23-Oct-2015 4:20 PM

Scoot’s new Guangzhou, Hangzhou and Jeddah routes illustrate evolution of SIA Group network strategy

Analysis

Medium/long haul low cost carrier Scoot is beginning a new phase as its role within the Singapore Airlines (SIA) Group evolves to include replacing sister carriers on routes to China, India and Saudi Arabia. The new role will see Scoot increase its reliance on feed from other SIA Group carriers, particularly for the Jeddah market.

Of Scoot's initial 14 destinations, six were launched as new destinations for the group while eight destinations were launched to supplement capacity provided by existing SIA Group brands. But as Scoot quickly expands its fleet from seven to 11 aircraft it is starting to also take over flights operated by other SIA Group carriers on at least three and likely four or five routes.

Scoot is launching Singapore-Hangzhou on 25-Oct-2015, taking over a route previously served by SIA full service regional subsidiary SilkAir. The SIA Group also recently announced that Scoot will take over from Jan-2016 one of two daily Singapore-Guangzhou flights operated by the group's short haul LCC subsidiary Tigerair and from May-2016 the three weekly flights to Jeddah operated by SIA mainline. Scoot is also expected to start serving existing SIA Group destinations in India in 1H2016.

Summary

Scoot, the medium/long haul low-cost carrier, is taking over routes from sister carriers within the Singapore Airlines (SIA) Group, including China, India, and Saudi Arabia.
Scoot is increasing its reliance on feed from other SIA Group carriers, particularly for the Jeddah market.
Scoot's fleet is expanding from seven to 11 aircraft, with the addition of nine Boeing 787s and the phasing out of its last Boeing 777-200.
Scoot plans to launch new routes to Hangzhou, Melbourne, Guangzhou, and Jeddah, and is also considering additional destinations in India and mainland China.
The transition to the 787 fleet has improved Scoot's efficiency and profitability, allowing for accelerated expansion.
Scoot's partnership with Tigerair is being enhanced to exploit potential synergies and improve network strategy.

Scoot's 787 fleet reaches nine aircraft as 777 charters continue

Scoot commenced operations in Jun-2012 and currently operates scheduled services to 14 destinations excluding Singapore. Scoot expanded slowly in the first three years, launching an initial six destinations in 2012 and another six destinations in 2013 but not a single new destinations in 2014.

Scoot began a new phase of accelerated growth in Jul-2015 with the launch of two new destinations after placing into service its seventh aircraft (its sixth 787). Scoot has just taken its ninth 787, giving it a fleet of six 375-seat 787-9s and three 335-seat 787-8s.

Scoot also still operates one 402-seat 777-200, but this aircraft is now only being used for charters. Five of the original six 777-200s have been phased out, with one aircraft transferred to Thailand-based joint venture start-up NokScoot and four aircraft being sold or parted out.

Scoot fleet summary: as of 23-Oct-2015

Aircraft	In Service	On Order
Total:	10	11
Boeing 777-200ER	1	0
Boeing 787-8	3	7
Boeing 787-9	6	4

Scoot now plans to phase out its last 777-200 at the end of Feb-2016, when its current contract for charters to Busan in South Korea expire. Scoot stopped using the 777 on scheduled flights in early Sep-2015 after its seventh 787 was delivered. But it decided to continue operating one 777 as charters to Busan are sufficiently lucrative to offset the additional costs of temporarily keeping a second aircraft type. The 777 charters now operate a couple of times per week using Scoot flight attendants but pilots from SIA.

Scoot will launch two routes over the next two weeks

Scoot's eighth 787 is being used to launch Hangzhou with four weekly flights on 25-Oct-2015. A fifth weekly frequency to Hangzhou will be added at the beginning of Dec-2015.

The ninth 787 will be placed into service by 1-Nov-2015, when Scoot plans to launch five weekly 787-8 flights to Melbourne.

Scoot's tenth 787 is slated to be delivered by the end of 2015 and enter service by 16-Jan-2016, when Scoot plans to launch a daily service to Guangzhou. The eleventh 787 is now slated to be delivered in Apr-2015 and support the 1-May-2015 launch of three weekly flights to Jeddah.

The eleventh 787 was originally slated to be delivered in Mar-2015, prior to the end of SIA Group's current fiscal year but has been delayed to the beginning of the fiscal year beginning 1-Apr-2016 (FY2017). Scoot has three more 787 deliveries scheduled for FY2017 followed by another three in FY2018 and the final three in FY2019.

Scoot to launch as yet unannounced India routes

Scoot plans to launch two and possibly three other new destinations using its initial 11 787s. There are opportunities to squeeze more utilisation out of these aircraft, particularly the eighth and eleventh aircraft as Hangzhou and Jeddah will not be daily services.

The eighth 787 will temporarily be used for additional peak period frequencies to existing destinations in Dec-2015 and Jan-2016 and to operate charters to Seoul in Feb-2016. But this aircraft is expected to be used to eventually support another scheduled route while the eleventh aircraft should be able to support another route from May-2015 as Jeddah is only being served with three weekly flights.

At least one and possibly two destinations in India are expected to be launched by May-2016. Scoot may also add one more destination in mainland China.

India and China will also likely be a focal point with the other three 787 deliveries slated for FY2017. Scoot has been looking at existing SIA Group destinations in India and is expected in some cases to replace existing flights and other cases operate new flights, providing supplemental capacity.

The SIA Group could potentially end up with services from all four of its airline brands in one or two Indian markets.

Bangalore and Chennai are already served by SIA, SilkAir and Tigerair. Scoot is also considering secondary cities in southern India which are currently served by one or two SIA Group carriers. Delhi and Mumbai are only served by SIA and are not expected to be served by Scoot due to bilateral constraints.

In China Scoot continues to look at a mix of new and existing destinations. Scoot was close to announcing new secondary destinations in China which are not currently served by the group before the opportunities in Guangzhou and Hangzhou became available.

The group initially decided in 2013 to give the Hangzhou route to SilkAir, which launched four weekly flights to Hangzhou in Jun-2014. SilkAir apparently struggled in the market, prompting a rethink at the group level.

Scoot initially focussed on new secondary destinations in China

Scoot's first four destinations in mainland China were all new to the group - Tianjin, Qingdao, Shenyang and Nanjing. The initial strategy with China was to use Scoot to open up new secondary destinations which were not viable with other SIA Group brands.

All of Scoot's initial Chinese destinations are at least five and a half hours from Singapore, making them out of range for a narrowbody LCC. These markets were also seen as too thin to support SIA mainline.

Shenyang is particularly thin and is currently only served with two weekly flights via Qingdao. Shenyang has struggled as only about 30% of passengers on the Singapore-Qingdao-Shenyang flights continue onto Shenyang, making the Qingdao-Shenyang sector highly unprofitable as Scoot is unable to pick up local domestic passengers.

Qingdao, Tianjin and particularly Nanjing have been much more successful markets for Scoot. SIA previously served Nanjing but struggled due primarily to low yields and a lack of premium demand.

SIA dropped Nanjing in Mar-2010 and the market was not served by any SIA Group carrier for over three years until Scoot launched Nanjing in Jun-2013 with four weekly flights. Scoot is adding a fifth weekly flight to Nanjing in early Nov-2015 and a sixth weekly frequency in early Jan-2016.

While the additional flights for now are only scheduled to operate through Mar-2016, Nanjing has been one of Scoot's most successful markets to date and Singapore-Nanjing has proven to be an ideal route for a medium haul LCC.

The Nanjing-Singapore market particularly sees strong demand from Chinese workers living in Singapore that are from the Nanjing area.

Scoot's ability to thrive in a market where SIA previously failed gave the group confidence that it can use Scoot on existing routes where SIA or SilkAir have struggled. Hangzhou is the first example of a route Scoot has taken over from one of its full-service sister carriers and Jeddah is for now slated to be the second such route but could be leapfrogged by another not yet announced route.

For Jeddah Scoot will need to rely heavily on feed from other SIA Group carriers

Hangzhou and Jeddah will be important tests for Scoot as it will need to successfully take over the network passengers these destinations provided to the group. SIA/SilkAir only began selling Scoot-operated flights in Jul-2015. Previously Scoot only had a one-way codeshare with SIA and SilkAir covering select SIA and SilkAir operated flights to regional destinations.

Scoot is confident it has competitive enough pro rates with SIA and SilkAir to be competitive in the key connecting markets for Jeddah and Hangzhou. This is particularly important for Jeddah as the Singapore-Jeddah route relies very heavily on connecting passengers.

Indonesia, Malaysia and the Philippines are now the main source markets for SIA's Jeddah service. Scoot has timed its Jeddah service to make sure it offers connections in the key source markets. This includes secondary cities in Indonesia, Malaysia and the Philippines which do not have non-stop services to Jeddah and are generally served by SilkAir. In some cases Tigerair also serves these markets and will provide some of the Jeddah feed for Scoot.

Scoot will offer passengers connecting from Indonesia, Malaysia and the Philippines to Jeddah a faster overall transit time as SIA serves Jeddah via Dubai. SIA dropped non-stops to Jeddah in late Sep-2014. At the same time it dropped services to Riyadh, which had been served via Jeddah.

Scoot will also increase the group's capacity to Jeddah as it will use 315-seat 787-8s while SIA deploys 285-seat A330-300s. Only a portion of the seats on the current A330 flights are available for Singapore-Jeddah passengers as some Singapore originating passengers disembark in Dubai.

Singapore-Jeddah will in theory experience an 18% increase in capacity from the SIA Group as Scoot takes over the route but in reality the increase is much bigger as the Dubai stop will be eliminated. In the Singapore-Hangzhou market the SIA Group is increasing seat capacity by over 150% as Scoot takes over from SilkAir, which has been operating fewer frequencies with smaller aircraft.

SIA Group route changes

Scoot to compete against Jetstar to Hangzhou

SIA Group is also increasing its capacity to Guangzhou by 17% as Scoot takes over one of Tigerair's two daily frequencies. SIA will continue to operate two daily mainline flights to Guangzhou using 285-seat A330s.

When excluding SIA mainline, the group's LCC capacity on Singapore-Guangzhou is increasing by 43% as Scoot enters. Singapore-Guangzhou is a large market that is also served by China Southern with three daily narrowbody flights. Jetstar Asia dropped Singapore-Guangzhou at the beginning of 2014, leaving Tigerair as the only LCC on the route.

Jetstar Asia continues to serve Singapore-Hangzhou with four weekly A320 flights but will likely review its position on the five-hour route as Scoot's entry inevitably impacts yields. Xiamen Airlines also operates one daily flight on Singapore-Hangzhou using 737-800s and with the withdrawal of SilkAir will be the only full service carrier on the pairing.

Singapore-Hangzhou capacity by carrier (one-way seats per week): 19-Sep-2011 to 3-Apr-2016

Saudi is currently the only carrier operating non-stops from Singapore to Jeddah. The Saudi Arabian flag carrier currently operates four weekly flights on the route.

SIA has so far used Scoot to supplement - and not replace - other brands

Jeddah will almost certainly become the first Scoot market that sees a majority of passengers connect beyond Singapore. This makes Jeddah an important test case as Scoot evolves to become more of a network carrier.

A network model was always the intention for Scoot but through the first three years Scoot has relied primarily on point to point passengers in part because it did not have a strong partnership with Tigerair. SIA's initial strategy for Scoot also did not envision a relationship between the group's full-service and low-cost brands.

While in mainland China the initial network strategy was to limit Scoot to markets not served by SIA or SilkAir for other markets Scoot was allowed to operate alongside its full-service sister carriers with careful segmentation of the two products. Of Scoot's 10 current non-Chinese destinations eight are also served by SIA - Bangkok, Hong Kong, Osaka Kansai, Perth, Seoul Incheon, Sydney, Taipei and Tokyo Narita.

Gold Coast in Australia and Kaohsiung in Taiwan have so far been the only Scoot destination outside mainland China that were not already served by the SIA Group. While SIA has never served the Gold Coast it operates three daily flights to nearby Brisbane. SilkAir dropped Kaohsiung in 2009.

Scoot's routes and frequency

Route	Launch date	Initial Frequency	Nov-2015 frequency
Singapore-Sydney	4-Jun-2012	Daily	Daily
Singapore-Gold Coast	12-Jun-2012	5x weekly	4x to 5xweekly
Singapore-Bangkok	05-Jul-2012	Daily	10x weekly
Singapore-Tianjin	23-Aug-2012	3x weekly	3x weekly
Singapore-Taipei-Tokyo Narita	18-Sep-2012	Daily	Daily
Singapore-Qingdao-Shenyang*	11-Jan-2013	4x weekly	4x weekly
Singapore-Taipei-Seoul	29-May-2013	3x weekly	3x weekly
Singapore-Nanjing	3-Jun-2013	4x weekly	5x weekly
Singapore-Hong Kong	15-Nov-2013	Daily	Daily
Singapore-Perth	12-Dec-2013	5x weekly	Daily
Singapore-Bangkok-Osaka	8-Jul-2015	3x weekly	3x weekly
Singapore-Kaohsiung-Osaka	9-Jul-2015	3x weekly	3x weekly
Singapore-Hangzhou	25-Oct-2015	4x weekly	4x weekly
Singapore-Melbourne	1-Nov-2015	5x weekly	5x weekly
Singapore-Guangzhou	16-Jan-2016	Daily	N/A
Singapore-Jeddah	1-May-2016	3x weekly	N/A

Melbourne is also served by SIA and was first announced as Scoot's fourth Australian destination in Dec-2014, over 10 months prior to the 1-Nov-2015 launch date. Melbourne was always part of Scoot's initial network plan but was pushed back as Scoot decided to focus first on Sydney, Gold Coast and Perth.

On the overlapping routes the group has been careful to differentiate the Scoot product with in some cases (such as Hong Kong and Sydney) intentionally inconvenient flight times. In other cases (such as Osaka, Seoul and Tokyo) the key difference is Scoot is only offering a one-stop option from Singapore while SIA provides non-stops.

About half of Scoot's passengers on the Singapore-Taipei-Seoul route embark or disembark in Taipei. On the Singapore-Taipei-Tokyo route the portion of local traffic on the Taipei-Tokyo sector is much higher - approximately 90%. This is partially a reflection of how underserved the Singapore-Seoul market is due to bilateral constraints while Singapore-Tokyo is more competitive.

On the newer Singapore-Bangkok-Osaka and Singapore-Kaohsiung-Osaka routes about 20% of passengers are heading between Singapore and Osaka.

Network strategy adjustments improve Scoot's outlook along with 787s and an enhanced Tigerair partnership

Fifth freedom routes have enabled Scoot to exploit opportunities in markets outside Singapore, reducing the risk of cannibalisation of other SIA Group carriers. Scoot has particularly been successful in Taiwan, where it now the second largest LCC after Tigerair Taiwan, and continues to evaluate new potential fifth freedom routes.

But in its latest phase of expansion the focus has shifted to taking over routes from Singapore that have been operated by other SIA Group carriers. This is a sensible and rational approach to network development as the SIA Group multi-brand model continues to evolve.

SIA Group brand matrix

As CAPA previously highlighted, 2015 has marked a new chapter in Scoot's history with the transition to 787s, which has generated much needed efficiency improvements and opened up an opportunity to accelerate expansion. With an all-787 fleet Scoot has the ability to be in the black for the first time as its break-even load factor was generally above 100% with the 777.

See related reports:

The recent evolution of the network strategy to include the takeover of routes from sister carriers mark yet another important strategic turning point for Scoot.

A closer relationship with Tigerair is another major strategic adjustment that was needed for Scoot to grow and have the opportunity to become profitable. While Scoot and Tigerair began operating a joint venture with anti-trust immunity on two overlapping routes (Bangkok and Hong Kong) in early 2015 the two carriers have only started to scratch the surface in exploiting potential synergies. The still evolving Scoot-Tigerair partnership and joint network strategy will be analysed in a separate upcoming report.

Background information

CAPA has analysed Scoot extensively since its establishment in 2011 and launch in 2012. Here is the full list of reports on Scoot in chronological order.