Rough air ahead for Singapore Airlines

Angela Jones
Bloomberg News
12 January 2004

Singapore Airlines, the sixth-worst performing stock in Singapore in 2003, may have an even rougher ride this year. Competition from a slew of startup carriers and the potential for another SARS outbreak are making investors wary of Southeast Asia’s biggest airline.

Singapore Airlines and its regional unit SilkAir, already battle cheaper fares offered by Jakarta-based Lion Air and AirAsia of Malaysia. From this year, Singapore Airlines will compete with a local rival, Valuair, and even its own discount carrier Tiger Airways.

“The main overhang on Singapore Air’s performance has been the low-cost carriers and what they’re going to do,” says Caleb Woo, a fund manager at DBS Asset Management in Singapore. “There are a lot of people who are attracted by cheaper fares. There will be some detrimental impact.”

Singapore Airlines, which is 57 percent-owned by the government, trimmed wages and fired almost 600 workers last year. Still, questions about whether Singapore is doing enough to remain an aviation hub were raised this month by Lee Kuan Yew, who as prime minister for more than three decades oversaw the airline’s creation in 1972.

“If we don’t have that discipline or the resolve or the wit to think of new strategies, new ways to overcome the competition, then we deserve to be sidelined,” said Lee said in a recent interview with Channel NewsAsia.

Singapore Airlines’ stock has risen only 5.6 percent in the past 12 months, trailing a 33 percent gain in the benchmark Straits Times index. The shares suffered their biggest one-day drop in almost three weeks on Jan. 6, after China confirmed its first case of SARS in six months, raising fears that tourists and businesspeople in Asia would once again curb travel and that airlines could be forced to cancel flights.

Apart from the threat of SARS, Singapore Airlines faces further pressure from the low-cost carriers.

AirAsia plans this year to start flying from Singapore, and Lion Air sells return trips from the city-state to Jakarta in Indonesia at a third of Singapore Airline’s fare.

Budget carriers are likely to win about a 4 percent share of air travel within Asia in 2004, says Kevin O’Connor, head of transport research at CLSA Asia Pacific Markets in Hong Kong.

“You’ve gone from two to five” carriers, O’Connor says. “You don’t have to be very good at math to work out that’s a huge increase in competition.”

Things could get tougher. Virgin Blue Holdings, the Australian airline founded by Richard Branson, also wants to start a budget carrier in Asia, as does Thai Airways International.

Singapore Airlines is trying to stay above the fray.

“While we have an interest in the low-cost market and want to be part of its development, our focus is on being a real six-star carrier at the premium end of the market,” the company has said.

Not all investors see the newcomers as a threat. Discount carriers operating short, regional flights may tempt more people to travel, boosting earnings for all airlines, says Christopher Wong, a fund manager at Aberdeen Asset Management in Singapore.

Against that is competition not just from new entrants to the industry but also from major rivals such as Emirates, based in Dubai, which last month began nonstop flights to Sydney that bypass Singapore and compete with Singapore Airline’s Australia-to-Europe routes.

“What we’re getting in Asia is competition and deregulation,” says O’Connor of CSLA. “Who’s the most exposed? Singapore Airlines.”

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