Malaysia Airlines & Singapore Airlines: competitors, natural partners

Summary

• Malaysia Airlines and Singapore Airlines signed an MOU in late Jun-2019 aimed at stepping up ties between the two airline groups.
• Malaysia Airlines, Singapore Airlines and SilkAir now have a limited codeshare covering four routes from Singapore to Malaysia.
• Under the enhanced partnership, subsidiaries Scoot and Firefly are expected to be added, leading to another five Malaysia-Singapore codeshare routes for the two groups.
• The two groups are also considering codesharing on routes beyond their Kuala Lumpur and Singapore hubs and a tie-up between their loyalty programmes.
• The enhanced partnership is a logical step for both airline groups, given that new and expanded partnerships have become an important component of their wider strategies.

Malaysia Airlines and Singapore Airlines are long-standing partners

Malaysia Airlines and Singapore Airlines (SIA) forged a memorandum of understanding (MOU) on 27-Jun-2019 to increase cooperation significantly.

The two airlines have an intertwined history, having been created following the split of Malaysia Singapore Airlines (MSA) in 1972, but have since been fierce competitors, despite maintaining a limited partnership.

Malaysia Airlines, Singapore Airlines and SIA's full service regional subsidiary SilkAir are long-standing codeshare partners but only on four routes linking Malaysia and Singapore.

Malaysia Airlines currently places its code on SIA-operated flights from Singapore to Kuala Lumpur and SilkAir flights from Singapore to Kuala Lumpur, Kota Kinabalu and Penang. SIA and SilkAir allocate their code on Malaysia Airlines-operated flights from Singapore to Kuala Lumpur and Kuching.

The codeshare partnership was a strong revenue and profit generator (despite covering a limited number of routes) until 2008, when Malaysia and Singapore implemented open skies.

Malaysia Airlines and SIA enjoyed a duopoly on the core Singapore-Kuala Lumpur route - which was essentially a monopoly, considering their cooperation and joint shuttle service - until the market was liberalised.

LCCs have dramatically changed the competitive landscape

Until three LCCs were allowed to enter in 2008, Malaysia Airlines and SIA combined had a nearly 100% share of the very profitable Singapore-Kuala Lumpur market (there was a limited number of flights from foreign airlines such as Japan Airlines using fifth freedom rights).

AirAsia, Jetstar Asia and Tiger Airways all began serving Singapore-Kuala Lumpur in Feb-2008, initially operating a combined four daily flights but quickly expanding in the following months.

Malaysia Airlines and SIA responded to the new competition by downgauging some of their Singapore-Kuala Lumpur flights from widebody to narrowbody aircraft in order to maintain frequency and compete more effectively. As SIA is an all-widebody operator, several flights were transferred to SilkAir and Malaysia Airlines started codesharing with SilkAir.

Malaysia Airlines, SIA and SilkAir combined now have approximately a 45% share of capacity from Singapore Changi to Kuala Lumpur International Airport (KLIA). AirAsia has a 25% share, Jetstar Asia 10%, Malindo Air 8% and Scoot 7%. (Scoot completed a merger with Tigerair in 2017, with Scoot being the surviving brand, although ex-Tigerair A320s are still used on the Kuala Lumpur route.)

Malindo, a Malaysia-based affiliate of Indonesia's Lion Group, began competing on the Singapore-Kuala Lumpur route in late 2014. It is categorised as a full service airline but is a low fare competitor.

Foreign airlines with fifth freedom rights account for the remaining 5% of seat capacity (although a smaller share of passengers as their flights carry some through passengers). Air Mauritius and Ethiopian Airlines are currently the only fifth freedom competitors on Singapore-Kuala Lumpur, although over the years there have been several others.

Singapore Changi Airport-Kuala Lumpur International one-way seat capacity by airline: Sep-2011 to Sep-2019

Note: Tigerair merged with Scoot in 2017, resulting in Tigerair's Kuala Lumpur flights assuming the Scoot brand.
Source: CAPA - Centre for Aviation & OAG.

Kuala Lumpur-Singapore: a huge aviation market due to a lack of high speed rail

Although Malaysia Airlines-SIA-SilkAir have lost more than half the market to new competitors, mainly to LCCs (Malindo is an FSC but offers low fares), the market has more than doubled in size. LCCs successfully stimulated demand as fares plummeted, enticing passengers who previously travelled between the two cities by bus.

Kuala Lumpur and Singapore are only 350km apart. The two cities are connected by highways, but the bus journey takes at least five hours and often takes longer due to congestion at the border and in Kuala Lumpur.

Affordable flights are the most attractive option due to the lack of a high speed rail option, which had been planned for 2026 but was scrapped a year ago by the Malaysian government.

See related report: Kuala Lumpur-Singapore air route: HSR no longer a threat

Scoot and Firefly codeshares to help Malaysia Airlines and SIA compete

By beefing up their partnership, the Malaysia Airlines and SIA groups should be able to compete more effectively in the Singapore-Kuala Lumpur market. Their combined market share will also increase as Scoot and Firefly will be included in the newly enhanced partnership, contingent on government approvals.

Scoot codeshares with SIA and SilkAir and Firefly codeshares with Malaysia Airlines, but at the moment Scoot does not work with Malaysia Airlines and Firefly does not work with SIA.

Scoot operates three daily flights from Singapore Changi to KLIA and will push up the proportion of seat capacity on this route controlled by the partnership from 45% to 52%.

Firefly operates six daily flights from Singapore's secondary airport, Seletar to Kuala Lumpur Subang, providing an alternative option for travelling between the two cities, which is popular with some business passengers. Firefly began serving Seletar in Apr-2019 but operated from Changi to Subang from 2009 until late 2018.

Firefly has a 5% share of the total Singapore-Kuala Lumpur market (all airports), pushing up the proportion of capacity in the city pair controlled by a newly expanded Malaysia Airlines-SIA partnership to 55%. This includes a 20% share for Malaysia Airlines, 15% for SilkAir, 8% for SIA and 7% for Scoot; their shares of the Singapore-Kuala Lumpur city pair are slightly less than the Singapore Changi-KLIA route as the former also includes the Subang-Seletar route.

Firefly and SIA would benefit from SIA selling Firefly's Seletar service

A codeshare and frequent flyer tie-up with SIA should enable Firefly to attract more passengers to its new exclusive service at Seletar, which in turn could enable it to add flights.

Firefly had 10 daily flights at Changi (seven from Subang, two from Ipoh and one from Kuantan) before it had to suspend its operation at Changi, which no longer allows turboprops. There was a gap of nearly five months between Firefly's Changi suspension and its launch of Seletar due to an airspace dispute between Malaysia and Singapore, which has now been resolved.

See related report from Blue Swan: Seletar reopens to airlines and offers new alternative for the busy Singapore-Kuala Lumpur market

See earlier report from CAPA: Singapore Seletar Airport: new terminal offers niche alternative

In addition to mounting more Seletar-Subang frequencies, Firefly could potentially resume flights from Singapore to Kuantan and Ipoh. It could also potentially begin serving new destinations from Seletar such as Langkawi, Kota Bahru, Kuala Terengganu and Penang.

A partnership with SIA is particularly important for Firefly as it not likely it will have exclusive use of Seletar's new terminal for much longer. Malindo is keen to begin serving Seletar and has secured traffic rights for Seletar-Subang and Seletar-Ipoh but is still waiting for approvals from the Changi Airport Group, which manages Seletar.

Scoot codeshare improves Malaysia Airlines' position in Singapore-Malaysia market

Adding Scoot to the partnership will improve Malaysia Airlines' position on secondary routes from Singapore.

The Malaysia Airlines Group currently only links Singapore with one market other than Kuala Lumpur - Kuching - but previously had several links between Singapore and secondary Malaysian cities.

The existing SilkAir codeshare gives Malaysia Airlines access to the Singapore-Penang and Singapore-Kota Kinabalu routes. With a Scoot codeshare Malaysia Airlines gains access to another five routes from Singapore - Ipoh, Kota Bahru, Kuantan, Kuching and Langkawi. (Scoot also operates alongside SilkAir on the Penang route.)

AirAsia also serves six secondary destinations in Malaysia from Singapore - Ipoh, Kota Kinabalu, Kuching, Langkawi, Miri and Penang.

Secondary destinations in Malaysia are generally price sensitive leisure markets, making it difficult for Malaysia Airlines to compete without an LCC subsidiary. Cooperating with SIA's budget subsidiary, Scoot, is therefore a sensible option.

AirAsia is the market leader between Singapore and Malaysia

AirAsia is by far the largest LCC by capacity in the Singapore-Malaysia market - and is also the largest airline overall. AirAsia currently accounts for 59% of LCC seat capacity and 32% of total seat capacity between the two countries, according to CAPA and OAG data.

Scoot accounts for 25% of LCC seat capacity between Singapore and Malaysia and 13% of total seat capacity.

Jetstar, which only serves Penang and Kuala Lumpur, account for 16% of LCC seat capacity and 8% of total capacity.

Singapore-Malaysia LCC one-way capacity by airline: Sep-2011 to Sep-2019

Note: Tigerair merged with Scoot in 2017, resulting in Tigerair's Malaysia flights assuming the Scoot brand.
Source: CAPA - Centre for Aviation & OAG.

LCCs have grown from a base of zero in 2008 to accounting for 53% of Singapore-Malaysia seat capacity. However, the LCC penetration rate has been relatively stable for the past eight years, fluctuating between 50% and 55%.

Most of the LCC growth came within the first couple of years after the market opened up. Local traffic between Singapore and Malaysia jumped by 70% within the first few months after open skies, driven by low fare stimulation. The market has since continued to grow but the rate of growth has been relatively modest, and with a relatively even split between LCCs and FSCs.

Singapore-Malaysia seat capacity has grown by approximately 35% over the past eight years. LCCs and FSCs have both grown by nearly identical amounts (approximately 35%).

Singapore-Malaysia total weekly seat capacity by airline: Sep-2011 to Sep-2019

Source: CAPA - Centre for Aviation & OAG.

Beyond codeshares would also benefit most airline groups

Approximately 30% of Singapore-Malaysia traffic is sixth freedom, connecting beyond Kuala Lumpur and Singapore.

Sixth freedom traffic could grow even faster than local traffic as a result of the expanded Malaysia Airlines-SIA partnership, since the two airline groups aim to pursue beyond codeshares for the first time.

In theory, SIA should benefit more from beyond codeshares, given that it has a much stronger international network. SIA has 22 passenger destinations outside Asia Pacific, whereas Malaysia Airlines has only two (London and Jeddah).

Malaysia Airlines has only one international destination that the SIA Group does not serve, but it has several domestic destinations in Malaysia that are not served by any airline from Singapore.

Singapore-Malaysia is an important market for both airline groups

Pursuing an enhanced partnership is sensible for both airline groups, given the strategic importance of the respective markets.

Singapore is Malaysia's second largest international market after Indonesia, accounting for 14% of total international seat capacity. Malaysia is also Singapore's second largest international market after Indonesia, accounting for 12% of total international seat capacity.

KLIA is Singapore Changi's busiest route, slightly ahead of Jakarta Soekarno-Hatta (based on CAPA and OAG capacity data for the week commencing 1-Jul-2019).

Changi-KLIA is the second biggest international route in the world after Hong Kong-Taipei, based on current seat capacity.

Partnerships are an important component of both airlines' strategies

Both airline groups have been pursuing new and expanded partnerships as part of their own respective strategies. It is sensible that their partner next door is included in these strategies, considering the importance of the market next door - and the fact that competition in the market linking the two countries has been intensifying.

For Malaysia Airlines, the new SIA tie-up follows a JV with Japan Airlines that was forged in May-2019 and is now being reviewed by competition authorities.

In 2015 Malaysia Airlines also forged a partnership with Emirates, which was expected to be comprehensive but has so far failed to generate significant traffic. The Emirates partnership could benefit from refocusing and enhancing, or alternatively Malaysia Airlines could pursue closer cooperation with Etihad or Qatar Airways, which are also codeshare partners.

SIA's partnership strategy began back in 2011 and has already resulted in new or enhanced partnerships with more than 15 airlines, including JVs with Air New Zealand, Lufthansa and SAS. SIA currently has 39 codeshare partners and Malaysia Airlines has 27 codeshare partners (based on CAPA data; includes codeshares with subsidiaries).

Although the JVs are all with alliance partners, both airlines have not been afraid to pursue partnerships outside their respective alliances.

For example, Malaysia Airlines has partnerships with Ethiopian Airlines and Thai Airways from Star, as well as China Airlines, Garuda Indonesia, KLM, Korean Air and Xiamen Airlines from SkyTeam. SIA has codeshares with S7 Airlines from oneworld, as well as Air France and Garuda from SkyTeam.

SIA has been a member of Star since 2000 and Malaysia Airlines entered oneworld in 2013. SIA naturally codeshares with more members of its own alliance than Malaysia Airlines, given that it has been in a global alliance for much longer.

An SIA investment in Malaysia Airlines is unlikely at this stage

The Malaysia Airlines-Singapore Airlines tie-up has captured a lot of media attention because of the intertwined history of these two airlines and Malaysia Airlines' recent woes, which has prompted the Malaysian government to state that it is open to selling the ailing flag carrier.

The MOU will naturally start speculation that SIA could be the white knight strategic investor that Malaysia Airlines needs, and the one that the Malaysian government has been advocating. However, there are many challenges (political and commercial) that would need to be overcome to make that a serious option.

It is too early to say how deep this partnership will go - and therefore how much of an impact it will have.

As is always the case with codeshares, the devil is in the details, particularly the prorate agreements. Often codeshares do not amount to anything significant if the fares set in these agreements are high, and the way they are structured can also favour one airline over another.

However, there are a lot of potential areas of cooperation that would benefit both airline groups. There is little or no risk and potentially a lot to be gained.

The enhanced partnership should be a win-win

Consumers should benefit from more flight options when travelling between the two countries and frequent flier reciprocity.

Codeshares beyond Kuala Lumpur and Singapore would also benefit passengers, particularly business passengers and corporates (as these codeshares typically are about offering more frequency and better connections rather than lower fares).

For Malaysia Airlines, the partnership should enable it to compete more effectively in an extremely challenging environment - both in its home market and regionally within Asia Pacific. After the airline's shrinking and restructuring, the JV with JAL and the MOU with SIA are sensible moves.

For the larger and stronger SIA, the environment is also challenging, and stronger partnerships are necessary. A stronger partnership with Malaysia Airlines will enable the SIA Group to beef up its presence in Malaysia, an important strategic market, and to open up new areas of cooperation, such as MRO.

For both groups the partnership should particularly help contend with AirAsia and other fast growing regional competitors such as the Lion Group.

AirAsia has become the dominant airline group in Malaysia and the largest foreign airline group by a wide margin in Singapore. Lion is among the five largest airline group in Singapore and is the third biggest player in Malaysia after AirAsia and Malaysia Airlines.