SIA's low-cost lesson for Cathay Pacific

What is Europe's most profitable airline?

Air France-KLM, whose premium passengers sleep in private suites with memory-foam mattresses, dine on Joel Robuchon dishes and have private jets at their disposal? Or Ryanair, which offers flights starting at €10 (S$15.50) and whose chief executive officer has mused about charging passengers for toilet visits?

No prizes for guessing, it is Ryanair. Trailing 12-month operating margins at the Irish budget carrier run at 23 per cent, compared with 4.8 per cent at Air France and 6.9 per cent at Lufthansa. They have a bare-bones image, but discount airlines are where the best money is made. Of the world's 10 most profitable airlines by operating margins, only Alaska Air Group and Delta Air Lines are full-service carriers.

There is a lesson in that for Asia's once-mighty full-service operators, Singapore Airlines (SIA) and Cathay Pacific Airways. Both have been relatively late to the discount-aviation party, and are now carrying out strategic reviews to address the threat from state-owned airlines in China and the Gulf.

Budget carriers were until relatively recently a smaller presence in Asia than in Europe and North America. Now, they are indisputably a major part of the future. Survival may depend on embracing the concept.

SIA has been the most forthright in adopting this change. Its Tiger Airways budget offshoot was established back in 2004, with the long-haul discount carrier Scoot following in 2012. The eponymous main carrier's share of group capacity fell to 76 per cent last year, from 95 per cent five years earlier.


Despite missteps and a delayed integration between Tiger and Scoot, discount flying as a whole is starting to pay off: SIA's budget carriers have posted profits for six consecutive quarters.

Absent earnings from them and SilkAir, the shorter-haul brand, the group as a whole would have reported an operating loss in fourth-quarter results announced on Thursday.

While SIA has been running to meet the future, Cathay Pacific has been yelling "stop".

It does not have a budget line, and when Qantas Airways and China Eastern Airlines attempted to set one up in Hong Kong in 2012, the result was a two-year regulatory battle that eventually sent the foreigners packing.

While Hong Kongers constantly moan about the high cost of Cathay's tickets, the only local low-cost carrier seeking to undercut the incumbent is Hong Kong Express, ultimately controlled by mainland takeover monster HNA Group. That conservatism worked well enough for Cathay in the past, but the tide cannot be halted.

Already, travellers from Hong Kong to South-east Asia can fly Tiger and Scoot, as well as AirAsia, Cebu Air and Qantas' Jetstar affiliates. Jetstar is competing with ANA Holdings' Peach and Vanilla Air on Japan routes, while Spring Airlines and Juneyao Airlines vie with HK Express to serve mainland China.

Cathay is well on its way to posting a second consecutive year of losses; SIA, for all its travails, has made a profit every year since at least 1990. Cathay's newly crowned chief executive officer Rupert Hogg would do well to learn from that comparison in addressing the carrier's predicament.

The long-haul routes where it has traditionally dominated are looking increasingly like a lost cause, given the growing muscle of Chinese and Gulf airlines. Regional routes are the best hope for sustained profits, and low-cost carriers are inevitably going to be fierce rivals there, too.

Cathay cannot beat the competition - so it should take a leaf from SIA's book, and join it instead.


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A version of this article appeared in the print edition of The Straits Times on May 20, 2017, with the headline 'SIA's low-cost lesson for Cathay Pacific'. Print Edition | Subscribe