Singapore Air Clings To Luxury As LCCs Thrive

 

Singapore Air Clings To Luxury As LCCs Thrive

Singapore Air Clings To Luxury As LCCs Thrive

Tony Fernandes, the flamboyant chief executive of budget airline AirAsia, joked last month that he could buy Singapore Airlines and even displayed an artist’s impression of his competitor’s plane painted in AirAsia livery.

It was a tongue-in-cheek jab, but one that struck at a painful truth for Singapore Airlines. The company has stuck to its luxury image even as low-cost carriers picked off passengers in a weak global economy, and profits have suffered.

The airline reported an unexpected loss in the January-March quarter, its first since the tail end of the global financial crisis in 2009 which crushed global air travel. Its shares are down 29 percent in the past 12 months, while AirAsia’s are up 10 percent.

While AirAsia pecks away at the low end, Dubai’s flag carrier Emirates is challenging Singapore for the title of top luxury carrier. Emirates does not have publicly traded shares, but its operating margins over the past six years have outpaced Singapore’s, 8.6 percent to 6.5 percent.

That poses a dilemma for Singapore Airlines chief executive Goh Choon Phong: stick with luxury to protect a prestigious brand or pare back on the perks to prop up profits.

Goh “assumed the mantle at a time when the industry is making a paradigm shift from the extravagance of the past to the economic realities of today” said Shukor Yusof, a Singapore-based aviation analyst for Standard & Poor’s.

“The strategy or model that SIA has long held needs to be redefined, but to what?” Yusof said.

Goh’s approach has been somewhat of a hedge. The company launched long-haul budget carrier Scoot this year, and is expanding the capacity of its regional carrier SilkAir by more than a fifth by early next year.

The hope is that this will insulate profits from a decline in long-haul business travel as Europe slides into a recession and the US economy struggles to gain momentum.

But the strategy depends on premium trans-oceanic travel bouncing back. Although international passenger traffic has increased so far in 2012, growth in economy class far outpaced premium traffic in April, the most recent month for which data is available.

If that pattern persists, SIA would be hit hard because of its focus on first- and business-class customers. It is the only major airline to operate all business-class flights – including a 19-hour, nonstop service connecting Singapore and New York, the longest scheduled route in the world.

FLYING EMPTY

SIA has a reputation for going out of its way to keep top-tier customers happy, which routinely earns the airline high marks for customer service.

The business class-only flights to the United States, which serve both New York City gateway Newark and Los Angeles, are a hit with passengers willing to pay a premium to shave hours off a trip to Asia.

The seats don’t come cheap, costing USD$10,000 for a round-trip journey, and the airline can’t always sell enough tickets to cover fuel and staff costs. Industry insiders told reporters the airline once flew to the United States carrying a single passenger, although SIA declined to confirm that.

The airline uses fuel-thirsty Airbus A340s for those long-haul direct flights. The planes, built for the world’s longest trips, run on four engines and were designed in an era of cheaper oil. Most other long-range jets such as Boeing’s 777 use two engines and burn less fuel, making them cheaper to operate.

A back-of-the-envelope calculation shows that SIA needed to fill 85 of the flight’s 100 seats to break even when fuel prices spiked earlier this year. SIA declined to comment.

Brendan Sobie, chief analyst at CAPA Centre for Aviation, said some unprofitable routes could be justified if they help build brand cachet.

But the sliding stock prices serves as a reminder that investors prize profits over prestige.

“SIA has stubbornly clung to a (luxury) concept that is becoming more and more outdated,” Standard & Poor’s Yusof said. “Goh will not be the one to force changes, but the market will.”

The all business-class service was introduced by the airline’s previous chief executive, Chew Choon Seng, who said luxury air travel can still be profitable and high-end demand had not disappeared.

“If people can sell paintings for USD$120 million, it tells you something,” he told reporters at an aviation conference, referring to Edvard Munch’s painting “The Scream” that sold for the record-setting sum at an auction in May.

(Reuters)



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