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Singapore Airlines to enter the Australian market? Testing the waters

Singapore Airlines Chairman, Stephen Lee
Singapore Airlines Chairman, Stephen Lee

Singapore Airlines has quietly tested the environment in Australia to see what response it might expect if it established a locally based airline in its biggest foreign market. After failing to secure a position in China Eastern (fortunately for SIA, as it turns out), the Singapore-based airline is continually looking for ways of extending its market presence beyond the small island state’s own population.

But until now it has consistently rejected suggestions that it would set up locally in Australia under that country's liberal domestic establishment policy.

Now, former Singapore Airlines executive, and one of the airline's key strategic thinkers, Michael Tan, has gone public in Saturday's Sydney Morning Herald with some comments on why Australia should permit SIA onto the Pacific route. Nothing exceptional about that, nor any new arguments.

An Australian subsidiary for Singapore Airlines

But the sting was in the tail. After effectively concluding that SIA had given up on any short term hope of getting access under existing policy, Mr Tan suggested "(i)t may not be premature to consider the merit of setting up a Singapore Airlines-led, Australia-based international airline." As he observes, "Not only can such an airline fly from Australia to the US, it will have extensive opportunities in the growth markets between Australia and Asia including India, and South Africa."

"Premature" it certainly would not be. Indeed, SIA has missed a number of excellent opportunities to set up in Australia, going right back to when it was pipped by British Airways from buying into an about-to-be privatised Qantas in the mid-90s.

Michael Tan retired from Singapore Airlines just over four years ago, but in Singapore's collegiate atmosphere, he would be most unlikely to make public utterances on this issue without first consulting his former colleagues - and possibly the airline's major shareholders.

Whether the timing is right for such a move, as the world slips into recession, is another issue. As Mr Tan noted, "obviously, the present economic conditions are not conducive, although feasibility studies could be carried out to assess the market potential and operational viability." The carrier has in fact conducted at least one detailed feasibility study for this project and completing another one would not be a long job. As "Australia's second (international) airline" it knows the market as well as anyone.

Despite last week's announced cutbacks and possible redundancies, for an airline with Singapore's balance sheet, counter-cyclical entry could be a master stroke, as other airlines are beginning to struggle.

Invitation to investors?

And Mr Tan ended his think piece with what appeared to be a blatant invitation to investors to come forward and show their interest: "I doubt Singapore Airlines, given its reputation, and the right economic conditions, will have any difficulty attracting investors and partners in Australia and elsewhere."

Even if it was not an express invitation, it is certain to be read like that by private equity groups and other investors.

A 51% locally owned airline, with 49% SIA ownership, would be eligible for international designation; alternatively, SIA could set up a 100% foreign owned airline to operate purely on domestic routes. Either possibility (or both), from an airline with the substance of Singapore Airlines, would have to be taken very seriously.

Or just a hand grenade?

Singapore Airlines has little to lose now in its long-running battle to get onto the Pacific route. The current government green paper process was perhaps its last chance and the Australian Minister has made it clear that there will be no opening at this time.

But there are other agendas that could well be served by throwing this sort of suggestion into the market. In today's rapidly changing world, all sorts of forces are washing around. Now is a time for change and the eventual winners may well be those who are willing to take a few calculated risks.

It would certainly be a test of the Australian government's liberal resolve if SIA were seriously to seek to enter the domestic (and international) market at this time. With a fragile marketplace and demand slipping, neither Qantas nor Virgin Blue is likely to welcome a new competitor.

Indeed, even a substantial rumour of SIA's entry could tip Virgin Blue into turmoil. SIA is extremely unlikely to buy into the partially Branson-owned airline, despite suggestions in the past. Singapore Airlines has experienced a less than an enjoyable ride with the 49% of Virgin Atlantic it bought a few years back - an unrewarding holding that SIA is now trying hard to escape from.

Whether this threat of Australian entry would make Branson more willing to give Singapore a face saving way out of its Virgin Atlantic shareholding only the parties themselves will know. But it does have an attraction.

And if Branson were to withdraw from Virgin Blue - which would be a major step forward for that carrier - then it could well become a suitable partner for SIA.

Whatever the reasoning, Michael Tan's contribution to the debate can be sure to liven up what is already a pretty exciting marketplace. Our bet? - that, if a number of investors do show their hands, this will move forward. Whatever the original motivation.

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