SIA fine-tunes group strategy to tackle big new challenges

Summary

• SIA is streamlining its multi-model group structure
• LCC Scoot takes on an increasing role in the group's strategy
• New airline partnerships are also part of SIA's plans
• Rapid fleet refresh is making new routes viable
• Changi hub represents an important competitive advantage

Near-term and strategic challenges abound for SIA

More recent headaches have arisen that are complicating SIA's structural and fleet changes. The grounding and delays of Boeing 737 MAXs have disrupted growth plans and the transfer of aircraft between group entities. And while SIA is still financially healthy, its profits have been under pressure from the same market forces that are hurting other Asian carriers - most recently the coronavirus outbreak.

SIA believes it can best compete in its markets by having different business models under its group umbrella, an approach also followed by major Asia-Pacific carriers such as Qantas and All Nippon Airways (ANA). In addition to the parent airline, SIA has SilkAir as a full-service narrowbody operator-although this brand will soon disappear-and Scoot as an LCC.

SIA has made major changes to the group's structure

The group has been fine-tuning and streamlining its structure, and an important development is the integration of SilkAir into the parent Singapore Airlines, a little like Cathay Pacific did with Dragonair, now Cathay Dragon. This process is due to continue this year, when the last of the SilkAir routes will be transferred to either the full-service parent or Scoot. SIA will then have two major entities-a full-service operation and an LCC. Scoot completed its merger with SIA subsidiary Tigerair in 2017, consolidating the LCC units.

A major part of the group reshuffle has been deciding which routes are best suited to full-service or LCC business models. SIA determined that many of the full-service routes-particularly those operated by SilkAir-would be more profitably served by Scoot. A handful of Scoot routes have also been shifted back to the full-service carrier.

In parallel with the route transfers, SilkAir was due to send 14 of its Boeing 737-800s to Scoot. However, the MAX groundings changed this plan, and the 737-800s have been retained in the full-service operation. Gaining a slew of new routes without the expected additional aircraft has caused operational challenges for Scoot, said Stephen Barnes, SIA's senior vice president of finance, during the group's half-year analyst briefing.

Scoot represents a vital plank in SIA strategy

Scoot, which commenced operations in 2012, has an important - and increasing - role in the group's long-term strategy. The LCC's fleet has grown to 20 Boeing 787s, 26 Airbus A320s and two A320neos, allowing it to serve both long-haul and short-haul routes.

Scoot now accounts for 20% of the group's capacity as measured in available seat-kilometres and almost 30% of its passenger enplanements. Having the LCC in its portfolio means the SIA group can serve more destinations that would otherwise not be viable, SIA CEO Goh Choon Phong told analysts. For example, Scoot operates about 70% of the group's routes in the crucial China market.

Partly due to the change in the 737 plans, Scoot only grew its capacity by a relatively moderate 4.5% in the nine months through Dec-2019 - compared to double-digit growth rates in previous years. However, Scoot's expansion is likely to pick up pace again, as the carrier has more than 45 A320neo and A321neo aircraft remaining on order.

Subsidiary carriers are hurting group profits

While the LCC growth is a long-term bet, in the nearer term this part of the business is proving to be a drag on profits. The group managed to increase its net profit to SGD520 million (USD372 million) for the nine months through 31-Dec-2019, the end of its fiscal third quarter. However, this was mainly due to the healthy performance of the parent airline.

The SilkAir subsidiary recorded an operating loss of SGD12 million for the period, and Scoot dipped to a SGD73 million loss. Both were worse results than the previous year. While SilkAir is absorbed into the parent carrier, SIA will expect the Scoot unit to turn around its losses and justify the group's investment. In particular, the long-haul LCC operations will need to prove they can be financially successful. Other carriers are also pursuing the long-haul LCC concept, but juggling the interests and roles of the dual brand model is a skill that not all groups can master.

Mr Goh admits Scoot is experiencing "transitional issues." He notes the carrier is faced with the need to build traffic and market presence on the routes it has taken over. Scoot has also been dealing with continuing operational challenges as some of its 787s have had to be grounded due to problems with Rolls-Royce Trent 1000 engines. The LCC arm has been particularly hard hit by the recent reduction in China traffic.

As part of a reorganisation of SIA senior staff, Campbell Wilson, SIA's Senior Vice President Sales and Marketing, will take on the role of Scoot CEO. Mr Wilson was the SIA-owned longhaul startup's first CEO and now brings his LCC and marketing credentials to take on the broader role of running both the longhaul and merged shorthaul operation of the former Tigerair.

SIA looks to overseas investments and partnerships

In addition to its Singapore-based businesses, SIA is expanding its interests in other countries. SIA helped establish Indian full service airline Vistara in 2013 and holds a 49% stake. The past year has seen rapid growth, with Vistara on track to almost double its fleet size and number of weekly flights by the end of the financial year on 31-March-2020 compared to the same point in 2019.

SIA is also looking to form strategic partnerships with other airlines. Unlike markets such as Europe and the U.S., there are fewer prospects for consolidation for Southeast Asian carriers due to restrictions on cross-border ownership. There are investment opportunities, such as SIA's stake in Vistara and its minority share in Virgin Australia, but true mergers and takeovers are rarer.

Mr Goh says he "is not holding [his] breath" over the prospect of increasing liberalisation in airline ownership in the Asia-Pacific region. One of the major hurdles is that the airlines involved are often national carriers, he says. However, Mr Goh stresses SIA can "look at other ways to cooperate" through deeper commercial relationships. "Until the regulatory environment in this part of the world allows for more liberal consolidations, this will be a good interim solution."

ANA, Malaysia Airlines to join list of SIA's strategic partners

SIA already has joint business agreements in certain markets with airlines such as Lufthansa, Air New Zealand and Scandinavian Airlines. In two new and significant steps, SIA plans to form closer partnerships with Malaysia Airlines (MAB) and ANA. The SIA/MAB proposal was unveiled in 2019 and is still awaiting regulatory approval. SIA and ANA confirmed on 31-Jan-2020 they will also seek approval for a joint venture.

The Malaysia Airlines arrangement is different from SIA's other commercial partnerships because the airlines' hubs are so close together. So instead of cooperating between two widely separated home markets, the carriers will look at "what is the best way to get a win-win for two airlines in the same region," Mr Goh says. The carriers intend to operate a revenue-sharing joint venture on flights between Singapore and Malaysia and expand codesharing on other routes.

Fleet renewal continues at pace, opening market opportunites

Major changes are also under way in the SIA Group's fleet. As well as the stalled introduction of MAXs and the planned addition of A321neos in the narrowbody operation, new types are altering the widebody fleet. SIA has more than 70 widebodies remaining on order, including Airbus A350-900s, 787-10s and 777Xs.

However, these deliveries are mainly aimed at fleet replacement in the short-term. The mainline parent carrier is on track to add 16 A350-900s and six 787-10s in the fiscal year through the end of March, offset by the retirement of 17 widebodies. This will mean a net increase of just five aircraft to a total of 133 in the mainline fleet.

Mr Goh says the carrier's strategy of "aggressive [fleet] renewal" will continue. The improved performance of the new aircraft types "gives us the capability to operate to markets [that] previously would not have been possible or commercially feasible."

A good example of this is the ultra-long-range (ULR) version of the A350-900 that SIA began receiving in late 2018. These -900ULRs have been used to operate new nonstop routes to the U.S., boosting SIA's network in that country and helping increase market share on connecting services from the U.S. to Southeast Asia, India and Australasia, says Mr Goh. A350s are also allowing the carrier to open secondary European markets such as Dusseldorf, Germany.

SIA's Changi stronghold is a competitive advantage

SIA benefits from having its base at one of the world's premier hubs, Singapore's Changi Airport. This has helped in the development of the international connecting traffic that represents a key part of the carrier's business model.

Like SIA, Changi is looking for new ways to stay ahead of the competition. The airport has continued to pour money into new facilities, such as the centrepiece mixed-use complex called the Jewel that opened in April 2019. Expansion work begins this year on Terminal 2, with completion scheduled for 2024. A massive fifth terminal is slated to open in the early 2030s.

The SIA Group had a combined 55.1% share of total seats departing Changi for the week of 24-Feb-2020, according to data from CAPA - Centre for Aviation and OAG. This comprised 34.5% for Singapore Airlines, 12.9% for Scoot and 7.7% for SilkAir. The next-highest airline was Jetstar Asia with 6.2%.

Departing seat share, Singapore Changi Airport, week of 24-Feb-2020

Source: CAPA-Centre for Aviation/OAG

The Australia market remains an important network piece for SIA

The group also holds strong positions in its key overseas markets. In Australia, for example, only the Qantas Group has a higher share of international seats than SIA, CAPA data for the week of 24-Feb-2020 shows. The close working relationship with Virgin Australia helps in aggregating traffic from beyond the immediate gateways and for onward journeys of travellers to Australia.

The three SIA Group airlines had about 180 departures from Australia during that week, and Australia represented SIA's largest overseas market as measured by seats.

Share of departing international seats in Australian market, week of 24-Feb-2020

Source: CAPA-Centre for Aviation/OAG

The group has yet to post an annual net loss, despite earnings dips

SIA has enjoyed a long run of annual profits - and remarkably has never posted a full-year loss. Some financial results have caused concern in recent years, however. For example, a rare quarterly loss in 2017 was enough to spur the airline to launch a three-year programme to reexamine many areas of its business. And in the group's most recent full financial year through March 2019, its net profit was nearly halved compared to the previous year.

The carrier reported encouraging results for the first nine months of its 2019-20 financial year, with profits up by 8.3%.

Full-year results will however come under pressure from recent events such as the decline in Hong Kong traffic due to the protest movement and the still-unfolding crisis related to the coronavirus outbreak. The SIA group's network in mainland China provides it with excellent opportunities for sixth freedom operations to the south, and this market has temporarily dried up.

SIA has proven strong enough to weather demand slumps, but the current threat is its biggest to date

The coronavirus crisis has hit SIA's key mainland China market particularly hard, and the carrier has either suspended or slashed capacity on its China routes. Demand has also been down in Asia-Pacific markets generally.

The impact of all of this on SIA's earnings will be clearer when the company releases its results for the Dec/Mar-2020 quarter and the full year. The damage to earnings will likely be spread across two fiscal years - including the last quarter of the current financial year and at least the first quarter of the next, beginning in Apr-2020.

SIA has proven repeatedly that its business model is strong enough to withstand such external shocks. Streamlining the group structure will yield long-term improvements in the company's financial health, and will help SIA better leverage its multi-model approach. But, with a lot of thirsty capacity among its neighbouring competitors, a still-uncertain travelling public and economies hurting from supply chain shutdowns, COVID-19 will offer one of the group's biggest threats to date.