27-Jan-2016 9:00 AM

Singapore Airlines Capital Express Part 2: SIA improves its position in Australia, New Zealand

Analysis

Singapore Airlines (SIA) is cementing its position as the leading foreign airline in Australasia as it launches services to Canberra and Wellington in Sep-2016. The addition of Canberra gives SIA six destinations in Australia, while Wellington gives SIA three destinations in New Zealand.

SIA's partnership with Virgin Australia will be key to making both sectors a success. Air New Zealand, which has a joint venture with SIA on non-stop flights from Singapore to New Zealand, is also expected to codeshare on the route although perhaps with some reluctance.

This is the second in a two part series of reports on SIA's new Singapore-Canberra-Wellington "Capital Express" route. The first part focused on the impact on Canberra and Wellington airports while this part will focus on the impact on SIA and its two partners from the region, Virgin Australia and Air New Zealand.

Summary

Singapore Airlines (SIA) is expanding its presence in Australasia with the launch of services to Canberra and Wellington in September 2016.
SIA's partnership with Virgin Australia will be crucial in making the new routes successful.
The Southwest Pacific region currently accounts for approximately 17% of SIA's seat capacity and 21% of the airline's ASKs.
SIA is the second largest foreign airline in Australia after Emirates, with approximately a 7% share of total international capacity.
SIA's capacity in Australia has been increasing, with plans to add three year-round weekly frequencies to Brisbane from May 2016.
SIA's partnership with Air New Zealand has resulted in increased capacity on the Singapore-New Zealand route.

Australia and NZ are strategically important markets for SIA

For SIA the Singapore-Canberra-Wellington route marks the group's continued expansion in a key market. The Southwest Pacific region currently accounts for approximately 17% of SIA's seat capacity and 21% of the airline's ASKs, according to CAPA and OAG data.

For the SIA Group, Southwest Pacific currently accounts for approximately 15% of total seats and 22% of ASKs. The SIA Group includes regional full service subsidiary SilkAir, short haul low cost subsidiary Tigerair Singapore and long haul low cost subsidiary Scoot, but only SilkAir and Scoot currently serve the Australasia/Southwest Pacific region.

SIA the parent airline currently has seven destinations in the region, including five in Australia - Adelaide, Brisbane, Melbourne, Perth and Sydney - and two in New Zealand - Auckland and Christchurch. Scoot also serves Melbourne, Perth and Sydney and operates the group's only service to the Gold Coast, while SilkAir operates the group's only services to Darwin and Cairns.

The SIA Group currently has approximately 90,000 weekly seats to/from Australia and 12,000 weekly seats to/from New Zealand. In both markets it is the second largest foreign airline group, only behind Emirates.

Top 10 airline groups in Australia's international market ranked by seat capacity: 25-Jan-2016 to 31-Jan-2016

Rank	Airline Group	Total Seats
1	Qantas Group	254,451
2	Emirates Group	93,800
3	Singapore Airlines Group	90,090
4	Air New Zealand Limited	70,108
5	Virgin Australia Holdings Limited	68,186
6	AirAsia/AirAsia X	54,566
7	Cathay Pacific Group	39,954
8	China Southern Air Holding Company	34,141
9	Etihad Aviation Group	26,854
10	Thai Airways Group	24,656

Top 10 airline groups in New Zealand ranked by seat capacity: 25-Jan-2016 to 31-Jan-2016

Rank	Airline Group	Total Seats
1	Air New Zealand Limited	131,144
2	Qantas Group	62,404
3	Virgin Australia Holdings Limited	31,328
4	Emirates Group	26,712
5	Singapore Airlines Group	11,759
6	LATAM Airlines Group S.A.	10,493
7	China Airlines Group	9,268
8	China Southern Air Holding Company	8,970
9	Cathay Pacific Group	7,896
10	Fiji Airways Group	5,200

Adding Canberra and Wellington to the SIA network would not have been possible without the ability to operate across the Tasman Sea as the Canberra or Wellington market itself is too small to support a non-stop service from Singapore. Australia-New Zealand is an open market with unlimited fifth freedom rights.

SIA will become the sixth foreign carrier to operate fifth freedom flights between Australia and New Zealand joining Emirates, China Airlines, LAN, Philippine Airlines (PAL) and AirAsia X. PAL launched services from Cairns to Auckland, providing the only year-round non-stop service on the city pair, in Dec-2015. As CAPA previously analysed, AirAsia X is launching a daily service from Gold Coast to Auckland in Mar-2016.

SIA has been expanding in Australia

SIA indvidually is the second largest foreign airline in Australia after Emirates. SIA currently has approximately a 7% share of total international capacity from Australia, slightly ahead of Air New Zealand, and behind only Qantas, Emirates and Jetstar.

Top 5 airlines in Australia's international market, ranked by seat capacity and capacity share: 25-Jan-2016 to 31-Jan-2016

Rank	Airline		Total Seats	Capacity Share
1	QF	Qantas Airways	157,696	15.9%
2	EK	Emirates Airline	93,800	9.5%
3	JQ	Jetstar Airways	89,855	9.1%
4	SQ	Singapore Airlines	70,906	7.2%
5	NZ	Air New Zealand	70,108	7.1%

While SIA's system-wide capacity has been broadly flat over the last several years it has continued to expand in Australia.

In late Oct-2012 SIA introduced a fourth daily year-round flight to Perth, and in Jul-2013 a fourth daily year-round flight to Melbourne. SIA added three year-round weekly frequencies to Sydney in Jul-2015, for a total of 31, and it recently unveiled plans to add three year-round weekly frequencies to Brisbane from late May-2016, for a total of 24.

SIA's current year-round Australia schedule includes 31 weekly flights to Sydney, 28 to Melbourne, 28 to Perth, 21 to Brisbane and seven to Adelaide. A small number of additional frequencies are operated in most markets for up to two months during the southern summer peak period.

SIA Australia schedule to exceed 120 weekly flights in Sep-2016

Following the increase to Brisbane and launch of Canberra, SIA will have 122 weekly year-round flights from Singapore to Australia, a 25% increase compared with 98 in Sep-2012. When including the Canberra-Wellington sector, SIA will have 126 weekly year-round frequencies in the Australian market.

SIA could be operating up to 130 weekly year-round frequencies in the Australian market by the end of 2016, since it is looking at further increasing Brisbane to 28 weekly flights. In the Brisbane market SIA has benefitted from the Aug-2015 suspension of services by rival Malaysia Airlines, which has also reduced capacity in other Australian markets.

SIA's seat capacity in Australia has increased at a slightly slower rate, but still significantly, due to a reduction in the number of A380 flights and the recent introduction of premium economy on 777-300ERs and A380s. SIA currently operates only one A380 flight to Australia (Sydney) and has four 777-300ER flights (two to Melbourne and two to Sydney), while the rest of its Australia flights use older model 777s and A330-300s, which do not have premium economy or lie-flat business class seats.

With SilkAir and Scoot, SIA Group expansion in Australia has been even faster

For the group, SIA's Australia schedule has increased even more significantly, as SilkAir only began serving Australia in 2012 and Scoot in 2013.

SilkAir launched four weekly flights from Singapore to Darwin in Mar-2012. It added Cairns in May 2015, initially operating four weekly flights on a circular routing combining Cairns with Darwin.

Cairns has surpassed expectations, prompting SilkAir to decouple Cairns from Darwin. In Oct-2015 SilkAir added one weekly non-stop return flight to Cairns while continuing to operate two flights on a circular routing via Darwin, along with three non-stop return flights to Darwin. From late May-2016 Cairns and Darwin will be completely decoupled, with Cairns being served by three weekly non-stop return flights and Darwin by five weekly non-stop return flights. As a result, SilkAir will have eight daily flights in the Australian market compared with six currently.

Scoot launched services to the Gold Coast and Sydney in mid-2012, followed by Perth in late 2013, and Melbourne in late 2014. The LCC currently operates 24 weekly flights to Australia, including one daily flight to Perth and Sydney and five weekly frequencies to Melbourne and Gold Coast. (During certain off peak months Scoot's Australia schedule is cut back to as few as 19 weekly frequencies, while peak periods have up to 28 frequencies.)

In Perth Scoot essentially replaced Tigerair, resulting in a significant increase in low cost SIA Group capacity, since Tigerair operates narrowbody aircraft. In the other three Scoot Australia markets the capacity provided by Scoot represented pure increases for the SIA Group.

When including SilkAir and Scoot, total SIA Group capacity in the Australian market has increased by more than 40% over the last four years, from approximately 61,000 weekly seats in Feb-2012 to roughly 87,000 weekly seats in Feb-2016.

Australia one-way weekly seat capacity for SIA Group airlines: Sep-2011 to Feb-2016

The launch of Singapore-Canberra-Wellington will add another 4,256 weekly seats, the equivalent of 5% of SIA Group's total Australia capacity, or over 6% of the parent airline's total Australia capacity. The three additional Singapore-Brisbane frequencies will add a further 1,710 weekly seats, providing another nearly 2% boost to total SIA Group Australia capacity.

Virgin Australia partnership has been key component of SIA's Australia strategy

SIA's rapid expansion in Australia over the last few years would not have been feasible without Virgin Australia, which forged a partnership with SIA in 2011. Virgin Australia does not serve Singapore, but it codeshares on all SIA and SilkAir routes to Australia and provides SIA, SilkAir and Scoot with domestic connections.

Virgin Australia will add its code to SIA's new flights from Canberra to both Singapore and Wellington. The new route should improve Virgin Australia's fight against Qantas for government and other Canberra business traffic, as it will be able to offer a non-stop option for Singapore and Wellington.

Virgin Australia already codeshares on an extensive array of SIA and SilkAir routes beyond Singapore. Passengers originating in Canberra will be able to access these connections, reducing journey times in several markets.

SIA-Air New Zealand JV has resulted in Singapore-NZ expansion

SIA forged a new partnership with Air New Zealand in 2014 that similarly enabled an expansion in the Singapore-New Zealand market. A joint venture between SIA and Air NZ covering the Singapore-New Zealand market was implemented in early 2015 as capacity on the Singapore-Auckland route was increased.

Singapore-Auckland is currently served with one daily A380 flight from SIA and one daily 787-9 flight from Air NZ. SIA also serves Singapore-Christchurch with one daily year-round 777-200ER flight, and two extra weekly frequencies during peak periods.

Air NZ launched its Singapore flight in Jan-2015, while SIA cut back from 12 year-round to seven year-round weekly Auckland flights, resulting in a slight net gain. SIA also upgauged Auckland from the 777-300ER to the A380 on a seasonal basis, with the A380 being used during the northern summer season.

Air NZ and SIA combined currently offer approximately 15,000 weekly seats in the Singapore-New Zealand market compared with around 11,000 seats two years ago (prior to their joint venture).

Air New Zealand and Singapore Airlines one-way Singapore-New Zealand weekly seat capacity: Sep-2011 to Feb-2016

In addition to pooling revenue on Singapore-Auckland and Singapore-Christchurch, Air NZ and SIA have a comprehensive codeshare covering domestic connections in New Zealand and a wide mix of short haul and long haul flights beyond Singapore.

Air NZ has little to gain from codesharing on SIA's Wellington service

Extending the codeshare to include SIA's new Singapore-Canberra-Wellington route does not provide a necessarily compelling business case for Air NZ.

Air NZ is currently able to offer its Wellington passengers a Singapore option via Auckland with the Auckland-Singapore leg operated by Air NZ or SIA. The existing one-stop itinerary via Auckland offers a similar total journey time as the new Wellington-Canberra-Singapore flight. The Auckland-Singapore flight also provides Air NZ passengers with a lie-flat business class product and a premium economy option, whereas for Wellington-Canberra-Singapore SIA is using a 777-200 with angled business class seats and no premium economy cabin.

Air NZ is also financially better off having Wellington-Singapore passengers travel via Auckland as it is sharing revenues with SIA on all Auckland-Singapore flights. Removing Wellington passengers from these flights could impact traffic and hence, the profitability of the Auckland-Singapore route.

For Wellington-Canberra passengers, Air NZ now offers a one-stop product via Brisbane, Melbourne or Sydney with partner Virgin Australia. Removing Wellington-Canberra passengers could impact traffic and hence, profitability of its existing Australia flights.

Air NZ still expected to codeshare with SIA on Singapore-Canberra, Canberra-Wellington

Air NZ understandably seems to be somewhat reluctant to codeshare on the new SIA Singapore-Canberra-Wellington route. Unlike Virgin Australia, Air NZ was not ready to commit to codesharing in time for SIA's 20-Jan-2016 announcement. (The business case for Virgin Australia is different, as it does not serve Singapore and relies heavily on partnerships to provide a virtual network.)

Air NZ, however, is expected to commit to a codeshare by the time the new route is launched on 20-Sep-2016. Air NZ may prefer that SIA does not operate the route, but as SIA is clearly launching the service regardless it is better off extending its support. Refusing to codeshare would send the wrong message to the market and potentially damage its relationship with SIA.

Ultimately Air NZ may not end up selling a significant number of seats on Wellington-Canberra or Wellington-Canberra-Singapore. With SIA flights it is generally significantly cheaper buying directly from SIA than from any of its codeshare partners.

SIA willing to experiment to strengthen presence in Australia and New Zealand

SIA does not need the Air NZ codeshare to make the new Singapore-Canberra-Wellington route work. SIA has a strong point of sale presence in both the New Zealand and Australia markets. However, the new SIA strategy strongly values partnerships, and the ideal scenario for SIA is clearly to have both Air New Zealand and Virgin Australia on board as it continues to expand its presence in the Southwest Pacific region.

SIA rarely launches new destinations these days but Australia and New Zealand are extremely important markets for the airline. (SIA has not launched a new destination outside Asia since São Paulo was added in Mar-2011, and all its new destinations within Asia over the last five years have been destinations already served by SilkAir. In 2016, Dusseldorf is also being launched.)

Adding services to Canberra and Wellington is a bold but calculated move for SIA. The new route indicates SIA is willing to experiment with new combinations, and keen to leverage its strong position in the Australasia market.