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Scoot adds Hong Kong, making it the third Singapore Airlines brand in HK as it targets segmentation


Sceptics may think Scoot's addition of a five-weekly Singapore-Hong Kong service on 15-Nov-2013 creates overlap with sister carrier Singapore Airlines and SIA Group affiliate Tigerair, which also serve the Singapore-Hong Kong market. But Scoot's route, which increases to daily in Dec-2013, is being carefully segmented.

The SIA Group, unlike others, has proclaimed low-cost carriers have a future and so the group must have full-service and low-cost brands. While Scoot's schedule partially overlaps with SIA, the product difference between the full service operator and the high density longhaul LCC subsidiary significantly reduces cannibalisation.

SIA also targets long-haul connecting traffic. Meanwhile Scoot's Hong Kong service departs and arrives in the early morning, avoiding overlap with Tigerair's predominantly afternoon and evening schedule. Scoot is particularly bullish on the overnight arrival into Hong Kong allowing for many connections in Singapore with Tigerair, with whom Scoot interlines.

Scoot to add a sixth 777

The new route is made possible by Scoot taking a sixth 777-200, its last aircraft before 787 deliveries commence in Nov-2014. Scoot previously was only planning to maintain its 777 fleet at five aircraft until it transitions to the 787.

The additional aircraft will also allow for a new medium/long-haul flight as well. This destination could be Perth as Scoot partially looks to target the leisure traffic Qantas gave up when it ended Perth-Hong Kong flights.

Scoot in the future could also operate  fifth-freedom flights from Hong Kong to North Asia, as it does with Taipei, which is linked with Tokyo Narita and Seoul. There is room in the Singapore-Hong Kong bilateral for some fifth-freedom services.

Hong Kong marks Scoot's 12th destination and eighth country/territory in its first 18 months. And while the route may be large, it will be one of Scoot's largest challenges yet as it seeks to break Cathay Pacific's strong grip and market tactics. But Scoot has an advantage as CEO Campbell Wilson was previously SIA's GM of Hong Kong.

Scoot brings new timings to SIA Group's presence in Hong Kong

At first blush, the prospect of Hong Kong seeing service from three SIA Group airlines – Scoot, SIA and Tigerair – may seem redundant. But SIA is segmenting the low-cost and full-service markets by way of product differences as well as SIA's more long-haul focus.

It is true Scoot and Tigerair have some overlap. While Scoot is focused on the medium/long-haul market, Hong Kong is the third route (after Bangkok and Taipei) that Scoot and Tigerair operate side by side. In contrast AirAsia and AirAsia X have much stronger segmentation with the two not operating any overlapping routes.

But Scoot is seeking its own opportunities. Its brand, albeit young, is arguably stronger than Tigerair, which is trying to shake its earlier poor and cheap perception. And with a widebody operation, Scoot can deliver lower unit costs than A320-operator Tigerair.

Scoot is also wholly-owned by SIA whereas SIA only owns about a third of Tigerair. If SIA were to re-do its low-cost strategy, it probably would not have two LCC brands. (Although it could have considered two different ownership models, as AirAsia and AirAsia X have.) For Hong Kong, Scoot is carving a niche away from Tigerair.

Its 05:25 arrival is significantly earlier than Tigerair's first arrival of the day at 10:05. Scoot's 06:50 departure is likewise earlier than Tigerair's first Hong Kong departure at 10:50.

And while the low-cost market is different from full-service, Scoot's morning arrival into Hong Kong is much earlier than SIA's first arrival (11:20). SIA overnights an aircraft at Hong Kong, which adds cost but enables it to have an 8:00 departure from Hong Kong to feed its network.

Hong Kong arrival and departure times for SIA Group: 18-Nov-2013 to 24-Nov-2013

Scoot's traffic is predominantly point-to-point. It expects the leisure market to like its flights, which maximise time at destinations while minimising hotel costs.

While a nighttime flight of only three or four hours is not ideal for the business market, Scoot's focus is on those who have more time than money. Scoot is looking to stimulate new traffic between the destinations. Eating and shopping are popular pastimes in each destination. The overnight flight also allows Scoot to keep high utilisation rates, currently about 14-15 hours.

Scoot also sees connecting traffic. While exact statistics are not disclosed, CEO Campbell Wilson told Bloomberg a "double digit" percentage of traffic directly connects (on Scoot, Tigerair, SIA or SilkAir) while another "double digit" percentage of traffic makes a self-connection. Tigerair has also not disclosed how many passengers it receives from Scoot since the two carriers began interlining in early 2013. But Tigerair Group CEO Koay Peng Yen said during the group's 2Q2013 results call that the figure is very small and that Tigerair is seeing a much larger number of passengers connecting between flights operated by Tigerair Singapore, Tigerair Mandala and Tigerair Philippines.

Scoot's flight departs Singapore at 1:30am, allowing for ample connection times. That includes Scoot's Australia services, but Scoot expects the largest number of connections to come from Tigerair.

Tigerair has a large Southeast and South Asian market although most of its South Asian flights are overnight, arriving Singapore in the early morning. Hong Kong has been starved of affordable leisure travel options given the low LCC penetration rate, in the single digits. Mr Wilson expects 10-15% of traffic on its Hong Kong route to be connecting, either directly or on a self-connection.

Bangkok and Taipei are also served by three SIA brands

Hong Kong is the third destination after Bangkok and Taipei where Scoot will overlap with both Tigerair and SIA. In all other markets there are no more than two brands, either SIA and Tigerair, or SIA and Scoot, or SilkAir and Tigerair. Hong Kong is also the third route it will operate alongside Tigerair on.

The first overlapping route between the three brands was Singapore-Bangkok. There is less segmentation as the large volume of capacity makes it difficult to avoid overlap. Indeed, Scoot and Tigerair have a service that departs Bangkok at the same time: 20:05.

Bangkok was added before the Scoot-Tigerair cooperation. Bangkok was necessary for Scoot as it allowed it to offer another destination in Australia besides Singapore for sale. Scoot's first two routes were both in Australia, Sydney and Gold Coast.

Bangkok also allowed Scoot to improve utilisation as there was enough slack in its launch fleet to include one more route but only a short-haul one. Scoot maintains Bangkok service (once daily compared to multiple flights from Tigerair) given the volume of traffic and the route's short distance allowing for efficient aircraft utilisation, reducing unit costs.

See related reports:

Bangkok arrival and departure times for SIA Group: 16-Sep-2013 to 22-Sep-2013

On Singapore-Taipei, the second overlapping route for Scoot and Tigerair, there is clearer scheduling segmentation than in Bangkok. Scoot  operates 10 weekly flights from Singapore to Taipei, with seven continuing to Tokyo Narita and three to Seoul Incheon. Some Singapore-Taipei traffic continues onto these destinations. Scoot also has local pick-up rights, taking advantage of the local market's lack of LCC options. 

Taipei arrival and departure times for SIA Group: 16-Sep-2013 to 22-Sep-2013

Scoot considering beyond services from Hong Kong – but not soon

Singapore has beyond traffic rights from Hong Kong that Scoot is considering using in the future. But this is likely some time away.

The sixth 777-200 Scoot is taking to launch Singapore-Hong Kong will be its last aircraft until the first of 20 787s start arriving from Nov-2014. The 787s will eventually replace the 777-200s. Scoot will have to weigh the prospects of beyond traffic from Hong Kong versus new routes or additional frequencies from Singapore.

There are a number of attractive Chinese points that are currently not viable because they are too small (but will grow in coming years) where Scoot's 777s bring too much capacity or the airport is not capable of handling a heavy aircraft like the 777-200.

Mainland China will likely be Scoot's largest market in the future. Scoot serves four points in mainland China: Nanjing, Shenyang, Tianjin, Qingdao. But all of these are served less than daily. As Scoot is targeting points new to the SIA group or served differently (such as through Taipei, in the case of Seoul and Tokyo), China holds greater potential due to landmass. While Japan also has secondary cities, the more compact geography means catchment area will be blurred whereas secondary Chinese cities are some distance away from first-tier cities.

Scoot's largest country/territory is Taiwan due to the fifth-freedom services from Taipei to Seoul and Tokyo, each thanks to the prevailing open skies agreements. Australia is the second-largest and mainland China third.

Scoot international capacity seat capacity by country/territory: 16-Sep-2013 to 22-Sep-2013

Scoot will also have to evaluate how the competitive landscape in Hong Kong changes. Hong Kong in Oct-2013 will gain its first LCC as Hong Kong Express adopts the LCC model.

Jetstar Hong Kong wishes to launch operations. Taiwan in contrast does not yet have a LCC although China Airlines is studying the concept. LCC development in Hong Kong, combined with rapidly decreasing slots at Hong Kong airport, could make Taiwan more attractive.

Singapore-Hong Kong is world's seventh largest international route

Singapore-Hong Kong will be the largest route Scoot will enter. It is the world's seventh largest ranked on seat capacity, compared with Singapore-Bangkok at ninth.

Five airlines ply the Singapore-Hong Kong route. This includes each party's full-service carriers (Cathay Pacific and Singapore Airlines), two LCCs from Singapore (Jetstar Asia and Tigerair) and United.

United operates the service as a tag from its services from the US. United cannot serve Singapore non-stop from the US. The carrier has a single daily flight, limiting its pickup traffic although it does have the rights. United is often the cheapest option on the route and sees local traffic given by consolidators. This traffic is mainly in United's economy cabin whereas the premium cabins are passengers coming from the US. The needs of United's premium passengers dictate not only United operate Hong Kong-Singapore but that it do so with a 777-200, which features a premium product despite the aircraft being over-kill on the route.

United down-gauged the Hong Kong-Singapore connection in late 2011 from a 747 a 737 but about six months later decided to go with a 777 in response to customer feedback. United continues to operate a 737 from Hong Kong to Ho Chi Minh, which gives it only enough capacity to carry passengers coming off US flights although its pick-up rights in Hong Kong allow connections to both Ho Chi Minh and Singapore.

See related report: US carriers shrinking in United States-Southeast Asia market

United sees its own niche tied more to the US market than to Asia. The LCCs are focussed on point-to-point traffic while Cathay and SIA are poaching each other's base for sixth-freedom traffic (as well as handsomely profitable local premium traffic between Asia's financial hubs).

Singapore to Hong Kong capacity by carrier (seats per week, one way): 19-Sep-2011 to 9-Mar-2014

Hong Kong Airlines tried the route and exited as its A330s provided too much capacity over limited frequencies. The legend in the above graph shows cargo operators but no capacity is expressed in the graph as these are freight options.

Freight will not be insignificant for Scoot. It is not atypical for Scoot to see 15-20 tons of cargo per flight, which offsets passenger unit costs. Scoot's belly space is outsourced entirely to SIA Cargo. Hong Kong being at the doorstep of the world's manufacturing centre should bode well for Scoot's cargo on Hong Kong services.

Scoot has the Singapore market but will have to crack Cathay's grip on HK

Scoot is confident the route will be successful from the Singapore end, but has its work cut out on the Hong Kong side. Singapore has a healthy online travel market whereas Hong Kong is dependent on a handful of consolidators who, due to lack of competition laws, have a cosy relationship with each other.

Scoot will also go up against Cathay Pacific, especially as Scoot overlaps with some of Cathay's services. Despite Scoot targeting the low-cost segment and Cathay the full-service one, Cathay has not taken kindly to the entrance of a competitor, especially not one wholly owned by SIA.

Even before Scoot's formal announcement Cathay started aggressive pricing tactics by giving extremely favourable –  even unprofitable – deals to consolidators, who it has a tight grip on. This is not unusual; Cathay has used its grip on the market to fight off against competitors, including LCCs and Hong Kong Airlines. By persuading consolidators to either not sell competitors or give preference to Cathay on overlapping routes, Cathay gives consolidators favourable deals on other routes.

The Hong Kong side holds more potential. Hong Kong's population is larger than Singapore and Hong Kong also has the tremendous catchment area of the Pearl River Delta, accessible via ferries and ground transport, which Scoot will surely seek to work with.

Scoot will have pushback. Mr Wilson was GM Hong Kong for SIA a few years prior to joining Scoot. He maintains his relationships and stature with the local market. This is besides the gradual trend of the Hong Kong market slowly moving towards online bookings. To promote web affiliation, Scoot is offering a promotion where the more people who "Like" its Facebook page, the lower the price will be of initial Hong Kong-Singapore fares available directly at Scoot's website.

Scoot has embraced indirect distribution, as Mr Wilson told CAPA's recent LCCs and New Age Airlines conference in Seoul. With 402 seats to fill on its 777-200s, Scoot has to work also with off-line distributors. "You have to be pragmatic," Mr Wilson explained. In some markets, like Japan, it is more cost effective to market through the trade as local marketing is expensive. In China, groups provide assurance to first-time travellers and provide assistance securing visas. Groups are sometimes the only way Chinese can visit certain locations. 

Mr Wilson says he is also interested in working with China's expanding high-speed railway network. While it has been in existence for a few years, only recently have airlines have been able to start partnerships with HSR. But these are so far limited and confined to Chinese carriers. Mr Wilson sees benefit enlarging Scoot's catchment area via high-speed rail.

Scoot could link Hong Kong with Perth, where Qantas has withdrawn

Scoot's sixth 777-200, used to launch Hong Kong, will also provide room for another medium/long-haul route. While there has been no formal announcement, the industry expects this to be Perth-Singapore.

Tigerair and SIA operate on Perth-Singapore, but Perth has seen an exodus of international capacity after Qantas withdrew earlier this year from the Perth-Hong Kong market and decreased Perth-Singapore services from two to one daily frequency. Scoot's opportunity would be to backfill the capacity, primarily in the leisure segment but also some business traffic, which it sees in moderation.

Connections in Singapore between eastern Australia and Hong Kong are not efficient given the backtracking involved, but Hong Kong to the west coast's Perth via Singapore is relatively efficient. Perth sees less Asian full-service capacity than Melbourne or Sydney, creating more room for Scoot.

This would be in addition to traffic Scoot could stimulate on either end, as well as connections. Singapore-Perth is a large local market as Perth has a sizeable Singaporean community and a large number of Singaporeans invest and have second homes in the Perth region.

Depending on timings, Scoot could partially overlap with Tigerair on Singapore-Perth but also facilitate new connecting opportunities. One of SIA's directives to Scoot is to capture traffic SIA has lost.

Qantas' Perth-Southeast Asia capacity has gone from 4,000 weekly seats in 2011/2012 to 2,000 by the end of 2013. Capacity additions from others (notably SIA) have seen its share of the market decrease from 13% to 5%.

Perth to Southeast Asia capacity by carrier: (seats per week, one way): 19-Sep-2011 to 9-Mar-2014

Qantas' Perth-Northeast Asia capacity has gone from 900 weekly seats in 2011/2012 to zero in mid-2013. Qantas has given up its once 20% hold of the market. The non-stop Perth-Northeast Asia is now only served by Cathay Pacific and China Southern.

Perth to Northeast Asia capacity by carrier (seats per week, one way): 19-Sep-2011 to 9-Mar-2014

Jetstar Hong Kong would target morning departures to Singapore

Scoot's arrival into Hong Kong pre-empts a possible move from proposed JV Jetstar Hong Kong, which still awaits permission to launch.

Qantas has said Jetstar Hong Kong will enable frequency growth. One example is Hong Kong-Singapore: as Jetstar Asia does not want to overnight an aircraft in Hong Kong it cannot have an early morning service from Hong Kong as the aircraft must first arrive from Singapore. A Hong Kong based operation would allow an early morning departure from Hong Kong, similar to what Scoot will offer.

Singapore based Jetstar Asia could have replicated Scoot's forthcoming move to have an overnight service to Hong Kong and then morning departure, but Jetstar Asia has not pursued this schedule timing, despite doing so in some mainland Chinese destinations.

Scoot keeps the momentum going while sticking to its core strategy

Scoot's Hong Kong service presents genuine opportunities the SIA group cannot currently target. Scoot will bring greater point-to-point options as well as some feed to Tigerair, which is once again rapidly expanding in Singapore as its affiliates in other markets stumble.

But Scoot's move could also be seen as pre-emptive. Although Singapore-Hong Kong is a large market already, Scoot will bring new options in terms of fares and schedules.

Scoot will also establish at an early stage of LCC development in the Hong Kong-Southeast Asia market.

Jetstar Hong Kong is still having to follow a tortuous regulatory process before it can mount operations, while HNA's LCC model Hong Kong Express has yet to prove itself a capable low cost player. Indeed, Cathay's support of Hong Kong Express, while opposing Jetstar, perhaps reflects its belief that Hong Kong Express will present less of a challenge.

Scoot however has been a formidable operator. It is a sharp departure from SIA's legacy status quo. Its growth has been diverse and rapid. It makes no apologies for still being in its start-up phase with overall profits yet to come.

The Hong Kong announcement – with another to come – maintains its expansion momentum, critical for a start-up carrier, especially one wanting to maximise direct website bookings. Scoot however will have to be creative in remaining in the limelight as it does not plan to take more aircraft or launch routes before the end of 2014. Scoot recently announced a no-kids zone on its aircraft, a story that was picked up in countries far from any of its markets. So Scoot has demonstrated the ability to maintain publicity in areas other than capacity additions.

Partnerships may represent the next area of attention. Scoot has interline arrangements with SIA (one way), SilkAir and Tigerair. While these are all SIA group carriers (wholly or partially owned), Scoot welcomes other partners.

See related reports:

Mr Wilson says Scoot is ready to sign off on deals with full service airlines, but the legacy nature of those carriers means they take longer to complete such arrangements. Forthcoming announcements in this area will have the dual benefit of bringing not just publicity but also valuable traffic.

That traffic, along with 787s replacing Scoot's 777-200s, should usher in the prospect of sustainable profitability. Then Scoot will be able to boast of being not only innovative and lean but also profitable.

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