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Why SilkAir’s merger with SIA is long overdue

It has taken Singapore Airlines a long time - against a backdrop of declining profits and intensive competition - to heed the writing on the wall regarding SilkAir’s irrelevance. But with the regional carrier out of the picture, the group's transformation from four to only two airlines in its fold catering to clearly defined markets augurs well for the future.

SilkAir, Singapore Airlines and Scoot planes sit on the tarmac at Changi Airport in Singapore on October 4, 2017.

SilkAir, Singapore Airlines and Scoot planes sit on the tarmac at Changi Airport in Singapore on October 4, 2017.

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The fate of SilkAir was all but sealed long before the rumour surfaced that it would go the way of Tigerair which was merged with Scoot last year.

Last week, following the announcement of its full year financial results ending 31 March 2018, Singapore Airlines (SIA) Group confirmed that its regional subsidiary would be dropped as a brand and merged with SIA.

The numbers tell a story.

SIA Group's operating profit surpassed S$1 billion, increasing by 70 per cent from last year's S$623 million, reversing a downward thrust.

Both flagship airline SIA and budget subsidiary Scoot did well for the group, the former increasing operating profit by more than 80 per cent to S$703 million and the latter by almost 15 per cent to S$77 million.

SilkAir on the other hand suffered a decline of 57 per cent as its operating profit plunged from S$101 million to S$43 million.

The results underline the irrelevance of SilkAir as a regional carrier operating services that overlap with the other two airlines within the same family.

At the height of SIA Group's expansion, its stable comprising four passenger carriers seemed a little overcrowded in spite of the apparently clear delineation of a full-service airline (SIA), a regional airline (SilkAir), a short-haul budget carrier (Tigerair) and a medium-to-long-haul budget carrier (Scoot).

The lines soon began to blur and then there were three, as the good sense of strengthening a single budget carrier prevailed with the merger of Tiger and Scoot.

That left SilkAir in an ambiguous middle-of-the-road position that has been growth-limiting as it becomes buffeted by the growing competition of budget carriers and other regional airlines.

Indeed, for too long, SilkAir has been operating in the shadow of SIA, but without its illustrious aura.

Turning 25 in 2014, SilkAir made a public declaration to distinguish itself as a carrier in its own right, announcing a slew of new destinations in the region, plans to acquire new jets to extend its operations farther to Japan and China, and upgraded product features such as audio and video streaming. But it never quite succeeded.

 Market penetration was tough at destinations served by secondary airports where SilkAir faced stiff competition from low-cost and homegrown carriers, and the yield was low.

 Although it begged the question as to whether the upgraded features would make that much more a difference, its then CEO Leslie Thng said: “We never wanted to match SIA.”

 That unfortunately became uncannily prophetic like a millstone that has kept SilkAir in its place.

Anyway, the SilkAir model seems strangely outdated in a changing aviation landscape that appears to favour the extremes of affordability.

Against an improved global economy, major legacy airlines are refocusing on the premium product while not ignoring the competition from budget carriers by the likes of AirAsia X, Norwegian Air Shuttle and WowAir.

SilkAir's midstream package is hardly an attractive alternative but more a by-product of parent SIA with fewer perks.

Over the years, the flourish of budget upstarts has led to a number of major legacy carriers spawning their own budget offshoots but with mixed success, ranging from the profitable Jetstar arm of Qantas to several now defunct entities such as Ted of United Airlines and Song of Delta Air Lines.

Today's trend seems to be one of offering different options on the same flight.

Besides the usual configuration of first, business and economy, there are premium economy and basic economy which has been variedly adopted by an increasing number of airlines, including SIA.

SilkAir as a vaguely defined regional carrier operating within a geographic area that is also part of SIA's and Scoot's networks seems an ill fit in the grand scheme of things.

One is apt to compare it with Cathay Dragon, a subsidiary of Cathay Pacific and similarly by definition a regional airline.

Unlike SIA, Cathay Pacific has resisted the temptation to set up a budget subsidiary, and was instrumental in causing the premature demise of Jetstar Hong Kong.

Cathay Pacific has stuck to a duet of mutual feeders with Cathay Dragon as a supplementary airline offering flights largely to secondary destinations that the parent airline does not fly to.

Also, Cathay Dragon has no other siblings to contend with in the same market, and it enjoys geographic proximity to the large China hinterland.

SilkAir's quest for dominance in the highly competitive South-east Asia region teeming with national airlines and a myriad of budget carriers has remained elusive.

In absorbing SilkAir, SIA will assert a stronger presence in the region, much in the same way that the merger of Scoot and Tigerair has built a stronger, singular budget arm.

In preparing for the full merger to take place after 2020, SIA will be embarking on a S$100-million programme to upgrade SilkAir's cabins to ensure system-wide product consistency.

It is likely that some of SilkAir's routes will go to Scoot as well. Overall, in streamlining the operations into two main arms of full-service and budget, SIA is moving towards optimising the group's network, benefiting from reduced cost and waste.

It has taken SIA a long time - against a backdrop of declining profits and intensive competition and the group's Q4 FY2016/17 net loss of S$138 million - to heed the writing on the wall.

But with the regional carrier out of the picture, the group's transformation from four to only two airlines in its fold catering to clearly defined markets augurs well for the future.

 

ABOUT THE AUTHOR:

David leo is an aviation veteran and published author.

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