How SIA and Changi Airport can stay ahead of the competition

The year ahead will be exciting but challenging for both Singapore Airlines (SIA) and Changi Airport, both of which depend largely on international air traffic. What are the factors that will affect the aviation industry in the coming months, and how can Singapore’s national airline and world-famous airport stay ahead of the competition?

First, fuel prices look set to rebound as oil-producing countries cut back production, ending a slump that has contributed to a steady return to profitability by several airlines. The movement so far appears to be oscillating, but all indications point to an upward trend.

Higher fuel costs may mean higher airfares and reduced travel — not an encouraging sign, particularly for the premium travel sector. But it would be stretching the pessimism too far to suggest that SIA might do away with the frill of free champagne. That would be a mistake, as it is during such times that SIA would stand out as a veritable competitor without compromising its product.

It is well known in the industry that SIA draws more earnings from First and Business class travellers than its competitors. Typically, the upper classes account for 12 to 13 per cent of all travellers but the yields far outweigh that of economy. SIA’s three-class A380-800 aircraft, for example, has a configuration of 12 First and 86 Business Class, making up 24 per cent of the total 409 seats; the four-class configuration has 12 First and 60 Business Class, making up 20 per cent of the total 353 seats with 36 Premium Economy and 245 Economy.

According to the International Air Transport Association, the growth spurts of premium travel in 2013 and early 2014 are slowing down, putting downward pressure on the share of this sector’s contribution.

Fortunately for SIA, which continues to be favoured among its rivals for First and Business classes, the premium business market is less price sensitive than the economy leisure market. The long-haul segment for this class of travel is also less likely to be affected than for short-haul flights, so SIA’s launch of the nonstop connections with the United States — San Francisco in October this year, and Los Angeles and New York planned for 2018 — is timely.

SIA is also turning its focus on Premium Economy, which is already enjoying growing popularity across the industry. This would cushion any decline in upper class revenue. Although a latecomer in the Premium Economy game compared with its rivals Cathay Pacific and Qantas, SIA is well positioned to leverage its reputation for quality product and service as it equips more aircraft in its fleet with this new class of travel.

It is in low-end travel that SIA will face the fiercest competition, from not only full-service airlines such as Middle-East carriers Emirates, Etihad Airways and Qatar Airways, but also budget carriers competing in the regional market. This sector of travel will continue to grow at a faster rate, with British Airways adding more seats in the Economy cabin and major American airlines such as United and Delta introducing yet another level of economy travel — Basic Economy — to stave off the competition from no-frills operators.

While rising fuel costs will drive up airfares, conversely, competition will drive prices down. If the latter holds sway, it is good news for Changi Airport, which has announced the opening of a fourth terminal with a handling capacity of 16 million passengers next year.

Cheaper airfares will encourage more people to travel, particularly within the region. The spectacular growth of budget airlines in recent years has boosted the number of passengers handled by Changi Airport. Interestingly, more than a quarter of these passengers fly to or from just four cities: Jakarta, Bangkok, Kuala Lumpur or Hong Kong.

One development that could hurt Changi is the introduction by airlines of more nonstop flights between destinations that skip Singapore as a transit point. An example is when Qantas shifted its hub on the Kangaroo route from Singapore to Dubai in 2013. Dubai will suffer a similar fate when Qantas operates non-stop services from Australia to Europe.

The Australian carrier has announced a nonstop service from Perth to London scheduled for 2018, with Perth set to be the hub for traffic between Australia and Britain — a move that Qantas chief executive Alan Joyce referred to as a “game changer”.

Another example is the growing number of direct services by carriers in China to major destinations in Australia, Europe and the US. Air India also operates a nonstop service from New Delhi to San Francisco.

All this, too, is not good news for SIA, which thrives on connecting traffic. It demonstrates how the market is constantly shifting as the competition intensifies. SIA, along with other airlines, can no longer rely fully on the traditional, cyclical pattern of conducting its business.

Although Qantas’ nonstop service from Perth to London will commence only in 2018, it is never too early for SIA to assess its wider impact and strategise. Constant re-strategising becomes critical to tap into growing markets, to cater to seasonal demands and to seek out new opportunities in a less predictable future.

There are good reasons to use Changi Airport as a hub, being a world’s best airport for its state-of-the-art infrastructure, and ease of connections and facilities; the challenge is for SIA and the airport to continually come up with more good reasons to do so. With Terminal 5 to be ready in the next decade, adding capacity to handle another 50 million passengers, this must remain a top priority.

SIA could also consider developing a second hub outside Singapore, taking a leaf from Qantas, which has for many years enjoyed the benefits of its Singapore hub with spokes to key markets in the region.

However, except through joint ventures that SIA has set up in India and Thailand, regulatory restrictions may limit its access.

Going forward, outgoing SIA chairman Stephen Lee advised the airline to engage the next generation of travellers. Their needs may not necessarily be the same as those of the previous generation.

ABOUT THE AUTHOR:

David Leo is a published author and veteran in the aviation industry, where his work experience included operations and customer service.