Singapore Airlines-Air New Zealand partnership opens a new era for Australia-NZ-Singapore dynamics

Air New Zealand-SIA relations improve after seven years of limited partnership

Subject to the new alliance securing regulatory approvals from the Singapore competition authority and the New Zealand Minister for Transport, Air NZ will resume flights to Singapore in late 2014, ending a hiatus of more than seven years. Air NZ pulled out of Singapore in 2006 and subsequently stopped putting its code on SIA-operated flights as the two could not agree on suitable through connections for Air NZ flights. The only piece of the Air NZ-SIA partnership that has remained over the past seven years has been a codeshare on a handful of Air NZ-operated domestic flights within New Zealand.

The partnership between two members of the same - Star - alliance comes as a respite from the more recent deals forged across the globe outside of alliance lines. But no doubt flexibility is still critical.

Air NZ previously found it challenging to work with SIA, which has always been a fierce competitor in the New Zealand-UK and New Zealand-Europe markets. Unable to forge a mutually beneficial partnership with SIA, Air NZ was essentially forced to stop using Singapore as a transit point for London and Europe. Air NZ instead launched Hong Kong-London Heathrow services in Oct-2006, giving its passengers a second online option to London in addition to the Los Angeles-London Heathrow service which it has now operated for two decades.

But Air NZ dropped Hong Kong-London in Mar-2013 as part of a restructuring of its long-haul operation. At the same time as deciding to drop the route Air NZ forged a partnership with Cathay Pacific which included a two-way codeshare on their respective Auckland-Hong Kong services. Cathay Pacific in Jun-2013 added a fifth daily flight to London using the slot pair that Air NZ had used for Hong Kong-London - this was a separate deal but at least at the time seemed intertwined.

The Cathay partnership was forged in order to serve the China market better. Air NZ ended service to Beijing, leaving its only mainland destination Shanghai, where there was no suitable partner. Air NZ codeshares with Air China on domestic connections from Shanghai but these are limited to less than 10 destinations as Air China is based in Beijing and has a limited presence at Shanghai Pudong.

Cathay and wholly-owned subsidiary Dragonair serve 21 mainland destinations compared to 10 from SIA and SilkAir. The partnership came amongst greater competition, notably from China Southern. It also united Cathay and Air NZ against common competitor Qantas. The Cathay partnership is taking time to mature, in part due to the strong competition for mainland Chinese passengers. New Zealand's market recognition is lower while costs are higher.

See related report: Air New Zealand-Cathay Pacific partnership has implications across Asia and for SIA & China Southern

Star and SIA could have blocked deeper partnership with Cathay from emerging

Air NZ now says its partnership with Cathay is limited to the New Zealand-greater China market. But in forging the partnership in Nov-2012 the two carriers talked about unspecified commercial arrangements covering flights beyond Hong Kong to other markets including India. These arrangements could have taken the form of interlines rather than codeshares, as third country codeshare opportunities beyond Hong Kong are limited due to bilateral limitations.

The prospects of a deeper Air NZ-Cathay partnership could have been thwarted by objections from the Star Alliance and some of its members. While Star would not have had issues with Air NZ and Cathay codesharing on the Auckland-Hong Kong route, some carriers that compete in the broader New Zealand market, including New Zealand-Europe, would not have taken kindly to Air NZ working more actively with a oneworld member beyond Hong Kong.

There are currently only two other Star carriers serving New Zealand - SIA and Thai Airways. SIA is much larger, operating 12 to 14 weekly flights to Auckland and seven weekly flights to Christchurch compared to five to Auckland for Thai Airways.

SIA currently has over 13,000 weekly seats to and from New Zealand, making it the largest long-haul carrier. Qantas, Virgin Australia, Emirates and Jetstar are larger but with the exception of Jetstar's three weekly flights to Singapore all four of these carriers only serve New Zealand from Australia.

New Zealand international capacity (seats) by carrier: 13-Jan-2014 to 19-Jan-2014

*foreign carrier
Source: CAPA - Centre for Aviation & OAG

Singapore is New Zealand's third largest international destination after Australia and the US, based on current seat capacity. But New Zealand-Singapore is a relatively small point-to-point market, with Singapore recording 124,000 visitors from New Zealand in 2012 and New Zealand recording 36,000 visitors from Singapore.

As a result a large portion of SIA's New Zealand passengers travel beyond Singapore, primarily to destinations in Southeast Asia, South Asia and Europe.

New Zealand international capacity share (% of seats) by country: 13-Jan-2014 to 19-Jan-2014

Source: CAPA - Centre for Aviation & OAG

Southeast Asia, South Asia and Europe are also important markets for Air NZ where the carrier has been looking to improve network coverage for some time. SIA has always been a logical partner for Air NZ as both are in the Star Alliance. But SIA has traditionally not been interested in close partnerships and been a relatively passive member of Star.

Air NZ's 26% holding in Virgin Australia will have been a strong negotiating factor for the New Zealand carrier

However, in recent years SIA has started seeking deeper and more strategic partnerships. The huge changes in the competitive landscape, particularly with the rise of the Gulf carriers, have prompted a re-think. SIA's strategic thinking also has evolved significantly under CEO Goh Choon Phong, who took over about three years ago. SIA has since forged a comprehensive partnership with, and taken an equity stake in, Virgin Australia.

It is no coincidence that Air NZ also owns an equity stake and has a close partnership in Virgin Australia. In different circumstances, this could have led to considerable chafing, as Air NZ had previously sought to gain wider control of Virgin Blue (as it was then). When Virgin Australia effectively diluted shareholdings in the holding company in 2013, Air NZ moved to shore up its equity to 26%, giving it a very powerful position on the company's board. Failure to have a meeting of minds between SIA and Air NZ (as well as Etihad Airways, which also has aspirations for a larger share of Virgin), could have been highly counter-productive for all concerned. It appears here that common sense and compromise has prevailed - unlike the position when SIA and Air NZ fell out over the now-defunct Ansett in 2001.

The new SIA-Air NZ partnership essentially completes the partnership circle. Etihad, Virgin Australia's third close partner and shareholder is one of the Gulf carriers that have been making life tougher for SIA, so will likely remain on the outside - something that will continue to exercise Virgin's group dynamics.

While SIA has a new approach to partnerships and would be particularly keen to forge a close partnership with a Chinese carrier, it is not yet ready to warm up to the concept of getting into bed with a Gulf carrier. But we have learned not to discount any possibility in today's fast-evolving marketplace.

See related report: Singapore Airlines needs more partnerships to complete new long-term strategy

Air NZ joins Virgin Australia and SAS as new level of partners for SIA

After Virgin Australia, SIA's closest partner is now SAS. SIA has touted its joint venture with SAS, which was signed in 2012 or one year after its agreement with Virgin Australia, as an example of a strong partnership. But the joint venture only covers the Singapore-Copenhagen route, which is served less than daily, while codeshares are in place beyond Copenhagen to markets throughout Europe.

SIA will pursue a similar joint venture with Air NZ covering the Auckland-Singapore and Christchurch-Singapore routes. SIA is not disclosing commercial details but the joint venture is expected to include revenue sharing, pending approval from competition authorities, but not profit sharing. SIA does not yet see a need to follow North Asian, European and North American carriers in seeking full profit sharing joint ventures with anti-trust immunity.

In this case Air NZ will operate in the joint venture alongside SIA. This is not the case with SAS and Virgin Australia. Neither carrier currently serves Singapore although there have been discussions for some time of Virgin Australia entering the Australia-Singapore market with its own metal. (The question is which route as previously it has been suggested that Virgin Australia take on new routes such as Singapore-Cairns, which it is not interested in operating.)

Air New Zealand ready to resume services to Singapore

Assuming the new partnership is approved by regulators (which should be little more than a formality), Air NZ plans to launch daily services to Singapore as early as Dec-2014 using retrofitted 777-200ERs. The carrier will later consider deploying to Singapore its new 787-9s, which will enter service in 2H2014 and initially be used to Perth, Tokyo and Shanghai. Air NZ's Asian destinations had been confined to North Asia, with the exception of Bali, which was an outbound New Zealand market. Singapore has the potential to be a large inbound market for Air NZ.

SIA plans to reduce its own Auckland-Singapore service to seven weekly flights but up-gauge the remaining flight from 777-300ERs to A380s. At least for now SIA plans to only operate the A380 to Auckland during peak periods, starting in the southern hemisphere summer season, but depending on demand could look to use the aircraft year-round.

SIA currently operates one daily 777-300ER flight to Auckland and one daily 777-200ER flight, according to OAG data. But the 777-200ER flight is reduced to six weekly frequencies in Feb-2014 and to five weekly frequencies in Mar-2014 - a level which is maintained for most of the year.

Could a SIA-Air NZ combination make Auckland-Singapore unsustainable for Jetstar?

Jetstar Airways is currently the only other carrier in the Auckland-Singapore market, operating three weekly flights with two-class A330-200s. It will be challenging for Jetstar to continue operating this already marginal route once Air NZ and SIA begin their partnership and boost capacity between Auckland and Singapore.

Jetstar has already significantly downsized its long-haul operation from Singapore, cutting two Beijing and Osaka flights in late 2013. Melbourne is currently Jetstar's only other remaining A330 route from Singapore.

SIA says its annual capacity between Singapore and New Zealand will grow by 30% if the joint venture is approved (includes capacity that would be flown by Air NZ). But if Jetstar ends up withdrawing from the market, total capacity will only increase by approximately 15%.

Jetstar currently has about 900 weekly one-way seats between Singapore and New Zealand compared to between about 5,500 and 6,700 (depending on the season) for SIA, according to CAPA and OAG data.

New Zealand to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 20-Jul-2014

Source: CAPA - Centre for Aviation & OAG

The Air NZ-SIA joint venture would also cover SIA's daily service from Christchurch on New Zealand's south island to Singapore, which is operated with retrofitted 777-200ERs. SIA is currently the only carrier with long-haul services at Christchurch. As Christchurch is otherwise only linked with Australia (including by Emirates) and domestic points in New Zealand, SIA has an exclusive one-stop product between Christchurch and Europe.

Partnership expands Air NZ's offline network by over 50 destinations

Air NZ will use the new joint venture to provide offline access beyond Singapore to Europe (including the UK), Southeast Asia, South Asia and Africa. Air NZ says the new codeshare will increase its virtual network by 50 destinations across Europe, Southeast Asia and Africa. Another eight destinations in India will initially be covered by interline as the New Zealand-India air services agreement does not permit third-country codesharing. But Air NZ is hoping the bilateral is re-negotiated to allow the carrier to codeshare on SIA and SilkAir flights to India.

India and Southeast Asia are important and fast-growing markets for New Zealand's tourism sector. Air NZ currently only covers Southeast Asia with seasonal services to Bali. Air NZ will continue to serve Bali, which is almost entirely an outbound leisure market for New Zealanders.

Tourism New Zealand is investing significantly in expanding the inbound market from Southeast Asia. As Southeast Asia's middle class expands, there are opportunities for New Zealand to attract more visitors. Tourism New Zealand is expected to work closely with Air NZ and SIA to expand this market. Indonesia particularly has large inbound potential but Jakarta and other major Indonesian cities are not a big enough market to support non-stop services. By working with SIA and regional subsidiary SilkAir to cover several points in Indonesia, Air NZ will be well positioned to tap into this market.

Air NZ is also keen to improve its coverage in Europe. Currently its passengers access continental Europe via London, where there are limited onward connections. Offering a Singapore option will reduce transit time significantly as Air NZ passengers will be able to access SIA's 11 destinations in continental Europe with just one stop. This gives Air NZ leverage over Gulf carriers.

To the UK, SIA has four daily flights to London Heathrow and one daily flight to Manchester (although Manchester is served via Munich). Offering a second Heathrow option via Singapore will complement Air NZ's existing Auckland-Los Angeles-London Heathrow flight. Passengers will also have more options as they can pursue stopovers in Southeast Asia or North America. Open jaw itineraries allowing passengers to fly in or out of London but to or from a continental European destination going the other way also will become part of the Air NZ offering.

Air NZ sees SIA emerging as its primary and in many cases only partner for Europe, Southeast Asia, South Asia and Africa while it relies on a combination of carriers to cover North Asia including Cathay, Air China and ANA. In North America it partners with United and Air Canada. But it views all these partnerships as limited to a relatively small number of markets while the new SIA partnership opens up a much broader array of destinations.

Air NZ says SIA will become its second centrepiece partner along with Virgin Australia and it does not see a need to have any other partners at this level. Air NZ and Virgin Australia have a joint venture on the trans-Tasman market, where the two carriers have more than a 50% share.

For SIA, Air NZ partnership opens up a limited number of new destinations but is still strategically important

For SIA the partnership is not as crucial. SIA is a much larger carrier and benefits from having a geographically well positioned hub while Air NZ is an end of the line carrier. SIA will gain improved access to the New Zealand market as well as new access to a few South Pacific islands that will be served by Air NZ beyond Auckland.

While New Zealand is an important market and helps feed SIA's overall network, it accounts for less than 3% of the carrier's total capacity. In comparison Australia accounts for 15%.

The handful of new offline destinations that the new partnership brings SIA are also very small and provide a relatively small benefit compared to the 58 destinations that SIA will give Air NZ. But SIA needs more strong partnerships as it continues to implement a new strategic plan that allows the group to compete more effectively in a rapidly changing landscape.

The deal with Air NZ is definitely worthwhile for SIA, particularly as it could prevent a potentially closer alliance between Air NZ and SIA arch-rival Cathay. The new partnership with Air NZ will further strengthen SIA's already strong position in the New Zealand market and further strengthen the position of Singapore as a transit hub for passengers heading to and from New Zealand.

New Zealand may be a relatively small market but it is also significantly less competitive because Gulf carriers only currently serve New Zealand via Australia. The new SIA-Air NZ duo will become a powerful combination enjoying a competitive advantage over other airlines serving New Zealand.

The larger impact to SIA is its building of partnerships, now under a CEO who seems much more ready to understand the potential for win-win benefits that can flow from sharing markets. Partnering with Air NZ represents a marked change of pace considering the sour situation last decade. It also helps resolve a potentially uncomfortable relationship between the two carriers on Virgin Australia's board, where each is desperate to have a major foothold in the Australian domestic market This alone would have been a strong incentive to talk deals with Air NZ.

But for now, SIA's partnerships are with carriers much smaller than itself. SIA partners SAS and Virgin Australia do not even serve Singapore. SIA will need to pursue bigger fish, if it is to secure its long term future as a major hub operator.