08-Sep-2013 4:00 PM

Singapore Airlines is falling behind Cathay Pacific as Asia's network airline giants diverge

Analysis

Asia's aviation axis has shifted from Singapore Airlines (SIA) to Cathay Pacific as the region undergoes both cyclical and structural change. SIA is more exposed than Cathay to the weak economies of Europe while Cathay can more effectively serve North America, currently a strong market. Cathay's Hong Kong hub is far better suited to capturing Chinese growth than is Changi, and Hong Kong's more northerly location than Singapore means diversions through the Middle East on Gulf carriers are less of a threat than at SIA.

Cathay's decision to offer premium economy - which SIA is still hesitant to do - is bearing fruit. SIA however has made more significant and bolder change than Cathay, embarking on new partnerships and launching long-haul LCC Scoot. These will take time to mature - Scoot especially.

These factors are unlikely to change in the short term, but the long term contains much greater uncertainty. The possibilities of deep partnerships, acquisition, consolidation, changes in bilaterals or a surge in growth out of India and Indonesia, to name but a few, could potentially re-balance not only SIA and Cathay, but all of Asian - and probably global - aviation. This report looks at where Cathay and SIA compare today and what the future may hold as they pursue different strategies.

Summary

Asia's aviation axis has shifted from Singapore Airlines (SIA) to Cathay Pacific as the region undergoes both cyclical and structural change.
Cathay Pacific's Hong Kong hub is better suited to capturing Chinese growth than Singapore Airlines' Changi hub.
Cathay Pacific's decision to offer premium economy is bearing fruit, while SIA is still hesitant to do so.
Cathay Pacific has made more significant and bolder changes than SIA, including new partnerships and launching long-haul LCC Scoot.
SIA is more exposed than Cathay to the weak economies of Europe, while Cathay can more effectively serve the strong North American market.
The long-term future of both airlines is uncertain, with potential factors such as deep partnerships, acquisitions, consolidation, changes in bilaterals, or a surge in growth out of India and Indonesia that could potentially re-balance the aviation industry in Asia and globally.

Profits and operating margins higher in last four years at Cathay than SIA

Since 2009 Cathay has posted larger operating profits than SIA. Prior to 2009 SIA was consistently the better performer, including during the global financial crisis which impacted both carriers significantly. 2012 gives a worrying trend for Cathay, but its performance in 1H2013 is significantly better (relative to itself - not globally) than a year ago due to capacity cuts and re-fleeting.

Reported operating profits are for each airline's group. For Cathay this includes Cathay Pacific, Dragonair, cargo, catering and other services. For SIA this primarily includes Singapore Airlines, SilkAir, cargo, engineering and in some years its SATS division. While the flying components are the largest source of revenue, they are typically lower yielding; the balance is further skewed as SIA has an engineering division with a large third-party business whereas Cathay does not. Cathay does not report profits for each main division but SIA does.

Cathay Pacific Group and SIA Group operating profits (USD millions): 2003-2012

Operating profits are not fully representational of the business strength but operating margins come closer. The operating margin trend is similar to operating profits: aside from 2007 and 2008, Cathay either performed better than SIA or had a narrower gap when it was below SIA's performance than when SIA was below Cathay.

Cathay Pacific Group and SIA Group operating profit margin: 2003-2012

Comparing the operating margins of the two main flying divisions against the group's total operating margin, SilkAir has had a higher operating margin than the SIA Group since 2008. Cathay does not report similar figures for its regional subsidiary, Dragonair.

SIA Group, Singapore Airlines and SilkAir operating profit margin: 2003-2012

The difference in operating margin underlines the long-haul weakness of SIA (average stage length: 4,700km) versus robust regional performance at SilkAir (average stage length: 1,500km). Some may argue there are cyclical events working against SIA more than Cathay but that these could swing the other way back in SIA's favour.

But in the last few years there have been structural changes that mean even if cyclical changes reverse, the competition landscape has changed significantly. Cathay for example has a growing North American market to derive profits from, where SIA is more limited.

Cathay was more expensive than SIA but now on par on CATK

Cathay has better managed costs than SIA. While both have seen increases (largely driven by fuel), Cathay in the last two years has been at or under SIA's cost base, measured in cost per ATK, which unlike CASK takes into account each carrier's large freight operation.

Cathay Pacific and SIA cost per ATK (USD): 2003-2012

Costs at Cathay should go down further as the group re-fleets. Whereas SIA went through a re-fleeting last decade, it has only been recently that Cathay has seriously moved to replace ageing and costly 747-400s, which SIA withdrew from passenger service in 2012.

Cathay will still have A340-300 phase-outs (there were 11 at the end of 31-Dec-2012) to drag its costs down until well into the middle of the decade. A recent agreement with Boeing will see the airframer take Cathay's 747-400BCFs that are unprofitable. Despite sounder moves at SIA with regards to fleeting, Cathay has performed better on the cost front.

This is challenging for SIA as outside of its cargo division and forthcoming withdrawal of its five A340-500s, there are few opportunities to improve fleet efficiency. The withdrawal of the A340-500s should drive a reduction in SIA costs in 4Q2013 as these aircraft are used exclusively on all-premium non-stop services to Los Angeles and Newark, which will be dropped as the aircraft are returned to Airbus. But this will be a one-time reduction while Cathay should be able to continue to reduce costs as its fleet is renewed.

SIA has yield advantage but Cathay has stronger load factors

Cathay in 2003 had a slight yield advantage over SIA but since then SIA has achieved a stronger yield.

Cathay and SIA passenger yield per RPK (USD): 2003-2012

But SIA's greater yield performance is offset by Cathay's load factors, which have been higher than SIA's in all but two of the last 10 years. Theoretically Cathay could have achieved yields around SIA levels by having less aggressive pricing and flying fewer low-yielding passengers.

Cathay and SIA passenger load factor: 2003-2012

Hong Kong and Cathay are better positioned to capture huge Chinese growth

Cathay Pacific's positioning at the foot of China makes it far more ideally suited than SIA to serve China and almost all connecting markets (an exception might be the small but growing Indonesia-China market).

Going to and from China via Singapore is circuitous from most major markets. Cathay and its Dragonair subsidiary are the largest foreign carriers in China and three times larger than SIA and its SilkAir unit, in absolute size and frequency and twice as large in destinations served.

Cathay Pacific and SIA competitive summary to mainland China: Aug-2013

	Cathay Pacific Group	SIA Group
Destinations	21	10
Passenger frequencies	1,730	527
Seats - Approximately	390,000	125,000

This difference has become evident in recent years as Cathay has eclipsed SIA's growth: Cathay in 2013 has about 24% more seats to China compared to 2007 while SIA has grown only 7%. But much of Cathay's growth has been unprofitable as the carrier is looking to secure Hong Kong slots before they are depleted; Cathay hopes in the long-term these services will be profitable or the slots can be used for a service to another destination.

Cathay Pacific and SIA seat capacity (left-hand scale) and frequencies (right-hand scale) to Mainland China: 2003-2013

Other regions are better suited for specific markets: Europe to China (and larger North Asia) is more efficient via Helsinki with Finnair than through Hong Kong while North America to North Asia is more efficiently reached via Seoul or Tokyo. After Cathay and Dragonair, Asiana and Korean Air dovetail as the next largest carriers, reflective not just of point-to-point traffic but also their large sixth freedom networks. (And not to mention that the Chinese carriers themselves are still waiting for a major long-haul growth spurt.)

Proximity brings other benefits. Dragonair can more readily use narrowbody aircraft to smaller cities or thinner frequencies. Most of Cathay and Dragonair's growth in the past two years has been narrowbody service to smaller Chinese cities, although this has largely been done to utilise Hong Kong slots which are running out and will not be expanded until a third runway is in use no later than next decade.

Product also benefits from proximity. As most Chinese services are within three hours from Hong Kong, Cathay and Dragonair can offer first and business class passengers seats that do not all have direct aisle access or convert into a bed. But with the shortest Singapore-China flight being three hours and services to the main markets of Shanghai five hours and Beijing six hours, premium passengers start demanding a premium product especially when connecting to or from a long-haul flight.

This increases direct costs of the product and reduces yield from a lower seating density. For example, SIA's A330-300 and Cathay's regional A330, both used on some Beijing flights, seat business passengers only in the first zone. But SIA fits 30 while Cathay fits 44 - 47% more. The overall configuration is 285 for SIA and 311 (9% more) for Cathay. But even then SIA does not typically offer a lie-flat product on its overnight China flights. (SIA currently has a lie-flat product on only three of its China frequencies, including one of its four Beijing frequencies and two of its four Shanghai frequencies.)

SIA is limited in growth options. Slots at key cities are growing incrementally and typically only available to Chinese carriers. Up-gauging has limitations: China has blocked the A380 for operational or commercial reasons in some cities (although Shanghai has finally come off that list, allowing SIA to start using the A380 on one of its Shanghai flights from late Oct-2013).

Cathay could have an easier time acquiring new slots, but if not does have aircraft now and in the future that it could theoretically upgrade to. The possibility of an acquisition by SIA, which it tried with China Eastern last decade, seems distant as China's mood is that its airlines, national assets and representations, are not for sale.

Australia-Southeast Asia flows are stronger for SIA, and it has a partnership with Virgin Australia

The Australasian market is more substantial than its population size would suggest: 17% of SIA's seats (not including subsidiaries) are dedicated to Australia/New Zealand; 8% of Cathay's and 7% of Emirates, in each case converting to larger proportions of revenue as the average travel distance occupies at least 20-30 hours in each case.

Singapore is the closest city to offer as a hub for Australia-Southeast Asia traffic (except Jakarta, but its airport is drastically constrained and not yet comparable to the services of Changi). SIA's largest long-haul market is to/from Australia/NZ (Southwest Pacific) and SIA is larger in the Southwest Pacific region than Cathay. Singapore and Australia allow an unlimited number of non-stop flights whereas there is a tight bilateral regime between Australia and Hong Kong that has seen Cathay Pacific effectively hit its capacity allotment for a few years now.

This size distinction used to mean more than it presently does. Whereas SIA was once the largest Australia-Asia/Europe operator, SIA is hurting because of the Gulf carriers - especially with Qantas now partnering with Emirates - and regional competition.

Singapore Airlines international seat capacity by region: 26-Aug-2013 to 1-Sep-2013

Cathay Pacific international seat capacity by region: 26-Aug-2013 to 1-Sep-2013

AirAsia X, an unfamiliar name even a few years ago, will become Australia's fourth-largest foreign carrier by the end of 2013. AirAsia X is doing well at the budget end of the market and which, to the north, China Southern is targeting with sixth freedom fares at unprecedented levels. Meanwhile MAS also has unveiled plans to add capacity to Australia with a third daily frequency on the Kuala Lumpur-Sydney route. MAS as part of a recently completed restructuring has cut costs and is now more competitive.

SIA is at a geographical disadvantage to target Australian traffic to Northeast Asia as routing from the east coast of Australia to Northeast Asia via Singapore means flying west to Singapore only to fly back east into Northeast Asia. And now the declining Australian dollar will further weaken soft yields.

See related reports:

SIA and Cathay have both seen significant changes in the Australia-Asia (Northeast, Southeast and South) market as China Southern and AirAsia X have grown significantly over a mere few years. AirAsia X's upcoming growth in Australia will see it overtake Cathay by the end of 2013.

MAS' planned growth will also see the carrier overtake Cathay in early 2014. Cathay is clearly at a disadvantage as it cannot respond due to the current bilateral limitations. Singapore has open skies with Australia while Malaysia and Australia recently agreed to a 40% expansion of their bilateral, putting Cathay at a disadvantage.

But the rapid changes in the Australia-Asia market are closer to home at SIA, which has seen Thai Airways grow while MAS is more sustainable than before and plans to grow in early 2014. Although Cathay has China Southern to worry about, the low fares China Southern has offered are less sustainable than the low fares from AirAsia X.

Select carriers' seat capacity in the Australia-Asia market: 2003-2013

Unlike SIA, Cathay holds a greater share of the Australia-Asia market in 2013 than it did a decade ago. Cathay's share peaked in 2011 - when SIA was at its lowest - but has declined as the carrier has introduced a new business class and premium economy that has seen a net reduction in seats per flight. SIA's larger position in the market - twice that of Cathay - also makes it more vulnerable.

Middle East carriers are targeting all types of traffic to their region and beyond while the growing Asian capacity is partially targeting SIA's lower-yielding segments. This is true not just for economy but premium cabins, where China Southern has slashed fares and some passengers are willing to trade for perhaps lower service for a much lower ticket price. The challenge (absent a cost-cutting programme) is ensuring the market is willing to pay a premium to SIA, which the industry on a whole has struggled to achieve.

While SIA is still targeting the Australia-Europe market, there is a necessary pivot underway to build greater Australia-Asia flows; these are not matched by the Gulf carriers. This re-orientation will take time to build, especially as Australia grows even closer to Asia with resulting increases in traffic, whose benefits could flow to SIA.

SIA has also made a game-changing move with a minority stake and strategic partnership in Virgin Australia, the country's second-largest domestic carrier. Financially this allows SIA to benefit (but not at the operating profit level) from the Australian economy and its partnership with Virgin, similar to Cathay's 2006 partnership with Air China.

Strategically the benefits are two-fold: first SIA gains beyond gateway access to serve cities it does not fly into. While SIA serves Australia's main cities, and these are where the vast majority of the population lives, smaller cities and regional centres are not to be over-looked, especially as mining grows.

Secondly the deal brings marketing power as passengers can earn and burn frequent flyer points between SIA and Virgin on one programme, making the combination more competitive to Qantas than either SIA or Virgin could offer on their own.

The partnership started strategically and later expanded to equity (one way, with SIA investing in Virgin). This theoretically lags the Cathay-Air China arrangement, but SIA had (unsuccessfully) tried its hand at partnerships before with Air New Zealand and Ansett - so perhaps SIA was first then. And with the Cathay-Air China arrangement, it is less clear whether or not Cathay was the driving force.

Cathay Pacific and SIA seat share of the Australia-Asia market: 2003-2013

SIA's options to North America are limited

The trade-off to being better positioned for Australia (for some onward markets) is a setback in reaching North America. Non-stop flights from Singapore to North America, given the distance, require ultra-long-haul aircraft and configurations that airlines have found to be unsustainable. Thai Airways briefly had non-stop services to Los Angeles and New York while SIA held on to its non-stops far longer but will give them up in Nov-2013. Its North American network will thereafter be solely dependent on one-stop flights.

Stopovers bring inconvenience in time and logistics, even if the nice airports SIA flies through are mostly world class.

SIA one-stop services to North America: Aug-2013

Route	Stopover Point	Equipment	Frequency
Singapore-Houston	Moscow Domodedovo	777-300ER	5x weekly
Singapore-Los Angeles	Tokyo Narita	A380	Daily
Singapore-New York JFK	Frankfurt	A380	Daily
Singapore-San Francisco	Hong Kong Seoul	777-300ER 777-300ER	Daily Daily

Even if stopovers are not an issue, growth is: SIA is captive to bilaterals, and these have already stunted growth. For example, the Korea-Singapore bilateral does not provide enough capacity for SIA to upgrade its service to San Francisco from a 777-300ER to an A380 while maintaining a daily presence, let alone add frequencies. The bilateral also only allows three weekly flights to Canada, a sticking point which prompted SIA to drop Vancouver in 2009 as it did not think it could be competitive on the route without a daily offering.

Cathay once also faced restrictions trying to fly non-stop to farther points like New York, but the opening of the polar route and advent of 777-300ER made ultra-long-haul flights from Hong Kong operationally and commercially feasible. Cathay was once a bit behind SIA on frequency and capacity, but today Cathay is twice the size of SIA in North America - a huge accomplishment. (But other North Asian carriers are able to serve more points, especially with smaller aircraft. Korean Air is the largest Asian carrier across the Pacific.)

As SIA is not currently planning to introduce any additional services to North America its pull-down of non-stop routes will see 2014 frequencies and seats further shrink, further widening the gap just as Cathay has a full year of restoration (from mid-2012 to mid-2013 frequencies were cut to accelerate 747-400 retirement). Capacity will shrink not just from the A340-500 service to Los Angeles and Newark withdrawal: in tandem with pulling-down Newark, SIA plans to change the A380s on its New York JFK and Los Angeles routes from the configuration with 60 business class seats to the one with 86. This adds business class seats to partially offset the loss of business class seats from the non-stop service. But the extra business class seats on the A380 come at the expense of a lower overall configuration, 409 versus 471.

Cathay Pacific and Singapore Airlines seat capacity (left-hand scale) and frequencies (right-hand scale) to North America: 2003-2013

Once its non-stop flights are cut, SIA will have a daily service to each Los Angeles, New York JFK and Houston and two daily services to San Francisco. Cathay by Sep-2013 will have three daily service to Los Angeles, two daily to San Francisco, four daily to New York JFK (including one via Vancouver) and from Mar-2014 a daily to Newark. Cathay does not serve Houston (it is considering Dallas/Ft Worth - a sign of even more growth) but does serve Chicago daily as well as 10 weekly to Toronto and two daily to Vancouver (plus the service that continues to New York JFK). The gap is significant. (SIA previously served Chicago, Vancouver and Las Vegas.)

Further hindering SIA, routings through North Asia are shorter, cheaper, less competitive and have stronger yields than going via Europe. But in North Asia the bilateral regime is tighter than elsewhere in the world, even on standard third and fourth freedoms, let alone special fifth freedoms. And there are fewer countries in North Asia than Europe that SIA can negotiate with.

These factors are unlikely to change in the medium term, meaning to tap North America better SIA will have to rely on partners or make an acquisition. SIA has favoured an independent strategy, so a partnership will take time to develop. SIA did make an unsuccessful bid for China Eastern last decade and more recently acquired a minority stake in Virgin Australia. Combined with a war chest of cash, another acquisition attempt could be possible - if not necessary. But with North Asia doing well and those carriers also favouring independence, candidates are slim to none.

SIA has lost more ground to Emirates, Etihad & Qatar than Cathay

Geography is once again on Cathay's side when considering the impact of Middle East network carriers. Europe is the second-largest long-haul market for Cathay and SIA, and the two have seen Middle East network carriers take traffic from them (either from their local hub or other points, especially Australia).

The difference is that the Middle East hubs are between Singapore and Hong Kong, with Singapore being more southern and Hong Kong northern. So connecting through the Middle East is far more circuitous from Hong Kong than Singapore, advantaging Cathay and disadvantaging SIA.

Sample circuity of Middle East hubs from Singapore and Hong Kong

Route	Non-Stop	Via Dubai	Circuity
Singapore-London Heathrow	10,888km	11,352km	4.3%
Hong Kong-London Heathrow	9,647km	11,434km	18.5%

The network impact is more intricate than that. The Middle East carriers offer a far greater range of European destinations - 33 at Emirates - that can be served on a single Asian carrier. Cathay and SIA have European codeshares and interlines, but depending on the hub require circuity as well. The hub airport may not offer the transfer facilities of Dubai and the connecting intra-European flight is increasingly likely to resemble a LCC service.

But Emirates, Etihad and Qatar offer their full premium service for the entire journey into Europe. Commercial policies further work in the Middle East carriers' favour: Emirates is known to be flexible on fares and change fees, allowing passengers even mid-journey to change their next port for little cost. These can suddenly make a diversion through the Middle East very acceptable, even favourable.

Proportion of Cathay and SIA's European seats flown by Middle East network carriers to their hubs: 2003-2013

SIA has lost more ground to the Middle East carriers than Cathay - but this could change. In 2011 the Middle East carriers had one third as many seats from Singapore as SIA had to Europe alone, and one fifth as many seats from Hong Kong as Cathay had to Europe (see above graph). Not all passengers on Emirates, Etihad and Qatar fly from Singapore/Hong Kong to Europe via the Middle East. Some travel to the Middle East, Africa and even North America, but Europe is the predominant destination.

So for every three seats SIA offered to Europe in 2011, one of those seats could have potentially been routed via the Middle East. But at Cathay only one in every five European seats could have potentially been routed via the Middle East.

However in 2013 that gap has been narrowed with Middle East network carriers having almost half as much capacity to the Middle East as Cathay or SIA have to Europe. So now, for every two seats Cathay or SIA offer to Europe, one seat could potentially be routed via the Middle East. This change has occurred as Cathay has cut European capacity by about 8% since 2011 while the Middle East carriers have grown 115%. In comparison, SIA has more European capacity in 2013 than it did in 2011.

European seats from Cathay and SIA & ex-Hong Kong/Singapore seats to Middle East hubs flown by Middle East network carriers: 2003-2013

SIA has been more exposed to the Middle East network carriers and for longer than Cathay, but SIA seemingly offers few, if any, lessons on how to fend them off. SIA remains committed to its premium positioning. In Jul-2013 SIA announced an enhancement to its seats while Cathay also refreshed its first class.

One advantage for Cathay over the Middle East network carriers is that the Middle East network carriers are less prolific in Cathay's backyard - China - due to regulatory restrictions. This keeps transfer traffic on Cathay rather than the Middle East network carriers. In Southeast Asia, the Middle East network carriers continue to expand, taking some transfer traffic that had gone via Singapore on SIA.

Long-haul fleet more densely configured at Cathay, lowering seat unit costs

As with Cathay having a configuration advantage over SIA on the A330-300 used to China, its long-haul positioning is stronger. SIA only operates one version of its 777-300ER whereas Cathay has had a few forms in recent years. The 777-300ER is the long-haul backbone at both carriers (SIA has an equal number - 19 - of A380s, but has more 777-300ERs than A380s on order).

Prior to premium economy's introduction, Cathay seated 297 (77D) to SIA's 278, a 7% advantage in seats. With the introduction of premium economy, the configuration (77H) dipped to 275, just below SIA, with the only change being economy seats taken out for premium economy; business class was left intact. Despite a slightly lower configuration, the yield-floorspace ratio would have improved.

777-300ER configurations at Cathay and SIA: 2013

	Cathay 777-300ER (77D) Inactive	Cathay 777-300ER (77G) 3-Class, No First	Cathay 777-300ER (77H) 4-Class	SIA 777-300ER Sole Configuration
First	6	0	6	8
Business	53	40	53	42
Premium Economy	0	32	34	0
Economy	238	268	182	228
Total	297	340	275	278
Percentage of seats that are premium (first and business)	20%	12%	21%	18%

Cathay also has a configuration (77G) without first class and a lower business class seat count, giving a total of 340 seats - a 22% advantage. This aircraft operates some flights to London Heathrow and will serve Newark from Mar-2014, both markets SIA is in (three A380s and one 777-300ER to London, one A380 to JFK and, until Nov-2013, one A340-500 to Newark). The differences translate to lower seat unit costs and - market depending - stronger yields as Cathay has more high-yielding seats. Except for this configuration, Cathay's 777-300ERs have a higher proportion of premium (first and business) seats than SIA - potentially good for yields if they can be filled.

SIA has an overall higher proportion of premium seats on some A380s. SIA originally had 60 business seats and 88 economy seats on the upper deck but has transitioned some aircraft to having on the upper deck only 86 business class seats (lower deck remains unchanged). This boosts the percentage of premium seats from 15% to 24%.

In terms of configurations, Cathay has become a cost-efficient airline. SIA may view Cathay - not necessarily incorrectly - as a cheap airline, squeezing in more seats. Ultimately lower prices is what the market in any segment is demanding. SIA may be conflicted between such moves and its positioning as a premium carrier. Cost cutting is not an ungrounded fear; quick negative perception destroys years of work. But Cathay seems to have found a balance.

Cathay is - for now - less exposed to LCCs than SIA

On the short-haul side of the business, SIA has been put under pressure from low-cost carriers, which currently account for over 30% of Singapore Changi's seat capacity but only about 6% in Hong Kong International Airport. Singapore is home to two LCCs, Jetstar Asia and Tigerair, while AirAsia has a large virtual presence and other foreign LCCs are rampant. Hong Kong has no local LCC although Hong Kong Express later in 2013 is due to transform from a full-service to low-cost model while Jetstar Hong Kong has a pending application.

LCC penetration rate of seats in Hong Kong and Singapore: 2003-2012

While LCCs have grown the volume of traffic, they have also taken traffic away from SIA. This has mainly been in the area of point-to-point but also short-haul connecting. More recently with the advent of AirAsia X and Jetstar's medium/long-haul operation, low-cost is a challenge to SIA on medium/long-haul too. This not only depletes revenue but in the case of higher-yielding point-to-point traffic, takes away a higher share of revenue.

One example is Ho Chi Minh, about two hours from each Hong Kong and Singapore. SIA is competing not just with Vietnam Airlines but with three LCCS offering a combined seven daily LCC flights. But from Hong Kong Cathay is only competing on local traffic with Vietnam Airlines as no LCCs serve this route. SIA in recent years has seen Ho Chi Minh become unprofitable while Cathay is still profitable.

Premium economy, managed correctly, presents new revenue streams - SIA missing out?

Cathay has not just ridden its geography advantage, it has introduced premium economy seating, becoming the first Asian airline to have a major roll-out of the product, although the cabin's prevalence elsewhere in the world indicates the inertia in the region. No separate performance statistics are published about the cabin, but in 1H2013 when Cathay had a 14% increase in North American yields, the carrier did say driving the growth was not price increases but rather yield mix. In 1H2012 Cathay did not have premium economy in North America; in 1H2013 it did. Premium classes (Cathay groups premium economy with economy) rebounded, which would also have driven a change in yield mix, but no doubt premium economy is part of the story - and so far trending well.

SIA's basic concern is that passengers will trade down from business to premium economy. That will happen - it already does - but the question becomes how many and if the loss of business passengers to premium economy is made up, such as by the higher density of premium economy seats. That can make it possible to achieve more revenue per floorspace with lower costs. There are passengers trading up from economy to premium economy and, maybe more lucratively, new passengers Cathay is receiving from airlines that either do not have premium economy (like SIA) or have a less high-end premium economy product.

Premium is what keeps SIA afloat and is the focus of significant capital expenditure, so SIA will not swiftly make a move that jeopardises this area.

Route nuances factor heavily. Cathay has seen the strongest premium economy up-take on long-haul flights, especially to North America and London. But medium-haul services from Hong Kong to Australia do not see as strong an uptake as the route is shorter and there is lower demand for greater comfort. But it is still relatively early for the cabin.

SIA would be challenged to replicate Cathay's premium economy success given SIA's limited North American footprint. SIA is also heavily exposed to Australia, which is far close to Singapore than Hong Kong. That means the shorter Australia-Singapore flights would likely see lower premium demand than what Cathay experiences between Australia and Hong Kong.

Weak or mediocre performance premium economy performance in such an important market for SIA like Australia would shift the viability of offering premium economy. A carve-out could be made in whole or part of Australia, but this then begins the complicated process of managing different aircraft configurations. Also a negative factor is that offering premium economy on long-haul flights from Singapore to Europe but not Australia to Singapore means some potential premium economy passengers are lost as premium economy would only be offered on one sector.

Cathay is still to develop a strategy for how to accommodate premium economy passengers on regional Asian flights. Currently only long-haul flights offer premium economy. While that is not an issue for point-to-point traffic, Cathay (like SIA) sees considerable connecting traffic. That means a long-haul passenger will have a regular economy seat for a regional Asia connecting service. It may be acceptable to have an economy seat for a three hour connecting flight after a 14 hour long-haul flight, but an economy seat for three hours after a nine or ten hour flight from Australia is less acceptable as a greater proportion of the overall journey time will be spent in economy.

Geography is once again at play as Cathay's base in Hong Kong offers more connecting services within only a few hours' range than SIA's Singapore base does. Connections to China, Japan and Korea are around two to five hours from Hong Kong but four to eight from Singapore.

Offering premium economy on regional flights would need to be managed as point-to-point traffic would likely be low, making the cabin dependent on transfer traffic. Differentiation would be a hurdle as long-haul premium economy is, on Cathay at least, not dissimilar to regional business class. That could see cannibalisation in business class on point-to-point regional routes. To avoid cannibalisation, a regional premium economy product would have to work in the narrow space between economy class and regional business class. The space may be so small that it is not feasible, unlike how the advent of lie-flat beds created a wide space between economy and long-haul business class that made premium economy feasible.

But if a solution is found to better accommodate premium economy passengers on regional flights, it would give a boost to Cathay's premium economy, especially out of Australia. This becomes further important as Cathay and SIA pivot away from Australia-Europe market to focus more on the Australia-Asia market. A strategy to accommodate premium economy passengers on regional flights could shift the calculation for SIA. So far no carrier has a strategy for this.

Outlook: Absent new markets, SIA needs to turn to new revenue areas. A fear of unfamiliarity?

So SIA needs more - not high capital-expenditure aircraft but relevant places and partners to fly those Big Boys' Toys to. The situation is not for want of trying. SIA CEO Goh Choon Phong took on his role about the same time as Cathay CEO John Slosar did, and in that time Mr Goh has implemented far broader strategic changes than Cathay (it appears Mr Goh will serve longer than Mr Slosar, as the latter will move to Chairman of his airline in 1Q2014). This in an accomplishment, especially considering the industry's acceptance to grow through expensive aircraft purchases but reluctance to invest far smaller sums in higher yielding strategies.

On the LCC front SIA is taking a more active role in Tigerair and also has Scoot, the latter of which is capturing market share but will for some years be chasing decent profits. To Scoot's detractors, it is a loss-making carrier, but this was anticipated; it is an investment. Scoot's own profitability is becoming nearer as it forms partnerships to receive feed and take aircraft better-suited to its network. Example of the profit potential from a medium/long-haul LCC is offered by AirAsia X, which recently completed an IPO.

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There are more areas SIA can and should look at.

SIA may be a member of Star Alliance and have codeshares, but at detail level the impact of these arrangements is small. For example, SIA has a JV with SAS, yet SAS does not fly to Singapore, diluting the significance of a JV. SIA prefers not to partner with airlines which serve its home base. Virgin Australia also currently does not serve Singapore.

Like Cathay, SIA remains a highly independent airline and it is an increasingly threatening world to be alone in, but fortunately SIA has a number of suitors who, despite being previously rejected, would partner with SIA if it became more willing. There will be some shift of traffic, but overall the volumes and yields should go up, to say nothing of new markets SIA will be able to reach.

What makes a SIA partnership scenario different from the Middle East-led ones that have dominated the partnership space of late is the matter of hubs. SIA has a strong local base but this is relatively small, and smaller than Cathay's catchment area around Hong Kong and the Pearl River Delta, linked by ferries, buses and trains.

In the biggest partnership of the recent round, Qantas-Emirates, Qantas was able to take its local base and connect it with the hub of Emirates via a daily A380 flight from both Melbourne and Sydney to Dubai linking to onward traffic.

Likewise for Garuda or airberlin flying into Etihad's home of Abu Dhabi, amongst other examples. But aside from Singapore originating or destined traffic, a Middle East partnership would require a two-stop journey, first through Singapore and then the Middle East.

No doubt there could be synergies with a Gulf carrier, but it will have different, and likely smaller, parameters - unless a fantasy of liberalisation is realised. That could see SIA fly non-stop from other points in Asia to the Middle East, and do wonders for European and North American services. But even now mere regional liberalisation under the auspices of the ASEAN multilateral agreement is a headache.

On another note of fantasy, if you were to start global aviation from scratch without government restrictions, you probably would not pick Hong Kong as one of your hubs. In Asia at least you would favour a hub further to the northeast to bring through Chinese traffic to Europe and North America and complement it with a Southeast Asian hub to capture the Australian and Southeast Asia market.

Translating this to reality, SIA has one of the hubs but needs to find another. Cathay has a half-pregnant partnership with Air China, based in Beijing - another good Northeast hub - but it is not clear if the relationship's future is one of mutual benefit. Even if it is and Cathay goes for a dual-hub strategy, its Southeast Asian presence would be disadvantaged. On the other hand, there is no clear shot for SIA to gain a Northeast hub.

An acquisition would be difficult, not from a cash perspective - SIA has a war chest - but availability. SIA remembers its failed bid to acquire China Eastern, and a more recent example can be found in Japan.

ANA raised USD1.8 billion in 2012 and stated it would seek to buy stakes in other carriers. After talking to carriers in India and the Philippines, the only strong option to materialise so far is a stake in a start-up in Myanmar, Asian Wings. That is not to discount the potential - it is there - but to reflect the going approach. The best option in the short term may be lots of baby steps, in acquisitions or partnerships and working on a market-by-market basis, as Air New Zealand and Cathay did with their small strategic deal covering the New Zealand market. SIA has not been a strong participant in complex partnerships, so growing slowly will give it experience in this area.

Finally, a caveat on comparing SIA with Cathay is that Cathay too has its own substantial work cut out for it. Other metrics show more ambitious carriers: China Southern is Asia's largest by size, AirAsia Malaysia by operating margin and Korean Air for trans-Pacific services, but it is Cathay and SIA that attract public attention. Years of strength are unlikely to fade away overnight, a comforting fact to the airlines knowing the market still largely backs them and could, a new strategy permitting, give them more business.

The scenario is that if SIA cannot catch up with Cathay and Cathay cannot widen the gap, they both face further trouble down the line. The risk is not another shift from one to the other but away from both.

Where each once saw the other as their main competitor, this has diminished as Middle East carriers become the major concern for SIA while Cathay watches out for China Southern and other carriers in specific markets. These are some of the much more competitive scenarios emerging, and quickly. The Chinese airlines, the rise and rise of Asian LCCs, short and long haul, the Gulf carriers and then - probably the most threatening - full liberalisation. Each can learn from the other's example and mistakes, but they are benchmark quality airlines and as long as they are able to adjust to the new environment, they should retain the ability to capture a yield premium sufficient to steer them through many hazards.