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How to restore the Singapore Girl's lustre

Action on all fronts, from budget to premium travel, needed to keep SIA a great way to fly.

She may have a wax statue at Madame Tussauds, but the Singapore Girl - icon of national carrier SIA - has lost some of her stature.

From focusing almost entirely on the premium market just five years ago, the Singapore Airlines (SIA) group now includes soon-to-be-merged budget carriers Scoot and Tigerair. These budget airlines are already pulling their weight, contributing almost 30 per cent to total operating profits brought in by the group's four passenger carriers - the fourth being regional airline SilkAir - in the year to March 31.

In the premium market where flagship carrier SIA competes, profits and yields have fallen as airlines compete ferociously to fill seats even as spending on business travel is reduced, forcing SIA to look for alternative revenue streams.

A one-year-old pilot training centre in Seletar, jointly owned and operated with plane-maker Airbus, is doing better than expected, SIA says. The airline has also taken equity stakes in Indian carrier Vistara and Virgin Australia.

It is fair to say that SIA has changed more in the last five years than it did in the 65 before that, to adjust to new challenges.

But what has it achieved? Looking at the latest financial results released last week, one can't help but think, not enough, given the turbulence ahead.

INDUSTRY CHANGES

For the first time in five years, SIA reported a quarterly loss, of $138 million in the three months from January to March.


ST ILLUSTRATION: MIEL

SIA shares plunged the most in nearly six years after the results were announced. They closed at $9.84 yesterday, down from $10.76 before the disclosure.

It could be worse. The International Air Transport Association - the global voice for carriers - estimates that yields during the January-to-March quarter were down 10 per cent across the industry, double the drop that SIA saw.

Last week, Emirates reported that profits plunged 82 per cent to just over $490 million for the 2016-2017 financial year. On Tuesday, Cathay Pacific announced that it would cut 600 jobs, as part of a three-year turnaround plan, after reporting its first full-year loss of more than $100 million in eight years.

In February, Qantas reported a 25 per cent year-on-year drop in profits for the six months from July to December.

Full-service airlines around the world are struggling, with the exception of some North American carriers that benefited from consolidation with the mergers of United and Continental airlines, as well as Delta and Northwest, about a decade ago.

A recent Bloomberg article noted that of the world's 10 most profitable airlines by operating margins, eight in 10 are not full-service carriers. The two that are: Alaska Air Group and Delta Air Lines.

SIA should be very concerned, in particular, about Cathay's plight. After all, the two carriers have much in common. Both are full-service, premium airlines that operate out of key financial hubs in Asia. Despite the lack of a sizeable domestic market, at their peak, SIA and Cathay flew high as hub carriers that connected people across the key continents of Asia, Australia, Europe and North America.

But the end-2008 global financial crisis hit them hard, with banks, finance companies and other businesses slashing travel budgets which, some say, have yet to be restored.

The next big attack, which continues to this day, came from rival carriers, especially Middle- Eastern and mainland Chinese airlines. The growth of budget carriers in South-east Asia has also dealt a serious blow to SIA's regional and short-haul business.

Will SIA be where Cathay is, a few years from now? Not if its chief executive officer can help it.

MAJOR BUSINESS REVIEW

When he met journalists and analysts last week, at his annual post-results briefing, SIA chief executive Goh Choon Phong vowed to make "bold", "radical" changes to transform the airline, to ensure its long-term viability. A new Transformation Office, to look at both revenues and costs, has been set up, he said. The team reports directly to him.

All areas of the business, from network and route planning to products and services, will be reviewed. What the plans are, he did not say, which has some analysts wondering if there's even a concrete one.

UOB Kay Hian wrote: "Our sense is that SIA is still exploring options and does not have a concrete strategy to stem losses as yet."

OCBC Investment Research said that "the worst may not be over for SIA as we continue to expect yield erosion to persist on overcapacity and sustained low oil price environment".

All is not lost for SIA. Unlike Cathay, which did not do enough to reinvent itself, SIA was wise to launch Scoot in 2012 and take full control of Tigerair last year. The airline also said last week that SIA Cargo, its wholly-owned subsidiary, will be re-integrated as a division within the SIA group. The process, aimed at improving efficiency, is expected to be completed in the first half of next year.

Despite the business slowdown, SIA ordered 67 Airbus 350s - widely regarded as the most efficient plane in its category. This has allowed the launch of new routes like Singapore-Dusseldorf (Germany) and plans to resume non-stop flights to Los Angeles and New York next year.

The airline is also going ahead to launch new in-flight products later this year for its long-haul services and, next year, for its planes that operate regional services.

DO MORE, MOVE FASTER

The plans are sound but the pace is so far questionable.

Scoot, which operates medium- and long-haul flights, should have started earlier, and Tigerair should have been acquired sooner, especially when it became apparent after the 2008 financial crisis that the industry was seeing structural, not just cyclical, changes. While SIA first took a stake in Tigerair in 2003, it was only last year that it acquired full control. Scoot, which was launched in 2012, will start flying long haul next month with flights to Athens.

Meanwhile, rival AirAsia started its first airline in Malaysia in 2001, while low-cost carrier Jetstar has been flying long haul since 2006.

A prolonged cargo crisis should have brought SIA Cargo back home sooner. The writing was on the wall from as early as December 2012 when weak global demand forced the airline to ground one aircraft. A second one was parked the next year. From 17 planes at its peak, the airline is now down to just seven.

Even as analysts called for a drastic downsizing of SIA Cargo, the airline did not seem to be in a hurry to move, until now. Being subsumed under the group will help the cargo unit contain costs, for example, if manpower and other resources can be shared.

Still, it is better late than never.

SIA must now deploy its resources quickly and efficiently, to reap the full benefits of operating both premium and budget carriers. Better integration will allow the group to grow its business by growing transit traffic through its Singapore hub.

For example, if being cost-efficient means transferring a significant number of routes now operated by the premium parent carrier to Scoot, which has a lower cost base, so be it. Open up new routes for Scoot. Never mind if one day, Scoot becomes bigger than SIA.

If Vistara is the tool to fight the Middle-Eastern carriers that have made their fortunes on the back of growing demand for air travel in South Asia, give the Indian carrier all the support it needs. This will be critical as Vistara prepares to launch international services in the second half of next year.

It is also worth reassessing the role of SilkAir, which was initially intended to operate as a feeder carrier, connecting SIA customers to leisure destinations in Asia. With Tigerair operating in the same regional market, SilkAir may have to scale back to avoid overlaps.

For the group to truly operate as a single entity and maximise resources including manpower deployment, SIA will need to relook staff benefits and privileges, to reduce the wide gap that now exists between those who work for the premium parent airline and the rest of the group.

As for the parent carrier, which still contributes to the bulk of the group's revenues, SIA needs to step back and take a good look at itself.

SIA's pricing strategy does not seem to have changed much and it still prices itself out of the reach of many Singapore-based travellers. This is despite its eroding profits and the prevalence of fare discounts in the industry. On some popular routes, a business class ticket on SIA can cost more than twice what other airlines offer.

SIA is at risk of losing its appeal among younger customers who grew up flying budget, and pricing itself out of reach of retiree and family vacationers.

Even at the premium level, anecdotal grouses appear more frequent. Businessman Gino Bertuccio, 54, travels first-class on SIA. While the on-board service and cabin products are "fantastic" - which is why he remains a loyal customer - SIA could improve its ground services, he said.

He said: "On other carriers that I have flown, I have been escorted from check-in to the lounge and, from there, to the aircraft when it is time to board. In some cases, the pickup is from the city location... The same meet-and-greet service is provided during transit. SIA does not do this, unless you ask for it. It should be part of the service for premium customers."

SIA has come a long way in 70 years but past glory is no guarantee of future success. It is time for a major shake-up, for SIA to listen to what its customers want and to rally staff to take the business to the next level. It is time for the top brass to put words into action.

A version of this article appeared in the print edition of The Straits Times on May 25, 2017, with the headline 'How to restore the Singapore Girl's lustre'. Print Edition | Subscribe