Straits Times, 24 December 2003
Battle for the skies
A four-part series that looks at what is at stake in Singapore's flight to retain its air hub status
http://straitstimes.asia1.com.sg/sin...26846,00.html?
By Karamjit Kaur
THE THREAT: The phenomenon of budget airlines, which swept through Europe and the United States, has swooped into the region - and Singapore Airlines (SIA) is not taking any chances on this front.
The Western experience shows that demand for low-cost travel hastens the dismantling of regulated and restricted traffic rights. Senior Minister Lee Kuan Yew predicts the market is likely to be freed up in 10 years or sooner.
When that happens, budget carriers will sprout, as they did in the US and Europe, although only two or three survived there. But they eat into the margins of the mainstream carriers, who have a large chunk of tourist-class passengers.
Also, full-service carriers appear inept at running discount carriers, with those of British Airways and United Airways failing miserably.
THE GAME PLAN: SIA, faced with at least three budget airlines planning to take off in the region next year, will unleash Tiger Airways in the final quarter of next year.
But, unlike its 100 per cent stake in SilkAir, it holds only a minority share in the joint venture, which has the owners of Europe's second-largest discount carrier Ryanair as one of the stakeholders.
Changi Airport also appears keen to support the low-cost carriers, saying it is considering a no-frills terminal, which could be ready as early as in 2005.
Analysts have applauded the moves, pointing out that discount airlines are the biggest threat confronting SIA now.
Says Mr Vincent Ng, an analyst at Standard & Poor's Asian equity research agency: 'It's good that we are not thumbing our noses and taking the threat too lightly. Clearly, the priority now is how to benefit from it.'
Mr Chris Sanda, an associate director and aviation analyst at DBS Vickers brokerage agrees. 'The experience in the US and Europe shows that full-service carriers that ignored the threat from budget airlines regretted the mistake.'
In America, budget carriers have wrested more than 25 per cent of the market share from the mainstream airlines, and in Europe, about 6 per cent.
These discount carriers also make enviable profits. Ryanair and easyJet were the most profitable airlines in the world last year.
And America's Southwest Airlines continues to make profits, even as the Sept 11 attacks caused Swissair of Switzerland, Sabena of Belgium and Ansett of Australia to go belly up.
For SIA, the response is to counter especially the threat to its short-haul market - flights of three to four hours - because 'people can tolerate inconveniences for short periods', says Mr Peter Harbison, managing director of the Sydney-based Centre for Asia-Pacific Aviation.
In fact, travellers such as housewife Maurice Tay, 45, and businessman Andrew Teo, 41, say they will dump SIA if a budget carrier offers fares at half the airline's price.
For that size of savings, they would willingly give up such frills as free food and drinks and assigned seats.
Says Mrs Tay: 'If I can save up to 50 per cent, there is no way I would fly SIA or any other main carrier, especially if the flying time is less than four hours.'
Some analysts, however, feel a stiff competition is not imminent in the region. Despite the spurt of start-ups next year - when AirAsia Thailand and Jetstar of Australia and homegrown Valuair would take off - they argue that conditions in Asia, unlike those in Europe and the US, are not conducive for budget carriers to grow as if the sky's the limit.
The pace will be slow, mainly because of the absence of airports and infrastructure that fit their needs and the slow adoption of open skies agreement.
The economics of budget carriers demand that costs be kept at a minimum but in Asia, they are not going to be spoilt for choice of cheaper secondary airports.
Adds Mr Sanda: 'There are other barriers too, like the lack of proper customs and immigration facilities and telecommunication services.'
Bilateral services agreements also govern flights across borders and they often limit the number of flights allowed, the airlines and the type of aircraft used.
Says Mr Ng of Standard & Poor's: 'No fairy godmother is going to wave a magic wand and lift all the restrictions overnight. The freeing up of the skies in Asia will be a very measured process, subject to many rounds of bilateral negotiations. There will be hits and misses and at best, the results will be patchy.'
In the US, where the domestic market is huge, discount carriers can make money even without having to fly international routes, while in Europe, these carriers took off only after the formation of the European Union led to the lifting of border restrictions.
Still, airlines such as Qantas, Thai Airways, Cathay Pacific and United Airways have told The Straits Times that they will do or are thinking of doing what SIA did.
The jury is out on whether budget carriers are sure winners.
As former SIA chief executive Cheong Choong Kong warned earlier this year: 'Aviation history is littered with the carcasses' of those who bet that low-cost airlines could be killer propositions.