begin in late 2013. Jetstar has previously said it planned to begin operating 787s from Singapore in 2013. Jetstar tells CAPA that the carrier expects to receive three 787s in 2013 but says the group has not yet confirmed where these aircraft will be based.

Since establishing the Singapore A330 base in 2010, Jetstar has been working at moving these aircraft onto Singapore registry. For now all three aircraft remain under Jetstar’s Australia operating certificate although they are flown with Singapore-based crews. Jetstar tells CAPA there is still no date set for transitioning its A330 fleet to Jetstar Asia’s Singaporean operating certificate and that this is not a high priority as benefits are few.

Jetstar Asia has been primarily focused over the last two years at expanding in China. Greater China now accounts for one-third or nine of the 27 destinations Jetstar Group serves from Singapore (which includes seven mainland destinations, Hong Kong and Taipei).

See related article: Jetstar's new North Asia focus leaves room for Qantas Singapore expansion to Europe and India

The Jetstar Group currently accounts for about 7% of capacity (seats) at Changi, according to Innovata data. The Tiger Airways Group also currently accounts for about 7% of capacity at Changi (includes flights operated by partners Mandala and SEAir). The AirAsia Group currently accounts for about 8% of capacity at Changi (includes AirAsia Malaysia, Indonesia AirAsia and ThaiAirAsia). By year-end, once Scoot is operating a full four-aircraft schedule, its capacity share at Changi should reach 1%.

Launch of Scoot represents change of strategy for SIA

SIA’s decision to launch Scoot is seen partially as a response to Jetstar. While Jetstar’s Singapore-based long-haul operation is relatively small, it has already carried 500,000 passengers since launching in 2010 and is expected to expand significantly over the next few years. Jetstar’s decision two years ago to base widebodies in SIA’s home market clearly caught the attention of SIA, prompting it to reassess its previously conservative LCC strategy.

Unlike other major airline groups in the Asia-Pacific region, SIA initially decided not to take an active involvement in the LCC sector, acquiring only a minority stake in Tiger when the carrier was established. In hindsight this decision was probably a mistake as Tiger has struggled and could have benefitted over the years from a more active role, including management expertise, from SIA. It was only after the grounding of Tiger’s Australian subsidiary last year that SIA become more involved in Tiger, temporarily seconding one of its executives to the Tiger Airways Group CEO position.

See related article: Tiger faces challenging year as it looks to recover following losses in Australia and Singapore

With Scoot, SIA is fully involved with a 100% stake although the group has given the Scoot management team, led by former SIA VP Campbell Wilson, independence and freedom to pursue a drastically different corporate culture. SIA has high aspirations for Scoot (although it has refrained from publicly stating when it expects the new subsidiary expects to begin contributing profits) and is banking on the new brand ushering a new era of growth for the group.

See related article: SIA's long-haul low-cost subsidiary strategy to restore growth after a lost decade

SIA Group business model diversification

Changi has seen total passenger numbers increase by about 50% over the last five years, driven by the rapid expansion of Tiger, Jetstar and AirAsia. Over this time period traffic at SIA itself has been relatively flat.

Changi Airport and SIA annual passenger traffic: FY2006 to FY2012

With the launch of Scoot and the continued expansion of Singapore’s established LCC brands (albeit slower expansion than seen in recent years), LCCs will continue to drive traffic growth at Changi. This time, however, the SIA Group will be participating in that growth.

After several years of sitting still, SIA has made a bold move by launching Scoot. There is always a risk associated with launching a new carrier and there is some uncertainty Singapore’s relative small market will be able to support two long-haul low-cost operations. But it is a risk SIA, which is one of the world’s best funded airline groups, can afford to take and needs to take as it can no longer afford to sit still while the rest of the Asian aviation industry races by.

Appendix

CAPA's complete coverage of Scoot includes the following analysis articles, in chronological order:


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