SIA takes bold gamble with new budget carrier

SINGAPORE—Singapore Airlines’ decision to launch a long-haul budget carrier is a risky but necessary gamble as it comes under growing pressure at both ends of the market, aviation analysts said.

SIA, one of the world’s most profitable premium airlines, surprised the industry on Wednesday by announcing plans to tap into the region’s growing appetite for budget air tickets on medium- to long-haul destinations.

The sector is currently dominated by neighboring Malaysia’s AirAsia X, which was launched four years ago and flies to 14 cities including London, Tehran, Paris, Seoul and Tokyo, as well as destinations in China, India and Australia.

SIA said it aims to launch its wholly owned but independently managed low-cost operation within one year using wide-body aircraft.

The announcement came amid intensifying competition in first- and business-class travel, with rivals such as Hong Kong’s Cathay Pacific and Gulf carriers like Emirates and Etihad muscling into SIA’s premium turf.

Analysts estimate that SIA gets 40-50 percent of its revenue from the higher end of the market.

“Low-cost carriers, even for long haul, is the way forward,” said Julius Yeo, a Singapore-based aviation analyst with Frost and Sullivan consultancy.

“The downside is the worry about diluting the SIA brand but the good part is they are willing to take the risk,” said Yeo.

“If you want to succeed, you have to take some risk.”

The huge capital outlay typically needed to start a new airline from scratch is another cause for concern but the move will also reap huge dividends if SIA gets its formula right, said another analyst.

“The trick for them is to find the right mix of aircraft, destinations and feeder traffic,” said Shukor Yusof of Standard and Poor’s Equity Research.

But Shukor is confident that SIA, one of the world’s richest airlines with a cash reserve of around Sg$7.0 billion ($5.7 billion), has what it takes to make the new airline a success.

“Somebody like SIA will not go into something like this without having done their homework,” said Shukor.

“I have no doubt that they can make money from this,” he added.

But there is also a risk the new airline may actually eat into SIA’s own turf.

“Cannabilization will remain a worry,” said analysts from CIMB Research who have nicknamed the new airline “SIA X” in a report.

Still, it makes sense for SIA to make a pre-emptive move to defend its home turf with Australia’s Jetstar already planning to launch long-haul flights from Singapore to various European destinations, they added.

“It is a far better option for SIA to start ‘SIA X’ now and establish its market presence than to wait for the Australians to steal the thunder in SIA’s home market,” they said.

Jetstar already flies from Singapore to various destinations in Australia and the Asia-Pacific region.

SIA said it will reveal more details about the new airline including its branding, management team and route network at a later date.

The Sydney-based Center for Asia Pacific Aviation (CAPA) said the plan is an acknowledgement by SIA that it can no longer rely on premium travel to drive future profitability.

“The message is that the carrier, despite its very high quality product, cannot grow profitably by only focusing on the top end of the market,” CAPA said in a report.

“Launching a low fare operation should help SIA Group mitigate its risk. Currently the group has been putting most of its eggs in the full service, top-end basket.”

The Singapore carrier already owns a regional unit, SilkAir, that flies to popular Asian holiday destinations and has a one-third stake in Tiger Airways, a locally based budget carrier that also flies to cities in Asia and Australia.

SIA announced in May it earned a profit of Sg$1.09 billion in the year to March 2011 on revenues of Sg$14.5 billion.