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Singapore Inc primed for offshore aviation investment

(Singapore: 07 March 2007) Centre for Asia

Pacific Aviation predicts Singapore-based aviation interests will significantly

expand their offshore investments in coming years, according to a new Aviation

Outlook report for 2007 released today.

“Investment will occur on many fronts – from airports, to LCCs and full service carriers – in response to changing market dynamics and emerging opportunities”, said Richard Pinkham, the Centre for Asia Pacific Aviation’s senior analyst, based in Singapore.

“Geographic diversification is the key for the future of Singapore’s aviation businesses. With a home market of only 4.3 million, maturing growth rates and increasing competition for transfer traffic from other hubs within and outside the region, Singapore’s world-leading aviation sector knows that its focus must shift off the island for growth opportunities”, he said.

According to the Outlook report, Singapore Airlines is expected to resist calls in the short term to break its vertically integrated businesses, namely SATS and SIA Engineering, as it has already has enough cash on hand to pursue opportunities in airlines in high growth potential markets, of which China is the leading candidate.

SIA regional affiliate, SilkAir, is undergoing a leadership transition in the first quarter of 2007, but the incoming CEO is unlikely to change SilkAir’s long-term strategy of providing full-service network support for Singapore Airlines and other Star Alliance carriers.

Meanwhile, the Outlook report predicts an acceleration of aviation liberalisation by governments in 2007 – a positive development for Singapore’s LCC sector.

“The prospect of a momentous opening up of the Singapore-Kuala Lumpur route – provoked, significantly, by tourism interests – would have repercussions right around the region, as ASEAN States prepare to open their skies between capital cities in 2008. Until now considered more of a concept than a serious reality, ASEAN 2008 would take on genuine meaning”, said Mr Pinkham.

For Tiger Airways, 2007 will be spent firming up its Philippine base with South East Asian Airlines and establishing its highly anticipated Australian operation. Tiger’s Australian base is expected to be successful as the airline is well funded, has a sound business plan, excellent management, a track record and can integrate an Australian operation into its Asian network, providing flexibility for future capacity deployment.

Tiger has lower costs than any other airline in Australia, meaning it can sustainably offer low fares, and thereby provide Qantas, but particularly Virgin Blue, with a serious competitive threat in the lead-up to Christmas 2007”, said Mr Pinkham.

Fellow Singapore-based LCC Jetstar (formerly Jetstar Asia) has struggled and has made its bet on foresaking traditional LCC orthodoxy by downgrading aircraft utilisation rates to maximise connectivity with the international operations of Qantas and sister long-haul LCC Jetstar International. This cooperation should improve the carrier’s performance in 2007, according to the Outlook report.

Meanwhile, faced with traffic overflying its airport, the Government has adopted a tack of building its business using the vehicle of direct offshore investments. In a sense, it is in the early stages of building an airport system – much like Airport Authority Hong Kong (AAHK) is doing through its investments/management contracts in airports in the Pearl and Yangtze River deltas.

“But Changi’s airport business will have a wider geographical focus than AAHK’s, developing its holdings and operations portfolio in four regions - China, India, the Middle East and Russia. Behind this outward strategy is the reality that Changi’s traffic growth has slowed to a level suggesting maturity, even as the Civil Aviation Authority of Singapore has proactively undertaken efforts to attract and facilitate new service and new carrier entry, especially in high-growth short-haul markets”, said Mr Pinkham.

These findings from part of the Centre’s 181-page outlook report, available now at centreforaviation.com. This year’s report covers the Big Issues facing Asia Pacific aviation in 2007, including LCCs, liberalisation, restructuring, aircraft orders/deliveries, skills, funding, security, the environment and the economy.

The overall themes of ‘Outlook 2007: Dawn of a New Era’ include an impending “full frontal attack” on flag carriers commencing in 2007, and the continued unfolding of the influential LCC story in Asia.