Wirraway
17th Apr 2004, 04:49
Sat "The Straits Times" Singapore
INSIGHT
A Singapore without SIA?
Competition is now at Singapore Airlines' doorstep after having snapped at the heels of its full-service rivals around the world. As it welcomes low-cost carriers with open arms, the Government has said that if it has to decide between protecting Changi's air-hub status and losing SIA's standing in the new aviation landscape, it will choose Changi. So how will the low-cost carrier phenomenon affect SIA's fortunes? As REBECCA LEE finds out, there are four challenges: slashing costs, betting on own budget carrier, riding the phenomenon and hanging onto its premium.
SHE is there waiting bright-eyed and smiling when you step onto the plane. She plies you with a hot towel soon after, serves French wine before you ask for it, a hot meal too, and almost everything else you fancy.
Ah, the Singapore Girl.
Now, imagine the same girl steering passengers from the aircraft to the airport terminal - sans aerobridge - or loading baggage onto the carousel.
It may not happen, but getting employees like the SIA girl to multi-task could be one slimming diet the national carrier could go on as it pares down its costs to take on low-cost competitors.
SIA chief executive Chew Choon Seng has said the airline is looking to cut between $800 million and $1.6 billion, or 10-20 per cent of its total expenditure. This to ensure it remains economically viable in the long term and so that it can achieve a targeted 8 per cent return on capital employed - a benchmark investors look at when they pump in money.
An aggressive target, analysts say, given that it is already running one of the tightest ships around compared with other full-service network carriers.
According to data from the Sydney-based Centre for Asia-Pacific Aviation, in 2002, SIA's But that's not the end of it: as part of the wage deal, workers will get back a one-off lump sum of 15 per cent more than the amount that was cut. This is on condition the company makes at least $600 million profit. It has. So workers will get a payback amounting to $72 million, $10 million more than what was cut.
Clearly, the flexibility injected into wages did not lead to lower costs, for this year at least. So how else can wage costs be cut? Will there be further retrenchments?
Mr Chew said SIA was not a 'hire-and-fire' organisation and that last year's layoffs - the largest in its history as it axed nearly 600 employees - was done under extreme circumstances.
Judging by how other airlines have tackled the cost issue, particularly low-cost carriers, workers will have to be prepared to multi-task.
So, for instance, baggage truck drivers may have to unload arriving bags and clear garbage from the aircraft, as well as place bags on the baggage claim carousel and even marshal the aircraft in and out of the parking stand. This increased productivity could bring about a leaner operation and may also lead to some redundancies.
Other ways in which SIA could save include changing the medical benefits scheme to make workers co-pay instead of the company footing the entire bill.
While staff costs amounted to $1.4 billion last year, it is only the second-largest cost component. Fuel takes up the lion's share at $1.5 billion or 19.4 per cent.
Though fuel is largely beyond the company's control - and prices have risen 17 per cent this year - it has mitigated its impact through hedging. But there is a limit to how much it can hedge.
Other major cost items are aircraft maintenance and overhaul, and sales costs.
The airline's distribution channels are one area ripe for pruning, said Professor Rigas Doganis of the College of Aeronautics, Cranfield University, in Britain. 'By selling more tickets through the Internet, an airline cuts out travel agents, who typically are paid commission fees of 5 to 10 per cent of the ticket price,' he noted.
Aircraft maintenance is now done by its 87-per-cent-owned unit SIA Engineering company and the airline has said it is not about to divest the subsidiary.
As for whether SIA should divest its other 87-per-cent-owned subsidiary, ground handler Singapore Airport Terminal Services (Sats), as a third ground handler enters the market, the jury is still out.
Divestment would mean it can pick the lowest bidder for contracts as it outsources its meals. But it risks lowering the quality of the SIA experience in which food is integral.
'There is no black or white answer to this. Airlines over the years have gone from one side to the other on this argument: divestiture or diversification,' said Mr Harbison.
Divesting and outsourcing of services are very much part of the low-cost model, while airline conglomerates have tended to diversify and expand into other areas to cushion shocks and smooth out their earnings.
As SIA seeks to slash costs, it will need to be worried too of the impact on staff. 'Imagine an organisation that has to cut costs by 10-20 per cent, what will happen to morale?' said Kim Eng Ong Asia Securities research head Seah Hiang Hong.
A fine balance will have to be struck between trimming the fat and retaining talent, which has been instrumental in keeping the airline a great way to fly.
==============================================
"The Straits Times" Singapore
Slice of budget pie: Will the gamble pay off?
If SIA had its way, it would have wanted no part of the budget carrier business, Senior Minister Lee Kuan Yew revealed recently. But it has since decided, if it can't beat 'em, join 'em.
Enter its own low-cost start-up Tiger Airways. Temasek Holdings has a share in both Tiger and a yet-to-be-named Qantas budget carrier as well. It is betting on the budget airline revolution but on multiple horses.
The way DBS Vickers' aviation analyst Chris Sanda sees it, when the dust settles, there will only be one successful low-cost carrier (LCC), as seen by the European and American example.
Can SIA's Tiger be the one and how can it ensure it wins?
UBS Warburg aviation analyst Tim Ross says gamble or not, SIA is left with no choice but to take the risk.
'There is a clear appetite for low-cost travel. If SIA doesn't do it, someone else will. But the burden of proof lies with legacy carriers to show they can change their legacy cost structure framework,' he said.
SIA will need to learn from the failures of its European rivals such as British Airways over its low-cost venture Go and KLM with its equivalent Buzz. These airlines were merely low-fare but not low-cost. The reason: they were unable to change their work practices.
With low-cost Tiger, SIA will end up with a finger in several pies: the premium market, the regional market via subsidiary SilkAir and the budget carrier sector.
At the margins, there will be some migration of low-end passengers from the premium brand switching to LCCs.
On the shorter regional routes such as Singapore-Kuala Lumpur and Singapore-Jakarta, many people, especially leisure travellers, may be prepared to forgo service - be it a hot meal, frequent flyer miles or lounge access - and pocket the savings.
What SIA needs to do is to figure out how to position SilkAir and Tiger in the marketplace without causing the Singapore Airlines brand to also be seen as being downmarket, said aviation analyst Peter Negline from investment bank JP Morgan.
In particular, it needs to work out how to position its regional Asian business, which makes up almost one-third of its revenue.
This could mean turning over - some if not all - the short-haul routes to cities such as Kuala Lumpur and Jakarta to Tiger, if the low-cost model can do it more profitably.
Further ahead, there is another experiment that could well change the airline's calculations. Down Under, budget carriers Leisurejet and Backpackers' Express say they want to cater to the budget long-haul market flying from Australia to Britain. Whether travellers will put up with no-frills service on journeys of more than 10 hours is anybody's guess right now.
The immediate battle, however, will be tackling destinations in the five-hour range.
Against such a backdrop, SIA is not without niches it can exploit further in the face of heat from the LCCs or even if Tiger fails to roar. These are in the areas of the cargo business and long-haul routes.
'The key factors that are driving the aviation industry at the moment are freight, long-haul and premium. And the last time I looked at it, low-cost carriers have neither of these,' said UBS' Mr Ross.
===========================================
Sat "The Straits Times" Singapore
INSIGHT
Low-cost terminal: Opportunity or threat?
THIS week, budget carrier upstart Valuair got its wings to go airborne after obtaining an Air Operators' Certificate. Last week, Qantas Airways announced the setting up of a low-cost carrier (LCC) in Singapore.
Then there is Singapore Airlines' low-cost offshoot Tiger Airways and Malaysia's AirAsia, which has roped in Singapore investors to mount flights from here.
Thus the total number of LCCs planning to fly out of Singapore is four.
The Government has also announced plans to set up a low-cost terminal at Changi, a pared-down facility much like a bus terminal.
Where does SIA fit in in all these plans?
The Government indicated that in allowing Qantas to set up an LCC here, the real prize is a further opening up of the skies in Australia. A Transport Ministry statement had said at the time that Qantas' expansion 'clearly shows' the carrier and the airline environment have stabilised - a precondition cited by the Australians for signing a fully-fledged open-skies agreement.
Who stands to gain? SIA. Getting further air rights will give the carrier a foothold in the lucrative trans- pacific route between Australia and the United States.
In the last round of negotiations held between the Singapore and Australian governments last year, Qantas was said to have blocked the talks.
The argument appears to be that when the governments next negotiate, Qantas would be less resistant. But this may prove a risky gambit.
'I'm sure Qantas wouldn't see it that way... Dixon is a master at playing the political game,' said Centre for Asia-Pacific Aviation managing director Peter Harbison, referring to Qantas CEO Geoff Dixon. Even if this is so, paving the way for Qantas to set up an LCC here, with Temasek pumping in $19 million, will also likely anchor Changi's second-biggest customer in Singapore.
Mr Harbison also pointed to the economic benefits that opening up to low-cost carriers - with or without the Down Under prize - will bring to travel and related industries. Indeed, UBS Warburg analyst Timothy Ross noted that five years after the market was deregulated in Europe, traffic grew at a compound annual rate of 37 per cent and, in the US, growth was 50 per cent.
Britain's Stansted airport had barely a million passengers 13 years ago. Now the base of budget carrier Ryanair, it handled 18.4 million passengers in 2002.
Singapore may not see the same phenomenal growth in traffic immediately. The skies in Asia are still restricted and it already has a large base, with 24.7 million passengers landing at Changi last year. But the expansion of the leisure market looks to be a sure thing.
Singapore's small population size wouldn't be a hindrance either although places like Bangkok may be more geographically advantaged. Its edge: affluence, Singaporeans' love for travel, and the close to three billion people within a five-hour flight range.
DBS Vickers analyst Chris Sanda estimates that the Singapore market will grow by 20-30 per cent with the proliferation of LCCs.
Hence SIA could even benefit as the cheap regional fares lure more foreigners here to hop onto the long-haul flights to and from Europe or the US. This means the low-cost carriers' traffic will feed into SIA's network.
So the impending turf-war, while posing immediate threats, may yet prove to be a further gain for SIA.
===========================================
INSIGHT
A Singapore without SIA?
Competition is now at Singapore Airlines' doorstep after having snapped at the heels of its full-service rivals around the world. As it welcomes low-cost carriers with open arms, the Government has said that if it has to decide between protecting Changi's air-hub status and losing SIA's standing in the new aviation landscape, it will choose Changi. So how will the low-cost carrier phenomenon affect SIA's fortunes? As REBECCA LEE finds out, there are four challenges: slashing costs, betting on own budget carrier, riding the phenomenon and hanging onto its premium.
SHE is there waiting bright-eyed and smiling when you step onto the plane. She plies you with a hot towel soon after, serves French wine before you ask for it, a hot meal too, and almost everything else you fancy.
Ah, the Singapore Girl.
Now, imagine the same girl steering passengers from the aircraft to the airport terminal - sans aerobridge - or loading baggage onto the carousel.
It may not happen, but getting employees like the SIA girl to multi-task could be one slimming diet the national carrier could go on as it pares down its costs to take on low-cost competitors.
SIA chief executive Chew Choon Seng has said the airline is looking to cut between $800 million and $1.6 billion, or 10-20 per cent of its total expenditure. This to ensure it remains economically viable in the long term and so that it can achieve a targeted 8 per cent return on capital employed - a benchmark investors look at when they pump in money.
An aggressive target, analysts say, given that it is already running one of the tightest ships around compared with other full-service network carriers.
According to data from the Sydney-based Centre for Asia-Pacific Aviation, in 2002, SIA's But that's not the end of it: as part of the wage deal, workers will get back a one-off lump sum of 15 per cent more than the amount that was cut. This is on condition the company makes at least $600 million profit. It has. So workers will get a payback amounting to $72 million, $10 million more than what was cut.
Clearly, the flexibility injected into wages did not lead to lower costs, for this year at least. So how else can wage costs be cut? Will there be further retrenchments?
Mr Chew said SIA was not a 'hire-and-fire' organisation and that last year's layoffs - the largest in its history as it axed nearly 600 employees - was done under extreme circumstances.
Judging by how other airlines have tackled the cost issue, particularly low-cost carriers, workers will have to be prepared to multi-task.
So, for instance, baggage truck drivers may have to unload arriving bags and clear garbage from the aircraft, as well as place bags on the baggage claim carousel and even marshal the aircraft in and out of the parking stand. This increased productivity could bring about a leaner operation and may also lead to some redundancies.
Other ways in which SIA could save include changing the medical benefits scheme to make workers co-pay instead of the company footing the entire bill.
While staff costs amounted to $1.4 billion last year, it is only the second-largest cost component. Fuel takes up the lion's share at $1.5 billion or 19.4 per cent.
Though fuel is largely beyond the company's control - and prices have risen 17 per cent this year - it has mitigated its impact through hedging. But there is a limit to how much it can hedge.
Other major cost items are aircraft maintenance and overhaul, and sales costs.
The airline's distribution channels are one area ripe for pruning, said Professor Rigas Doganis of the College of Aeronautics, Cranfield University, in Britain. 'By selling more tickets through the Internet, an airline cuts out travel agents, who typically are paid commission fees of 5 to 10 per cent of the ticket price,' he noted.
Aircraft maintenance is now done by its 87-per-cent-owned unit SIA Engineering company and the airline has said it is not about to divest the subsidiary.
As for whether SIA should divest its other 87-per-cent-owned subsidiary, ground handler Singapore Airport Terminal Services (Sats), as a third ground handler enters the market, the jury is still out.
Divestment would mean it can pick the lowest bidder for contracts as it outsources its meals. But it risks lowering the quality of the SIA experience in which food is integral.
'There is no black or white answer to this. Airlines over the years have gone from one side to the other on this argument: divestiture or diversification,' said Mr Harbison.
Divesting and outsourcing of services are very much part of the low-cost model, while airline conglomerates have tended to diversify and expand into other areas to cushion shocks and smooth out their earnings.
As SIA seeks to slash costs, it will need to be worried too of the impact on staff. 'Imagine an organisation that has to cut costs by 10-20 per cent, what will happen to morale?' said Kim Eng Ong Asia Securities research head Seah Hiang Hong.
A fine balance will have to be struck between trimming the fat and retaining talent, which has been instrumental in keeping the airline a great way to fly.
==============================================
"The Straits Times" Singapore
Slice of budget pie: Will the gamble pay off?
If SIA had its way, it would have wanted no part of the budget carrier business, Senior Minister Lee Kuan Yew revealed recently. But it has since decided, if it can't beat 'em, join 'em.
Enter its own low-cost start-up Tiger Airways. Temasek Holdings has a share in both Tiger and a yet-to-be-named Qantas budget carrier as well. It is betting on the budget airline revolution but on multiple horses.
The way DBS Vickers' aviation analyst Chris Sanda sees it, when the dust settles, there will only be one successful low-cost carrier (LCC), as seen by the European and American example.
Can SIA's Tiger be the one and how can it ensure it wins?
UBS Warburg aviation analyst Tim Ross says gamble or not, SIA is left with no choice but to take the risk.
'There is a clear appetite for low-cost travel. If SIA doesn't do it, someone else will. But the burden of proof lies with legacy carriers to show they can change their legacy cost structure framework,' he said.
SIA will need to learn from the failures of its European rivals such as British Airways over its low-cost venture Go and KLM with its equivalent Buzz. These airlines were merely low-fare but not low-cost. The reason: they were unable to change their work practices.
With low-cost Tiger, SIA will end up with a finger in several pies: the premium market, the regional market via subsidiary SilkAir and the budget carrier sector.
At the margins, there will be some migration of low-end passengers from the premium brand switching to LCCs.
On the shorter regional routes such as Singapore-Kuala Lumpur and Singapore-Jakarta, many people, especially leisure travellers, may be prepared to forgo service - be it a hot meal, frequent flyer miles or lounge access - and pocket the savings.
What SIA needs to do is to figure out how to position SilkAir and Tiger in the marketplace without causing the Singapore Airlines brand to also be seen as being downmarket, said aviation analyst Peter Negline from investment bank JP Morgan.
In particular, it needs to work out how to position its regional Asian business, which makes up almost one-third of its revenue.
This could mean turning over - some if not all - the short-haul routes to cities such as Kuala Lumpur and Jakarta to Tiger, if the low-cost model can do it more profitably.
Further ahead, there is another experiment that could well change the airline's calculations. Down Under, budget carriers Leisurejet and Backpackers' Express say they want to cater to the budget long-haul market flying from Australia to Britain. Whether travellers will put up with no-frills service on journeys of more than 10 hours is anybody's guess right now.
The immediate battle, however, will be tackling destinations in the five-hour range.
Against such a backdrop, SIA is not without niches it can exploit further in the face of heat from the LCCs or even if Tiger fails to roar. These are in the areas of the cargo business and long-haul routes.
'The key factors that are driving the aviation industry at the moment are freight, long-haul and premium. And the last time I looked at it, low-cost carriers have neither of these,' said UBS' Mr Ross.
===========================================
Sat "The Straits Times" Singapore
INSIGHT
Low-cost terminal: Opportunity or threat?
THIS week, budget carrier upstart Valuair got its wings to go airborne after obtaining an Air Operators' Certificate. Last week, Qantas Airways announced the setting up of a low-cost carrier (LCC) in Singapore.
Then there is Singapore Airlines' low-cost offshoot Tiger Airways and Malaysia's AirAsia, which has roped in Singapore investors to mount flights from here.
Thus the total number of LCCs planning to fly out of Singapore is four.
The Government has also announced plans to set up a low-cost terminal at Changi, a pared-down facility much like a bus terminal.
Where does SIA fit in in all these plans?
The Government indicated that in allowing Qantas to set up an LCC here, the real prize is a further opening up of the skies in Australia. A Transport Ministry statement had said at the time that Qantas' expansion 'clearly shows' the carrier and the airline environment have stabilised - a precondition cited by the Australians for signing a fully-fledged open-skies agreement.
Who stands to gain? SIA. Getting further air rights will give the carrier a foothold in the lucrative trans- pacific route between Australia and the United States.
In the last round of negotiations held between the Singapore and Australian governments last year, Qantas was said to have blocked the talks.
The argument appears to be that when the governments next negotiate, Qantas would be less resistant. But this may prove a risky gambit.
'I'm sure Qantas wouldn't see it that way... Dixon is a master at playing the political game,' said Centre for Asia-Pacific Aviation managing director Peter Harbison, referring to Qantas CEO Geoff Dixon. Even if this is so, paving the way for Qantas to set up an LCC here, with Temasek pumping in $19 million, will also likely anchor Changi's second-biggest customer in Singapore.
Mr Harbison also pointed to the economic benefits that opening up to low-cost carriers - with or without the Down Under prize - will bring to travel and related industries. Indeed, UBS Warburg analyst Timothy Ross noted that five years after the market was deregulated in Europe, traffic grew at a compound annual rate of 37 per cent and, in the US, growth was 50 per cent.
Britain's Stansted airport had barely a million passengers 13 years ago. Now the base of budget carrier Ryanair, it handled 18.4 million passengers in 2002.
Singapore may not see the same phenomenal growth in traffic immediately. The skies in Asia are still restricted and it already has a large base, with 24.7 million passengers landing at Changi last year. But the expansion of the leisure market looks to be a sure thing.
Singapore's small population size wouldn't be a hindrance either although places like Bangkok may be more geographically advantaged. Its edge: affluence, Singaporeans' love for travel, and the close to three billion people within a five-hour flight range.
DBS Vickers analyst Chris Sanda estimates that the Singapore market will grow by 20-30 per cent with the proliferation of LCCs.
Hence SIA could even benefit as the cheap regional fares lure more foreigners here to hop onto the long-haul flights to and from Europe or the US. This means the low-cost carriers' traffic will feed into SIA's network.
So the impending turf-war, while posing immediate threats, may yet prove to be a further gain for SIA.
===========================================