19-Apr-2013 5:30 PM

Singapore Airlines Group and Changi Airport to benefit as India-Singapore market opens up further

Analysis

The Singapore-India market is poised for a modest increase in capacity, driven by further expansion from the Singapore Airlines (SIA) Group made possible by the recent signing of an expanded bilateral between the two countries.

The updated air services agreement only increases the previous capacity allotment for Singapore-based carriers by 10%. But SIA will take whatever it can get as Singapore-India is an important and generally under-served market. Incremental increases are typical with the India-Singapore bilateral, which has been updated several times in recent years, although Singapore would prefer a much bigger and broader agreement.

SIA along with full-service subsidiary SilkAir and low-cost carrier affiliate Tiger Airways already account for over 70% of capacity between India and Singapore. Indian carriers do not require a revised bilateral as they were using less than 40% of the prior allotment. Indian carriers over the last year have seen their share of the market decrease and may see their share drop further by the end of 2013 as the SIA Group again boosts capacity to India.

Summary

The Singapore-India market is set to see a modest increase in capacity due to the expanded bilateral agreement between the two countries.
Singapore Airlines (SIA) Group, including SilkAir and Tiger Airways, already accounts for over 70% of capacity between India and Singapore.
India is an important market for SIA and Changi Airport, with strong local and transit demand.
SIA Group airlines dominate the India-Singapore market but face capacity constraints in major Indian cities.
Additional frequencies are likely to be added to major Indian cities, as the India-Singapore bilateral does not permit A380 services.
Indian carriers have reduced their capacity to Singapore, facing challenges in competing with the SIA Group.

India is an important market for SIA and Changi

India is a strategically important market to Singapore Changi Airport and SIA. India is the seventh largest market for Changi based on current seat capacity. The 12 Indian destinations with non-stop links to Singapore are important for Changi as India is both a strong local and transit market.

Connections from India via Singapore are particularly strong to Australia, Indonesia, North Asia and the west coast of the US - large markets from India that have limited non-stop services. Singapore is also the only international destination to the east for several secondary Indian cities, giving Changi an advantage over other international hubs.

For SIA, India currently accounts for 8% of the combined seat capacity at its two full-service brands (about 7% for SIA and 11% for SilkAir), according to CAPA and Innovata data. SIA and SilkAir currently operate 98 weekly flights to 11 Indian destinations.

Tiger, which is 39% owned by SIA, currently operates 39 weekly flights to six Indian destinations. India accounts for 13% of Tiger's seat capacity.

Five of Tiger's six Indian destinations are also served by SIA and/or SilkAir. Tiger focuses primarily on point-to-point traffic at the budget end of the market, minimising overlap with SIA and SilkAir, which focus on the top end of the market and rely heavily on transit passengers.

Indian carriers currently only serve Singapore from four destinations. The four Indian carriers currently serving Singapore - Air India, Jet Airways and LCCs Air India Express and IndiGo - currently only offer about 11,000 one-way weekly seats to Singapore. SIA, SilkAir and Tiger currently provide almost 29,000 one-way weekly seats to India. SIA Group carriers have been the only Singapore-based carriers in the Indian market since 2006, when Jetstar Asia dropped service to India after briefly serving Kolkata.

Singapore to India capacity by carrier (one-way seats per week): 19-Sep-2011 to 6-Oct-2013

SIA Group airlines dominate the India-Singapore market but need more traffic rights

Bilateral constraints in India have been a sticking point for SIA over the last several years as India is a profitable market and an important component of its current strategy of focusing more on growth markets within Asia-Pacific to offset weaknesses in long-haul markets such as Europe. The group is always interested in adding capacity to India's main cities, which in many cases can easily absorb capacity increases given the strong business times between Singapore and India and SIA's strong network of connecting services.

At the same time the group has been constantly looking at new destinations in India which could potentially support a link from Singapore, particularly with narrowbody aircraft such as the A319/A320s operated by SilkAir. Vishakhapatnam is the latest example, having been launched by SilkAir in Sep-2012 with three weekly flights. SilkAir is the only foreign carrier at Vishakhapatnam and Singapore is the only non-stop service from the southeast Indian city, which has a population of about two million.

While SIA believes there are several other potential Vishakhapatnams in the group's network, it is the main Indian cities where it has faced capacity constraints for several years. The India-Singapore air services agreement has traditionally limited capacity only to eight Indian cities: Bangalore, Chennai, Coimbatore, Delhi, Hyderabad, Kochi, Kolkata and Mumbai.

SIA, SilkAir and Tiger currently provide about 24,500 weekly one-way seats to these eight destinations, according to CAPA and Innovata data. The MOU updating the India-Singapore bilateral which was signed on 2-Apr-2013 immediately increases the total allotment for Singapore-based carriers by 10% to 28,700 weekly seats, according to a statement from India's Ministry of Civil Aviation.

This would suggest that previously the allotment for Singapore-based carriers was about 26,000 seats. As a result, approximately 96% of the Singaporean allotment was already being used. The remaining 4% was likely not useable given that for each of the eight routes there is a fixed cap that cannot be exceeded and in most cases while Singaporean carriers were slightly under that cap the addition of one weekly flight would put it over the threshold.

The India-Singapore air services agreement has historically provided a specific number of seats or 747 units (with one 747 unit the equivalent of 400 seats) covering each of the eight routes. In addition Singapore-based carriers were provided 12.95 units, the equivalent of 5,160 weekly seats, as common pool rights which could be allocated to any of four markets - Chennai, Delhi, Kolkata and Mumbai. The Ministry of Civil Aviation statement says these "common pool rights" have been eliminated with the new MOU and the capacity entitlements based on route specific caps have been "rationalised".

The details are complex, as is often the case with air service agreements, and not entirely transparent. But this is not significant as the end result and positive impact for the SIA Group is the same regardless of the specific details. The SIA Group will be able to add capacity and offer up to 28,700 weekly seats to the eight major markets of India, up from the approximately 24,500 seats offered currently. The SIA Group carriers and affiliates would have all been party to the recent negotiations and have made sure the deal was crafted in a way that meets the overall objective for the group's 2013/2014 northern hemisphere winter schedule.

Additional frequencies to the metros are likely as A380 remains banned

The three largest markets of Delhi, Mumbai and Chennai will likely all see incremental increases in capacity. SIA now serves Mumbai with three daily 777 frequencies and Delhi with two daily 777 frequencies. Chennai is served with one daily SIA A330 frequency, 11 weekly Tiger A320 flights and four weekly SilkAir A319 flights. Bangalore is the only other market served with 14 or more weekly frequencies - featuring one daily SIA 777 flight, five weekly SilkAir A320 frequencies and five weekly Tiger A320 frequencies.

Additional frequencies rather than up-gauging is likely on the Delhi and Mumbai routes as the India-Singapore bilateral continues to not permit A380 services. This limitation originates from the fact the bilateral was initially negotiated prior to the A380 and as a result units were specified based on the 747, with smaller aircraft counting as portions of one unit based on a formula outlined in the agreement. But since the entry into service of the A380 in 2007, India has refused to amend its bilaterals to account for the A380, frustrating several A380 operators including Lufthansa and Emirates. SIA is the launch customer of the A380 and uses the type on some routes within Asia, including Hong Kong and Tokyo, as well as on long-haul services.

While Singapore-based carriers have historically faced constraints in major Indian markets, the Indian Government has identified 18 secondary cities in India that Singaporean carriers can serve without any limitations. Four of these currently have service: Vishakhapatnam (SilkAir), Ahmedabad (SIA), Tiruchirappalli (Tiger and Air India Express) and Thiruvananthapuram (Tiger and SilkAir).

SIA Group blocked from launching services to Pune and Madurai

Singaporean authorities have been frustrated in attempts to add more secondary cities to the bilateral which were not on the original list but the SIA Group now sees as potentially viable. In the most recent negotiations, Indian authorities declined requests from the Singapore side to add Pune and Madurai.

Pune is a potentially lucrative destination that has been evaluated by SIA and its new low-cost long-haul subsidiary Scoot, which is keen to enter the Indian market and serve Indian destinations that are not already part of the SIA Group network. Pune, located in western India near Mumbai, is India's ninth largest city and is an important business destination. It is currently under-served as it has only one international service - a twice weekly all-business service to Frankfurt from Lufthansa, however the airport is capacity constrained.

Madurai is a city in southern India that is connected only domestically to Chennai and to Colombo in nearby Sri Lanka. It is a smaller city but it does have VFR and religious traffic potential and could be viable as it is within narrowbody range of Singapore, making it a potential destination for Tiger or SilkAir.

Indian airlines get additional Singapore entitlements increase but not yet required

As part of the MOU, Indian carriers will see their allotment to Singapore increase by 10% to 29,400 weekly seats. But the increase is moot as Indian carriers currently only operate about 11,000 weekly seats to Singapore, including about 9,700 to cities that come under the allotment as Air India Express currently has about 1,300 weekly seats to Tiruchirappalli.

Of the eight cities that come under the allotments for Singaporean and Indian carriers, Indian carriers only serve three - Chennai, Delhi and Mumbai. Indian carriers have reduced their capacity to Singapore by nearly 30% since late 2011, when Indian carriers provided over 15,000 weekly seats, according to CAPA and Innovata data.

The reduction highlights the challenges Indian carriers face in competing with the SIA Group which will only intensify as SIA continues to expand in India. SIA has the advantage of offering a strong network beyond Singapore while Indian carriers have to rely predominately on the local India-Singapore market as their beyond networks, with the exception of domestic connections, are of limited value to passengers heading to or from Singapore. There is large and growing demand in the local India-Singapore market, but local demand can fluctuate depending on the season and the route. Indian carriers also do not enjoy the brand awareness in Singapore that SIA enjoys in India.

The latest example of failed Indian carrier routes to Singapore came in Feb-2013, when IndiGo dropped its daily services from Mumbai and Delhi to Singapore. Delhi and Mumbai to Singapore are huge markets that should be able to support an additional carrier and particularly an LCC. But at over five hours they are long routes for an LCC and IndiGo struggled despite relatively high load factors. IndiGo instead decided to launch service from Chennai to Singapore, a more economical option for an LCC as the flight is just under four hours. Chennai is also a popular market from Singapore given the strong links between much of Singapore's Indian community and the state of Tamil Nadu.

Chennai is now the most competitive Indian route from Singapore with six carriers - Air India, IndiGo, Jet, SIA, SilkAir and Tiger. With nearly 10,000 weekly one-way seats, the route is bigger than both Singapore-Delhi and Singapore-Mumbai, both which are down to just three competitors - SIA, Jet and Air India.

Singapore to Chennai capacity by carrier (one-way seats per week): 19-Sep-2011 to 6-Oct-2013

Singapore to Delhi capacity by carrier (one-way seats per week): 19-Sep-2011 to 6-Oct-2013

Singapore to Mumbai capacity by carrier (one-way seats per week): 19-Sep-2011 to 6-Oct-2013

IndiGo fails to follow through on Singapore ambitions

When IndiGo launched services to Singapore in Sep-2011, just after meeting India's requirement to have completed five years of domestic operations before being permitted to launch international services, the LCC had huge ambitions for expanding at Changi. IndiGo started with one daily flight to Delhi and Mumbai but initially expected to expand both routes in early 2012 to two daily flights as well as launch daily service to Chennai and Kolkata with Bangalore and Hyderabad also under consideration.

But IndiGo never added capacity on Delhi and Mumbai and launched Chennai a year later than planned and only after dropping Delhi and Mumbai. Bangalore, Hyderabad and Kolkata have not yet launched and are now only served by Singaporean carriers.

Meanwhile Kingfisher also suspended services to Singapore from Mumbai in early 2012 as it ran into financial problems. Air India Express, meanwhile, pulled out of the Kolkata-Singapore market in early 2012. The Kolkata-Singapore route is now served by SIA and SilkAir, which combined offer a daily service (with four weekly frequencies from SIA and three weekly frequencies from SilkAir). The market is also now served by Bhutan's Druk Air, which launched two weekly flights to Singapore in 2012 from its Paro base with a stop in Kolkata where it has pick-up rights.

Air India Express in early 2012 also dropped Chennai-Singapore, leaving the LCC with just one route to Singapore, from Tiruchirappalli. Parent company Air India also has reduced capacity over the last year from Delhi and Mumbai to Singapore. It currently serves both markets, which historically it has served with widebody aircraft, with an A319 operating generally one daily frequency. This highlights Air India's struggles in competing against SIA in large business markets.

Chennai-Singapore is now a bigger route for Air India, with two daily A321s or a single daily 747-400 frequency depending on the season. Chennai has a relatively larger proportion of leisure and VFR traffic while Delhi and Mumbai are more business-focused.

Jet is currently the leading Indian carrier in Singapore, operating two daily 737-800 services from Delhi, one A330 daily service from Mumbai and one 737-800 service from Chennai. Jet has a strong premium product, allowing it to compete with SIA at the top end of the market. It also uses Singapore as a virtual hub to beyond destinations, such as Australia though a partnership with Qantas.

Singapore-India carriers ranked by one-way frequencies: 15-Apr-2013 to 21-Apr-2013

Qantas had served Mumbai via Singapore with its own aircraft until May-2012 and has since been relying on Jet to give it offline access to Mumbai and other points in India. India was also a target market for Qantas' new proposed Singapore-based premium carrier but Qantas dropped plans for the carrier about one year ago after getting a cold shoulder from Singaporean authorities. Singapore was reluctant to see a new entrant vie for traffic rights in markets such as India, where bilateral constraints make it challenging for any Singaporean carrier - existing or new - outside the SIA Group.

SIA's domination makes it tough for others except in LCC-friendly southern India

The reality is that as SIA continues to expand in India, it will become a harder entity to compete against. The India-Singapore market however is big enough and growing fast enough to support multiple carriers and carriers with different product propositions. The Singapore-south India market should particularly be able to support multiple carriers and remain a large market for LCCs, with continued growth. Southern India is a more leisure and VFR focused market and is a shorter flight from Singapore than north and western India.

SIA and to a lesser extent Jet will likely continue to build on their positions in the key Singapore to Delhi and Mumbai markets, with SIA taking advantage of the latest update to the India-Singapore bilateral to again increase capacity. SIA and SilkAir will also continue to rapidly expand their footprint in India by launching services to secondary destinations which cannot be viably served by other carriers. India has emerged as an important market for SIA and the group will certainly continue to take advantage of every opportunity available in the metros as well as secondary markets.

While Singapore has not been able negotiate the large expansion in the India bilateral the SIA Group has been seeking for several years, the capacity available has increased slowly but surely. The amount of capacity available to Singaporean carriers to the eight constrained cities has now increased by about 80% since 2005, with increases negotiated approximately every two years. More incremental increases are likely with SIA continuing to be the main and perhaps only beneficiary.