Why SIA is desperate for a deal

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singapore-airlines1Singapore Airlines’ third stab at the Indian market by joining hands with a partner to start an airline there shows how desperate it is in wanting to maintain its premier position. The headwinds moving against SIA are there for all to see. There is intense competition in the long-haul and medium-haul markets  from Gulf carriers like Emirates and neighbours such as Garuda and Malaysia Airlines. The low-cost carriers are also squeezing the airline’s profits. One way for it to stay on top is to widen its portfolio. This is where the latest attempt to tie the knot with Tata Group comes in.

Here P N Balji, editor of The Independent Singapore, discusses the issues with  Siva Govindasamy, Reuters chief aerospace and defence correspondent for Asia.

Q. What has changed in India that gives SIA the confidence that this time they will make it?

A. The regulatory environment has changed and India last year allowed foreign airlines to finally own a stake of up to 49% in an Indian carrier. The Indian airline industry remains buoyant, with passenger numbers rising in both the domestic and international sectors. The long-term growth potential, aligned with the development of airport infrastructure, is immense.

 Q. Are tie-ups, like this one, the way to go for SIA as it gets crowded out?

A. It is part of a broader change in SIA’s direction. The CEO is pushing for a different direction – one that is less reliant, over the medium to long term, on the flagship carrier and instead has a slew of new subsidiaries that generate revenue in growth markets. This comes amid growing pressure on SIA from the Gulf carriers and other neighbouring full-service airlines.

Scoot, for example, is SIA’s play in the medium and long haul low-fare leisure market that the flagship left sometime back. India can be a separate revenue-generating business unit, as can future investments in China for example. So this is a change from the dependence on the flagship to a holding structure with diversified revenue streams.

Given SIA’s large cash pile of over $4 billion, the company has the ability to make these investments and the wherewithal to see them through the initial losses and hiccups. It can afford to have a long-term view with these investments.

 Q. What has been the success of tie-ups like this for SIA? Do countries fear SIA? It failed twice in India, did not really succeed in Australia and New Zealand.

A. There are many issues at play. One question is how much control over the management SIA will have – it did not with Virgin Atlantic, and that was a major factor in the failure of that venture and hence the sale of the stake to Delta Air Lines this year. In New Zealand, economic factors came into play.

SIA’s 19.9% stake in Virgin Australia, on the other hand, is to cement a partnership that is mutually beneficial. There is no reason to influence management there beyond ensuring that the alliance stays strong.

In India, it will be important for SIA to ensure it has some degree of control over the new airline’s strategic direction – and it should be able to effect a change, if needed. Otherwise, it will likely let the new airline’s management chart its own course. And that will be the best option – excessive inference from a parent has never been good in the airline industry.

Beyond that, success will depend on how the new airline’s management navigates a course around India’s bureaucracy, tax regime, politics and the cut-throat competition. There are risks, but SIA needs to take such risks if it wants to be successful and if it wants its new strategic direction to be successful. The medium to long-term  rewards in an airline market like India could be immense if this pays off.