How to Fix Singapore Airlines
It entered the crisis on an upswing. But it’s poorly positioned in a post-Covid world.
Singapore Airlines is lucky. Singapore Airlines is cursed.
As early as March 26, the ASEAN region’s largest airline counted its blessings as its government provided backing for $13b in new liquidity. It was facing the greatest crisis in industry history, yes. But it would have plenty of cash — a lot more than its rivals, presumably — to ride out the storm. Entering the crisis, Singapore Airlines was on an upswing of sorts. Its 7% operating margin last year wasn’t terribly impressive. But it was enough to maintain a multi-year streak of continuous improvement. The year before, its operating margin was 6%. For the two preceding years: 5%. The year before that: 4%. And between 2011 through 2014, four of its worst years ever, operating margins ranged between 1% and 3%.
Even in the darker days of the early 2010s, when fuel price spikes and competition from Gulf carriers, Chinese carriers, and low-cost carriers intensified, Singapore Airlines maintained a strong balance sheet. That enabled it to maintain a long-held practice of introducing the latest-generation Boeing and Airbus airplanes. In recent years, that’s meant B737 MAXs and A320 NEOs. It’s meant B787s and A350s. And it was quick to order next-generation B777s.
With margins rising and revenues at record highs, the airline flew into 2020 with high hopes. Its digitalization efforts were advancing, generating productivity gains and customer service enhancements. Its list of alliance partners was growing — it has joint ventures with Air New Zealand, Virgin Australia, Lufthansa, and SAS. Seeking cooperation rather than confrontation near home, Singapore formed partnerships with its one-time parent Malaysia Airlines, plus another with Indonesia’s Garuda. As late as January 31, it announced a new joint venture with Japan’s All Nippon. All the while, it was developing joint venture airlines in India (Vistara) and Thailand (NokScoot). It was growing its loyalty plan, phasing out its Silk Air brand, launching ultra-long nonstops to the U.S., and densifying the configuration of its A380s.
So as 2020 began, Singapore Airlines was indeed feeling lucky, all the more so with Gulf rivals in retreat, fuel prices fairly low, and the global economy strong enough to support plentiful corporate and premium intercontinental traffic.
But now what? The Covid crisis hit Singapore Airlines early and hard. It has its liquidity cushion, yes, but the airline is burning through it quickly as most of its passenger planes remain idle. Mercifully, it does have a sizable cargo business that’s thriving, preventing even faster cash burn. But on the passenger side, few airlines anywhere find themselves more cursed. Some are lucky to have domestic traffic to cultivate. Some are successfully chasing elements of leisure demand. Some are low-cost carriers without any dependence on the corporate and premium intercontinental demand that’s hardest hit by the crisis.
Singapore Airlines is the opposite. An airline without a domestic market and supremely dependent on globetrotting corporate fliers using their company credit cards on tickets that offer lie-flat seats, lush lounges, gourmet meals, and other luxuries. In late March, it was all but forced to ground 185 of its 196 planes, thereby cutting capacity 96%. Far from passing quickly, the crisis lingered on through the northern summer. In August, Singapore Airlines, including its low-cost carrier Scoot and whatever’s left of Silk Air, carried a mere 40k passengers, down 99% y/y. Seats were just 19% full.
With borders within Asia still largely closed and no recovery in sight, the airline earlier this month announced more than 4k permanent job cuts, roughly half imposed through involuntary means. It still clings to the goal of restoring capacity to about half its normal levels by the end of its fiscal year in March. But even that’s speculative. As the company stated while announcing the layoffs: “The road to recovery will be long and fraught with uncertainty.”
Singapore’s government recently began allowing more transfer traffic through Changi airport. It also established “green lane” corridors with China and Malaysia, allowing limited travel on selected routes. This month, it said it would ease the entry restrictions and waive the quarantine requirements for passengers from Brunei and New Zealand who test negative for Covid-19 upon arrival in Singapore. These measures, however, are negligible in terms of fostering even the green shoots of a recovery. Singapore Airlines has been adding back some routes, like Istanbul, Perth, and Kuala Lumpur. But as it defers aircraft deliveries and plans to become a smaller airline for many years, it’s also permanently exiting markets like the Australasian capital cities of Canberra and Wellington, along with the European cities Dusseldorf and Stockholm.
Singapore Airlines, however, will have to do more than just shrink. But what can it do, given its luckless reliance on premium intercontinental demand?
Scoot might help. Originally designed mostly as a defensive measure against a swelling tide of low-cost rivals, Singapore’s low-cost unit was never much of a money-maker — it lost $57m in 2019. The unit operates both longhaul and shorthaul flights within the Asia-Pacific region, with the shorthaul flights originally flown under the Tigerair brand. Given the relative vigor of price-sensitive leisure and family-visit traffic at the moment, Singapore Airlines could decide to give greater prominence and responsibility to Scoot, much like Air France is doing with Transavia, and Cathay Pacific with HK Express.
Singapore’s NokScoot joint venture, unfortunately, was a casualty of the crisis. It’s no longer in business. But its Indian joint venture Vistara remains an important avenue of potential relief and recovery. Vistara is just now embarking on an intercontinental push, starting with Dreamliner flights to London. Things stand to get more interesting if India’s Tata Group, Singapore’s partner in the Vistara venture, winds up buying Air India. Singapore Airlines could perhaps even participate in a takeover, though it’s hardly in a mood to put capital at risk right now. India’s Economic Times, in fact, reports that it’s not at all happy about Tata’s interest in Air India, viewing it as a violation of contractual commitments to avoid investing in a Vistara competitor. That aside, India has always been a crucial market for Singapore, with a huge population, massive economic potential, and the sort of large domestic market that Singapore lacks.
As it looks west to India for a way out of the crisis, Singapore Airlines is surely looking north to China as well. Twelve years ago, it came close to buying a stake in China Eastern. Yes, even then, China was on its strategic radar. Last year, China was essentially tied with Australia as Singapore’s largest country market measured by scheduled seat capacity, according to Cirium data. With China now recovering from the crisis faster than most of the world, it’s all the more enticing a market now. There’s not much to do until international travel reopens of course. But as it does, Singapore will want to be ready.
Japan is another critical market, and one where the All Nippon joint venture will come in handy. It’s also a market that could see a quick recovery in tourism, both to and from Singapore. The key London market, as discussed in last week’s Airline Weekly feature story, is undergoing competitive changes that might relieve Singapore of some competition during the next few years. Qantas, for example pushed back plans to launch London nonstops from Australia’s east coast. Others that compete for Asian traffic to London, like Thai Airways and Garuda are in far deeper distress. Singapore’s arch-enemy Cathay Pacific, though it also received a big government bailout, has severe problems of its own.
The U.S. market could take longer to recover. It’s so dependent on business traffic, notwithstanding some connecting family-visit demand between say, the Philippines and California, or Australia and New York. India to the U.S. West Coast is another notable niche. In Australia, the bankruptcy of Virgin Australia wiped out Singapore’s 20% ownership stake in the airline. The extent to which Virgin still wants to be an intercontinental airline, and a partner with Singapore, remains unanswered. Cooperation with Air New Zealand won’t change, but Australia is the much larger market. Elsewhere, Singapore for a time dabbled with the idea of investing in Korea’s Jeju Air, an LCC. Back in Japan, there might be opportunities to cooperate with All Nippon’s LCC Peach.
It’s back at home within the ASEAN region that Singapore has the opportunity to trigger big changes in its competitive position, and ultimately its financial fortunes. It was domestic consolidation after all, that arguably did more than anything else to lift the fortunes of America’s bankrupt airlines. Outright mergers are more politically difficult across borders within Asia. But last year’s efforts to befriend Malaysia Airlines and Garuda are a start. The crisis, meanwhile, is changing calculations for all airlines, including champions of the pre-crisis era like AirAsia. Might it be open to working with Singapore Airlines, especially as it focuses on building non-aviation businesses? Thai Airways is bankrupt. Can Singapore Airlines be part of its resuscitation? Vietnam, Indonesia, and the Philippines are other key ASEAN markets with potential airline partners.
What else can Singapore Airlines do to foster a faster recovery? Reconfigure planes with fewer premium seats? Refocus sales efforts toward thriving industrial sectors like technology and health care, and away from more troubled sectors like energy? Fortunately, the large financial sector hasn’t been hit too badly this crisis and could become an early mover in returning to business travel. Singapore’s efforts to cut costs and become more efficient through technology, meanwhile, will be essential to climbing out of the crisis. A little luck would help too.
Singapore Airlines by the Numbers
Singapore Airlines: Busiest Foreign Markets in 2019
Source: Cirium; includes Scoot and SilkAir