10-Jan-2014 10:00 AM

SilkAir 2014 outlook: more rapid expansion and major milestones for Singapore Airlines subsidiary

Analysis

Singapore Airlines (SIA) full-service regional subsidiary SilkAir is planning more rapid capacity and network expansion for 2014. The carrier plans to expand its fleet by four aircraft to 28 as eight 737-800s are delivered and four A320s exit.

2014 will also be a year of major milestones. SilkAir turns 25 years old in Feb-2014 and will celebrate the occasion by taking delivery of its first of at least 54 new 737s.

Normally low key SilkAir is also using its silver anniversary to come out of its shell with a major marketing campaign. Product improvements will be introduced and several more destinations will be added, starting with Mandalay in Myanmar and Kalibo in the Philipinnes.

Summary

SilkAir, the regional subsidiary of Singapore Airlines, plans to expand its fleet by four aircraft in 2014, bringing the total to 28.
The carrier will celebrate its 25th anniversary in February 2014 and will take delivery of its first of at least 54 new Boeing 737s.
SilkAir has experienced significant growth in recent years, with a 20% increase in ASKs in the fiscal year ending March 2013.
The carrier plans to add several more destinations to its network, starting with Mandalay in Myanmar and Kalibo in the Philippines.
SilkAir's new 737-800s will feature 12 business class and 150 economy class seats, with power sockets and audio programming available in both cabins.
The carrier's profits have slipped in the current fiscal year due to increased competition from low-cost carriers and other full-service carriers in the region.

SilkAir's rapid growth trajectory continues

SilkAir currently operates a fleet of 18 A320s and six A319s to 45 destinations in 12 countries. The carrier has grown significantly in recent years in line with the SIA Group's strategy to focus more on the Asia-Pacific region, where market conditions are more favourable compared to Europe and North America.

SilkAir reported a 20% jump in ASKs for the fiscal year ending 31-Mar-2013. ASKs were up another 14% in the six months ending 30-Sep-2013 and 13% in the months of Oct-2013 and Nov-2013. SilkAir chief executive Leslie Thng says ASKs will be up 12% to 13% for the full fiscal year ending 31-Mar-2014 and that the carrier expects continued double-digit annual growth for the rest of the decade. Double-digit growth began in the fiscal year ending 31-Mar-2012, when ASKs were up 12%.

The 737 order, which was announced in Aug-2012, will enable SilkAir to more than double the size of its fleet over the next decade. The order included 23 737-800s, 31 next-generation 737 MAX 8s and 14 purchase rights. The 737-800s will be delivered over the next three years, starting with eight in 2014. The 737 MAX 8s are slated to be delivered from 2018.

Steady double-digit annual capacity increases will be generated by growth in aircraft numbers and an increase in the average aircraft size. SilkAir's current A320s are configured with 150 seats while its new 737-800s will be configured with 162 seats, resulting in an 8% increase in seat capacity.

There will be 12 business class and 150 economy class seats on SilkAir's 737-800s. Both cabins will feature power sockets and audio programming. A combination of drop down screens and downloadable wireless in-flight entertainment content will be available.

SilkAir economy class on new 737-800s

SilkAir business class on new 737-800s

SilkAir's current fleet of A320s do not have power sockets or audio. Only silent programming is available on the drop down monitors.

In Dec-2013 SilkAir started trialling wireless IFE on one of its newer A320s. If the trial proves successful the carrier plans to retrofit most of its A320 fleet for wireless IFE but the A320s will still not offer power sockets or audio.

SilkAir to begin 737-800 flights on 20-Feb-2014

SilkAir is picking up its first 737-800 in Seattle in early Feb-2014. The aircraft, which will feature special 25-year anniversary livery, will be on display at the 2014 Singapore Airshow, which runs from 11-Feb-2014 to 16-Feb-2014.

SilkAir plans to subsequently deploy the aircraft from 20-Feb-2014 on the Kuala Lumpur, Penang, Phuket and Medan routes. The second aircraft, which is slated to be delivered in Mar-2014, will be deployed from 17-Mar-2014 on the Siem Reap, Da Nang, Davao, Cebu and Kochi routes. Mr Thng says more India routes and the first China routes will be operated with the 737-800 following the delivery of the third and fourth aircraft.

SilkAir has the option of switching some of its orders to the smaller 737-700/737 MAX 7 or larger 737-900/737 MAX 9. For now the carrier's 128-seat A319s will be replaced with 737-800s, resulting in a 29% increase in capacity.

SilkAir could potentially re-look at adding a second smaller aircraft type to replace its A319s and supplement its new 737 fleet. The carrier evaluated regional jets and considered splitting its order between two types before deciding in 2012 to exclusively order 737s.

SilkAir plans to own its initial batch of 737-800s but for subsequent batches plans to consider sale and leasebacks. The carrier says its current fleet is roughly an even mix of owned and leased. The A320s it owns are being remarketed, starting with a couple of aircraft in 2014.

Some of the A320s could potentially end up at SIA affiliates. Tigerair, which is 40% owned by SIA, also operates IAE V2500-powered A320s. SIA's new Indian joint venture carrier with Tata is also expected to operate A320s. The new Indian carrier, which plans to launch by the end of 2014, is reportedly close to acquiring 20 A320s from leasing companies. As securing new aircraft with such short notice could be challenging, aircraft coming out of the SilkAir fleet could be a good fit.

SilkAir's A320 fleet is still relatively young. The oldest aircraft in its fleet is 15 years but on average the fleet is only seven years old, according to the CAPA Fleet Database. SilkAir took its last A320 in Oct-2013, completing an order which was placed in 2006. The transition to 737s will be gradual and is not currently expected to be completed until towards the end of the decade.

737 MAX opens up possibility of longer routes

The 737 MAX 8 will bring greater efficiency and open up the possibility of longer medium-haul routes. Currently the carrier's longest route, Singapore to Kathmandu in Nepal, is about five hours. Mr Thng said during a 9-Jan-2014 media briefing that as 2018 approaches SilkAir will consider longer routes of up to six and a half hours.

He declined to say which destinations are candidates but the extra range of the 737 MAX should in theory open up more parts of China and India. China and India are two key markets for SilkAir but the carrier currently only serves the southern and central portions of both countries. North and west India and northeast China are roughly six hours from Singapore.

Other possibilities include Cairns in Australia, parts of Central Asia and islands in the Indian Ocean. These types of destinations are not currently served from Singapore because they are generally too thin for widebody aircraft, but could become viable with longer-range next-generation narrowbody aircraft.

SilkAir network starts to approach 50 destinations

The SilkAir network has already grown by 50% over the past five years with 15 destinations added, including three in 2013. The carrier on 2-Jan-2014 unveiled plans to launch services to Kalibo and Mandalay and Mr Thng says the carrier is "working on a few more for 2014".

Kalibo will become SilkAir's third destination in the Philippines on 27-May. Kalibo, which is the gateway to Boracay island, will initially be served with three weekly flights on a circle routing with Cebu. Two of the flights will operate Singapore-Kalibo-Cebu-Singapore and one will operate Singapore-Cebu-Kalibo-Singapore.

SilkAir will be the only foreign carrier with scheduled services to Kalibo, according to OAG data. This is a role not unfamiliar for SilkAir as the carrier has always specialised in serving exotic leisure destinations.

Mandalay will become SilkAir's second destination in Myanmar on 10-Jun-2014. It will also be served with three weekly flights on a circular routing. In this case all the flights will operate Singapore-Yangon-Mandalay-Singapore. Visitors to Myanmar typically fly into the capital Yangon and gradually make their way north to Mandalay via Bagan, both of which are famous for their Buddhist temples.

Indonesia is SilkAir's largest market based on number of destinations, 12. But Malaysia is its largest market based on number of weekly frequencies, with 101. China and India make up the carrier's other key strategic markets.

SilkAir's key markets

Thailand is also a big market as Phuket is one of SilkAir's three largest routes with four to five daily flights, depending on the season. Phuket was one of the carrier's original five destinations when it launched services on 21-Feb-1989. SilkAir also serves Koh Samui and Chiang Mai in Thailand.

Malaysia, Indonesia, China, India and Thailand combined currently account for about 80% of SilkAir's seat capacity, according to CAPA and OAG data. In terms of destinations, these five countries account for 35 or 78% of the total network.

SilkAir capacity share (% of seats) by country: 6-Jan-2014 to 12-Jan-2014

The other 10 destinations are spread across seven countries - the Philippines (two expanding to three in May-2014), Cambodia (two), Vietnam (two), Myanmar (one expanding to two in Jun-2014), Australia (one), Nepal (one) and Timor-Leste (one).

SilkAir network: as of 1-Jan-2014

Kuala Lumpur and Penang in Malaysia are SilkAir's two largest destinations with 44 and 33 weekly return frequencies respectively. Both destinations were previously only served by SIA, which handed some flights to SilkAir as competition increased after the Singapore-Malaysia market opened up to low-cost carriers. SIA no longer serves Penang but continues to operate 17 weekly flights to Kuala Lumpur.

Penang and particularly Kuala Lumpur have a higher portion of business traffic compared to the traditional leisure-focused SilkAir route. Mr Thng says Bangalore and Chennai, which SIA also serves alongside SilkAir, also have relatively high volumes of business traffic. He says as SilkAir has taken over these four routes its leisure/business mix has decreased. SilkAir currently has about a 70%/30% leisure/business mix. It also relies on connections from SIA for about half of its traffic.

SilkAir adopted the regional feeder carrier model in Apr-1992. At the same time it took on the SilkAir name and introduced a business class cabin. In its first three years the carrier was known as TradeWinds and operated MD87s in single-class configuration with a focus on local traffic between Singapore and exotic leisure destinations. SilkAir transitioned to the 737-300 in 1990 and initially purchased A320s in 1997.

SilkAir remains profitable in a very competitive market

As the carrier starts the transition back to Boeing and celebrates its 25th anniversary it is rolling out a new brand campaign that focuses on its leading full-service position in the Asian market. SilkAir has been successful financially despite competing in a market with intense competition from LCCs. The carrier is now seeking to build on this success in 2014 by further improving its product and further growing its network.

SilkAir should be able to remain profitable and to continue outperforming Singapore-based LCCs. While many sceptics predicted the demise of SilkAir when the Singapore market opened up to LCCs in 2004, the carrier's profits instead grew as competition intensified. SilkAir has been profitable for 12 consecutive years and in the last four fiscal years has had a higher operating profit margin than all other Singapore-based carriers, including SIA.

SilkAir has seen its profits slip in the current fiscal year, including a 41% reduction for the six months ending 30-Sep-2013 (1HFY2014) to SGD37 million (USD29 million). As CAPA reported in Nov-2013, increased competition regionally from LCCs and other full-service carriers has created a challenging operating environment for SilkAir. As a result SilkAir has been unable to grow passenger traffic as fast as capacity, leading to a drop in its load factor over the past year.

SilkAir operating performance: 1HFY2014 vs 1HFY2013

SilkAir's average load factor in 1HFY2014 was only 69.3%, a reduction of 5.1ppts compared to 1HFY2013. The load subsequently dropped even further, reaching a low of 64.9% in Sep-2013. It improved slightly in Oct-2013 and Nov-2013, the last two months the SIA Group has reported operating data, but was still below 70%.

SilkAir monthly passenger load factor: Jan-2011 to Sep-2013

But SilkAir is confident the capacity it has added to the market will eventually be absorbed. Mr Thng points out that new markets in particular take time to mature and the carrier should be able to reap the benefits over the long term. He acknowledges "competition will continue to be intense" but points out that LCCs have been in the Singapore market now for some time and have created a new segment while SilkAir has remained profitable.

SilkAir's success over the last decade has proven there is still a niche - in fact a large and growing niche - for short-haul full-service carriers in Southeast Asia. SilkAir's model has been so successful it has been emulated by other full-service airline groups in the region, including Thai Airways in its establishment of Thai Smile.

There will be challenges in 2014 and beyond as Asian LCCs hybridize, targeting higher segments of the market and offering new connection products that target passengers which have until now relied on full-service network airlines. Other Southeast Asian full-service carriers are also pursuing rapid expansion of their short-haul operations, providing new or increased competition in several SilkAir markets. But as SilkAir passes the 25-year milestone it has firmly silenced all sceptics who had questioned its survival and begins a new chapter with a bright outlook.