SINGAPORE (Reuters) - Almost 13 years after pulling the plug on its last attempt to enter the Indian market, Singapore Airlines Ltd (SIAL.SI) is taking another stab at the country by again teaming up with the Tata Group as part of a broader strategic shift.
Last week, the two companies applied to set up a new New Delhi-based full-service carrier, pledging a combined $100 million to get it going. This follows an unsuccessful attempt to do the same in the mid-1990s and a failed attempt to buy state-owned Air India in 2000.
The new carrier, if approved, will initially serve the 1.2 billion Indian market. Barring no political or regulatory obstacles, it could be airborne in about a year.
SIA, which will have a 49 percent stake in the carrier, will be banking on its success.
Intense competition on its mainline medium and long-haul markets from Gulf carriers like Emirates Airline and neighbors such as Garuda Indonesia (GIAA.JK) and Malaysian Airline MASM.KL, and weak demand on services to Europe, means that SIA, Asia’s second-biggest airline with a market value of $10 billion, has changed course in recent years.
Sources familiar with the airline’s strategy say that the management, led by low-profile chief executive Goh Choon Phong, is pushing ahead with a “portfolio” strategy that revolves around increasing the company’s exposure to the fast-growing Asia Pacific and the low-cost markets.
By diversifying its revenue streams and creating new ones, like the Indian joint venture, Goh and his team plans to reduce SIA’s dependence on the flagship carrier over the medium term, say investors and analysts.
“They just have to address why their brand should still be at a premium. They still have a lot to do to actually get investors to be a bit more confident of their prospects,” said Kristy Fong, an investment manager at Aberdeen Asset Management, which holds a stake of about 4 percent in SIA.
Despite the near term pressure on profits, SIA’s cash pile of $4.5 billion - the biggest among Asian airlines - means that it has the ability to invest in existing and new airlines, the Centre for Aviation (CAPA) said in a report.
It started Scoot, a long-haul low-cost airline, last year to tap the low-fare leisure markets that SIA left behind as it focused on the premium business. Its one-third stake in short-haul LCC Tiger Airways Holdings Ltd TAHL.SI could also potentially go up to 46.5 percent.
SIA bought a stake in Virgin Australia Holdings Ltd (VAH.AX) in late 2012 and increased this to 19.9 percent, ensuring access to the important Australian market.
Silkair, SIA’s fully-owned regional subsidiary, will retire its fleet of Airbus EAD.PA A320s and induct new Boeing (BA.N) 737s over the next few years as it grows its network of Asia-Pacific services. SIA itself has ordered dozens of new Airbus A350s, and Boeing’s 777-300ERs and 787-10s.
The Indian venture has its challenges. SIA must successfully chart a course around India’s political and bureaucratic minefield for regulatory approval.
Under existing regulations, it must serve the domestic market for five years before it can operate international flights. Taxes and airport fees are high, and profitability rare for the country’s airlines.
SIA’s competitors in the full-service segment are beleaguered Air India, which survives only because of the hundreds of millions of dollars New Delhi has pumped into it, and Jet Airways (JET.NS), in which Etihad Airways is buying a minority stake.
Editing by Jeremy Laurence