Singapore Airlines raises the stakes, commits to 100% lie flat fleet following SilkAir merger

Summary

• Singapore Airlines has unveiled plans to install lie-flat business class seats and seatback IFE on the SilkAir 737 fleet, which will result in a more consistent product across the group's entire full service fleet (both narrowbody and widebody).
• Singapore Airlines also has announced SilkAir will merge into Singapore Airlines once most of the SilkAir fleet is retrofitted, resulting in a single full service brand for the group.
• Singapore Airlines was already committed to transitioning its widebody fleet to 100% lie-flat and now will likely become the first airline with a 100% lie-flat product across both narrowbody and widebody aircraft.
• With the SilkAir merger, Singapore Airlines will also reduce the number of AOCs in the group to just two from five prior to the recent merger of Scoot and Tigerair and the folding of SIA Cargo into Singapore Airlines.

SIA announces merger with SilkAir and narrowbody product upgrades

On 18-May-2018 SIA announced that SilkAir will undertake "a significant investment programme to upgrade its cabin products as part of a multi-year initiative that will ultimately see it merged into SIA".

In 2020 the group expects the first SilkAir aircraft to be retrofitted with lie-flat seats in business and seatback IFE systems in both business and economy. The retrofit programme is expected to take several years to complete.

SilkAir will merge into SIA at some point during the retrofit programme. SIA will determine a merger date later, and stated that the merger would only occur once a "sufficient number of aircraft have been fitted with the new cabin products". During its FY2018 results briefing on 18-May-2018, SIA declined to elaborate what would constitute a sufficient number of aircraft.

SIA Group CEO Goh Choon Phong stressed during the results briefing that the merger with SilkAir should not be considered a consolidation exercise. "This is really an exercise to ensure we have even greater seamless connectivity between widebody and narrowbody", he said. "With this integration we do believe there will be greater opportunities for the group to grow further."

SilkAir has doubled in size since 2009

SilkAir and SIA have already pursued significant integration in recent years, resulting in more commercial and network collaboration. The two airlines now operate side by side on 10 routes. SilkAir has also fully taken over several SIA routes in recent years.

Transitioning to a single brand will make for a more seamless experience, particularly for connecting passengers. While SilkAir has developed a relatively strong brand regionally in Asia Pacific, it is not known in Europe or North America - which are important markets for SIA.

Folding SilkAir into SIA will also significantly improve Star Alliance's network in Southeast Asia. SIA has always kept SilkAir outside Star, which has been somewhat controversial as several Star members are keen to access secondary destinations in Asia that are served by SilkAir but not SIA. SilkAir currently has 40 destinations that are not also served SIA; approximately half of these are not currently served by any Star members.

SilkAir has grown much faster than SIA this decade. SilkAir carried 4.7 million passengers in the fiscal year ending 31-Mar-2018 (FY2018), compared to 2.8 million in FY2011. SilkAir passenger numbers were up 14% in CY2017 and by another 10% in the first four months of 2018.

SilkAir passenger traffic and year-over-year growth: CY2008 to 4M2018

Source: CAPA - Centre for Aviation and company reports.

SIA the parent airline carried 19.5 million passengers in FY2018, compared to 16.7 million passengers in FY2011. SIA is the largest international airline in Southeast Asia based on current seat capacity. SilkAir is one quarter the size of SIA but is also a relatively significant player; SilkAir is currently the seventh largest Southeast Asian full service airline, based on international seat capacity.

Merger will improve SIA Group's long term position in a highly competitive market

SilkAir has been consistently profitable, reporting operating profits for 17 consecutive years. Its ability to maintain profitability despite intensifying competition from LCCs, which now account for over half of total seat capacity within Southeast Asia, is an indication that SilkAir has been highly successful under its current full service feeder model.

SIA's decision to fold SilkAir into SIA therefore should not be viewed in any way as a response to SilkAir struggling to compete. It should instead be viewed as a sensible decision to improve the group's long term position.

The gap between its full service widebody and full service narrowbody product has long been a weakness at the SIA Group. SilkAir's increasing size and role, along with narrowbody product improvements from competitors, meant that SIA had to make a move in the narrowbody space to maintain its leading position in the full service segment of the market.

If anything, SilkAir should have pursued product upgrades and a rebranding, or merger with SIA, sooner. An earlier decision would have enabled the group to introduce product improvements with the introduction of the 737 MAX 8 in late 2017, enabling the group to avoid spending millions in retrofitting practically new aircraft. However, making a move now and committing to narrowbody product improvements early next decade, along with a merger, is an example of the saying "better late than never".

SilkAir currently operates 34 aircraft, 22 of which will be retrofitted

SIA has been an all-widebody operator since it phased out the 727 in the mid-1980s. In 1989 the group resumed scheduled narrowbody flights under the subsidiary Tradewinds, which became SilkAir in 1992.

SilkAir currently operates 34 aircraft, consisting of 17 162-seat 737-800s, five 156-seat 737 MAX 8s, nine 150-seat A320s and three 128-seat A319s. The A320s and A319s, which have 12 and eight business class seats respectively, will not be retrofitted because SilkAir is phasing out its Airbus fleet by the end of 2020.

SilkAir will be retrofitting its entire 737-800 fleet, which is currently only two to four years old. SilkAir took delivery of its first 737-800 in early 2014, added another seven by the end of CY2014, which were followed by six in CY2015 and the last three in CY2016.

SilkAir took delivery of its first three 737 MAX 8s in 4QCY2017. It added another two 737 MAX 8s in Apr-2018, the first month in SIA Group's FY2019. SilkAir is slated to take only one more 737 MAX 8 in FY2019, for a total of six aircraft.

SilkAir plans to phase out one more A319 and one more A320 in FY2019, resulting in a fleet of 33 aircraft. Although SilkAir's fleet is increasing by only one aircraft in FY2019 (and is actually decreasing over the last 11 months of the fiscal year), the airline is projecting 9% ASK growth for the year as frequencies are added on several existing routes.

SilkAir in-service fleet: end CY2010 to May-2018

Aircraft	End 2010	End 2011	End 2012	End 2013	End 2014	End 2015	End 2016	End 2017	May- 2018*
Airbus A319	4	6	6	6	5	4	3	3	3
Airbus A320	12	13	16	18	13	11	11	10	9
Boeing 737-800	0	0	0	0	8	14	17	17	17
Boeing 737 MAX 8	0	0	0	0	0	0	0	3	5
TOTAL	16	19	22	24	26	29	31	33	34

Source: CAPA - Centre for Aviation.

SIA unable to start retrofit programme until 2020

The SIA Group does not provide aircraft delivery dates beyond the current fiscal year. However, it would be sensible for the group to delay delivery of additional 737 MAX 8s (starting with the seventh aircraft) until the new lie-flat business class seat is ready, since each retrofit is expected to cost more than USD4 million.

The SIA Group expects it will be about two years until its narrowbody lie-flat business class seat is ready, due to the current long lead times from seat suppliers. SIA has not yet selected a seat and is talking to several potential suppliers.

While there are significant backlogs at all the main suppliers, SIA also typically opts to customise its business class seats, resulting in even longer lead times than seats that are acquired off the shelf.

Lie-flat seats will require only slight increase in business class floor space

The group has not yet decided on a new configuration for the 737-800s or 737 MAX 8s. However, Mr Goh stated during the 18-May-2018 results briefing that the new lie-flat business class seats would not need significantly more space than the recliner style business class seats currently installed on SilkAir's 737s. Mr Goh pointed out there have been significant technology improvements with the design of narrowbody lie-flat business class seats, improvements that have reduced the space required for such seats and contributed to the group's decision now to pursue a narrowbody lie-flat product.

"One reason why we have decided at this point in time to do this particular exercise is because we are seeing the availability of lie-flat seats which are much more space efficient is now in the market...Therefore we are able to make use of that ability to do the configuration without having to compromise too much on the reduction in the number of seats", Mr Goh said.

Mr Goh also pointed out that business class demand on SilkAir regional routes had been healthy, and the group is therefore confident that there is sufficient demand for a narrowbody lie-flat product. "The load factors are not low at all", Mr Goh said.

Low economy load factors suggest a reduction in capacity would be manageable

SilkAir has 12 business class seats on both its 737-800s and 737 MAX 8s. However, the airline has improved the pitch with the 737 MAX 8 to 49in and the recline to 12in, compared to a pitch of 39in and a recline of 8in on the 737-800. One row of economy class seats was removed to make room for the increased pitch in business, resulting in 144 economy class seats in the 737 MAX 8, compared to 150 on the 737-800.

Given the efficient design of new generation lie-flat narrowbody seats, the SIA Group should be able to maintain a business class cabin of 12 seats on the 737 MAX 8 without a significant reduction in economy class capacity. At most, one additional row of economy may have to be removed to accommodate 12 lie-flat business class seats. At most two economy class rows on the 737-800 would have to be removed, given that the 737-800 currently has a tighter pitch.

A slight reduction in economy class capacity should be manageable, considering SilkAir's relatively low load factor. In FY2018, SilkAir's load factor was only 73.4%, although this represented a 2.6ppts improvement compared to FY2017. SilkAir's load factor peaked in FY2011 at a still relatively low 76.2%.

SilkAir passenger load factor and year-over-year growth: CY2008 to 4M2018

Source: CAPA - Centre for Aviation and company reports.

SIA Group should consider larger narrowbody aircraft

SIA also has the option of converting 737 MAX 8 orders to the larger MAX 9 or MAX 10, which would give it the floor space to squeeze in more lie-flat business class seats while also increasing economy capacity. For example, rival Malaysia Airlines is planning to configure its future fleet of 737 MAX 10s with 16 lie-flat business class seat and 166 economy class seats.

The SIA Group currently has commitments for 32 737 MAX 8s. Trading up to the 737 MAX 9 or MAX 10 for some of these aircraft is likely, given the current large gap between SIA's largest widebody aircraft and SilkAir's largest narrowbody aircraft. SIA the parent airline is upgauging regional routes as it introduces 337-seat 787-10s, which further widens this gap and makes the business case for larger narrowbody aircraft more obvious.

See related report: Boeing 787-10 fleet analysis: Singapore Airlines and Boeing bet on game changing efficiency

The group may have initially been reluctant to have SilkAir operate larger narrowbody aircraft because of its weaker product. The SIA-SilkAir merger and introduction of lie-flat narrowbody business class seats eliminate this potential concern.

Large narrowbody aircraft under the SIA brand would be an ideal solution for thick regional routes to slot constrained airports and would enable SIA to reduce the unit costs of its narrowbody operation.

SilkAir product upgrade is overdue

Philippine Airlines will become the first airline in Southeast Asia to offer a narrowbody lie-flat business product in Jun-2018, when it puts its first A321neo into service. PAL is configuring its A321neos with 12 lie-flat business class and 156 economy class seats.

More airlines in Asia will inevitably opt to introduce lie-flat business class seats in narrowbody aircraft, joining a global trend which has so far been more pronounced in other regions. SIA had to make a move in order to be competitive in the narrowbody segment.

Several of SIA's regional competitors also already offer seatback IFE systems on narrowbody aircraft. SilkAir currently only has overhead dropdown monitors and offers streaming to passengers bringing their own devices.

SilkAir introduced some product improvements with the delivery of its first 737-800 in 2014 and with the delivery of its first 737 MAX 8 in late 2017. However, the improvements were relatively minor. A more significant upgrade has been overdue.

Folding SilkAir into SIA has also seemed inevitable for some time. CAPA stated in a Jan-2017 report that: "Following the completion of the Scoot-Tigerair merger a reduction in the number of full service brands would be logical. Folding SilkAir, which has been around for 28 years, into Singapore Airlines would be a much more difficult and relatively drastic decision, but would not be unfathomable".

See related report: SilkAir 2017 outlook: needs to rebrand as 737 MAX arrives amid challenging conditions

In a Oct-2017 report CAPA stated that the need to upgrade the SilkAir product had become more critical, leading to a potential merger with SIA, due to SIA's decision to introduce a new lie-flat regional product with the 787-10.

At the time, CAPA stated: "SilkAir has started taking delivery of new 737 MAX 8 aircraft, providing an opportunity to deploy highly efficient new generation narrowbody aircraft on longer medium haul routes - both new routes and those now served with SIA's all-widebody fleet. SilkAir has so far elected only to pursue modest upgrades of its inflight product with the 737 MAX, but will likely consider more significant upgrades and a rebranding or merger with the parent airline as part of an overall SIA Group review."

"SilkAir could potentially offer lie-flat business class seats on a new sub-fleet and use the same product SIA will be introducing in 2018 on its new fleet of 787-10s. SIA is planning a significant improvement to its regional premium product as the new two class 787-10s replace two class A330-300s and older model 777s on short/medium haul routes."

See related report: Singapore Airlines Group faces critical decisions with regional strategy as 787-10s, 737 MAXs arrive

SIA's fleet to become 100% lie-flat

SIA's first 787-10 was put into service in early Apr-2018. SIA plans to put eight 787-10s into service in FY2019, along with its first three regional configured A350-900s, which will also offer a lie-flat business class product. The eight 787-10s and three A350s will replace five A330-300s, five 777-200ERs and one 777-200.

SIA currently still has 34 aircraft with angled flat seats, according to the CAPA Fleet Database. SIA is expected to complete the transition to an all lie-flat widebody fleet within five years.

The new retrofit programme for the 737 fleet will mean SIA will also have an all lie-flat product on its future narrowbody fleet. This is an impressive achievement, although perhaps unnecessary given that a majority of SilkAir's routes are less than four hours.

SilkAir currently serves 50 destinations, 27 of which are less than four hours from Singapore. Routes of less than four hours account for approximately two thirds of SilkAir's seat capacity and 40% of ASKs, according to CAPA and OAG data.

SIA the parent airline has 40 destinations, but only 10 are less than four hours from Singapore. Only 25% of SIA's seat capacity and 8% of its ASKs are on routes of less than four hours.

As SIA's regional fleet is mainly used on medium haul routes of four to eight hours, the decision to transition to an all lie-flat product is more obvious than it is for the SilkAir narrowbody fleet. However, the group has concluded that offering a consistent product across both the widebody and narrowbody fleets is important, even if most of its narrowbody services are short haul. The group believes it does not make sense to have a subfleet without the lie-flat product. Such a subfleet, in addition to resulting in product inconsistencies, would make aircraft rotation and scheduling more complicated.

SIA will likely become the first airline in the world offering lie-flat business class products across all narrowbody and widebody aircraft. SIA is often a trendsetter and other airlines will surely take note of SIA's unprecedented narrowbody product commitment.