Singapore Air turns to regional cities to drive growth

SINGAPORE Thu May 10, 2012 5:43am EDT

A Singapore Airlines (SIA) Boeing 777-300ER passenger jet takes off in the rain at Changi Airport in Singapore April 21, 2012. REUTERS/Tim Chong

A Singapore Airlines (SIA) Boeing 777-300ER passenger jet takes off in the rain at Changi Airport in Singapore April 21, 2012.

Credit: Reuters/Tim Chong

SINGAPORE (Reuters) - Singapore Airlines Ltd, the world's No.2 carrier by market value, will focus on flights to smaller Asian cities as a weak global economy batters demand on long-haul routes and competition from premium airlines intensifies.

SIA (SIAL.SI), which posted its first quarterly loss in more than two years on Wednesday, has been hammered by rising fuel costs and slower cargo and passenger volumes on routes to Europe and the United States.

Middle Eastern carriers such as Emirates and Qatar Airways have also been grabbing a bigger share of premium passengers with high service standards, attractive deals and gleaming new planes.

"The results highlight SIA's lack of pricing power and erosion of brand value," brokerage UOB KayHian said in a report. "The decline in yields appears to indicate that the brand differentiation that SIA has enjoyed has finally eroded."

SIA, which has promoted itself as a prestigious global airline over the years, will focus on the network of Asian cities served by its regional arm SilkAir.

"SilkAir is very much part of SIA, and we have to leverage SIA's long haul (network) to connect into SilkAir's regional routes," said SIA's Chief Executive Goh Choon Phong, who took charge in January last year.

SilkAir's network of cities, which include Xiamen, Bangalore and Koh Samui, would strengthen connections for customers, encouraging them to choose the SIA group for their entire trip instead of hopping onto budget carriers, Goh told reporters and analysts at a briefing on Thursday.

SIA, 56 percent owned by Singapore sovereign investor Temasek Holdings , has missed analysts' earnings forecasts for five consecutive quarters.

The airline's new medium-to-long haul budget carrier "Scoot" will start flying in June to destinations such as Sydney, Bangkok and Tianjin, putting it head on with Qantas' Jetstar and Air Asia X.

It would also compete with its bigger affiliate Tiger Airways Holdings Ltd (TAHL.SI) in one sector.

"The key risk in this particular cycle would be Scoot actually," said China Construction Bank CCB.L analyst Timothy M. Bacchus.

"It is a new departure for them, and all four airlines -- SIA, SilkAir, Tiger and Scoot -- will be in that same market."

SILKAIR'S SURPRISE GROWTH

SilkAir will expand its capacity at a faster pace of 22 percent in the year to March 2013 compared with SIA's 3 percent, and is seeking proposals to buy next-generation single-aisle jets from Boeing (BA.N) or Airbus.

"SilkAir continues to positively surprise me. A couple of years ago, we were wondering whether its position in the market is sustainable given the growth of low-cost carriers on short-haul routes," said CLSA analyst Robert Bruce.

"But now it has shown there is a good demand in the market."

SilkAir contributed S$105 million to the SIA Group's 2011/12 operating profit of S$286 million that was eroded by a loss of S$119 million from its cargo operations.

Asia would be SIA's main focus for the next one or two years, a similar strategy adopted by Cathay Pacific (0293.HK), CCB's Bacchus said.

"It is the same story with what Cathay is actually doing with Dragon Air. They are pushing up capacity of Dragon Air and pulling down the main line. It is a function of weakness in Europe and United States, so the near-term focus has to be Asia."

On Thursday, Emirates reported a 72 percent profit drop in the year ended March 31, hit by fuel prices.

Its passenger seat factor came in at 80 percent, compared with SIA's passenger load factor of 77.4 for the same period.

(Editing by Anshuman Daga and Ryan Woo)

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