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Rise of Chinese airlines hits Singapore and Cathay

Asia rivals face headwinds after regional dominance in long-haul business travel

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9 HOURS AGO by: Jeevan Vasagar in Singapore
For decades, the two were rivals: Singapore Airlines and Cathay Pacific cornered the market in long-haul business travel, connecting Asia to the rest of the world.

Now both face headwinds from a similar direction. Cathay Pacific announced 600 job cuts at headquarters this week after months of turbulence that saw the Hong Kong carrier’s first annual loss for eight years and the departure of its chief executive.

Shares in Singapore’s flag-carrier dropped more than 7 per cent last week following disappointing earnings.

The rise of Chinese carriers has buffeted both of Asia’s marquee airlines at a time when they were already under pressure from Gulf airlines and low-cost alternatives.

Declining financing costs for new jets have encouraged airlines to add capacity.

Analysts say weak passenger yields — a measure of the fare paid per kilometre travelled — are likely to persist as Chinese rivals expand aggressively.

Low fuel prices will intensify competition, encouraging rival airlines to cut fares in an already highly competitive Asian market.

“Overall, the airline industry is suffering from oversupply,” said Corrine Png, who runs independent equity research house Crucial Perspective.

“Traffic is growing but capacity is growing in excess of it. Airlines such as Singapore Airlines have had to discount [fares] to fill up the planes.”

Passenger yield at Singapore Airlines was down to 10.1 Singapore cents per passenger-kilometre in the quarter ending in March, down nearly 5 per cent year-on-year.

Analysts say this metric, indicating aggressive price discounting, has spooked the market, prompting Friday’s selldown.


The broader narrative behind both airlines’ troubles is the shift away from reliance on Singapore and Hong Kong as connectors for outbound Asian travel.

Both airlines played an important role in their cities’ transformation from gritty, commercial centres into unlikely tourist destinations.

But now, rather than stop over in Singapore on their way to Sydney, mainland Chinese tourists are flying directly to Australia on their domestic carriers.

“The hub and spoke model is no longer as dominant as it was,” said DBS analyst Paul Yong. “Consumers prefer — or demand — to travel point-to-point. One of the big growth drivers has been the Chinese traveller and the fact that their own carriers have been able to grow quickly has posed challenges to Singapore Airlines and Cathay Pacific.”

Both airlines built their brand by focusing on the needs of first- and business-class travellers, and held back from launching premium economy services for years after other airlines had done so.

Singapore Airlines rolled out premium economy only in 2015, and is still retro-fitting a few of its Boeing 777s with such seating.

This front-end focused model has worked well for them in the past, analysts say, but demand for business class has weakened while budget aviation has boomed.

Business-class travel loses customers each time there is a recession, according to analysts, and this segment is slower to recover when demand picks up. Corporate travel departments face pressure to keep spending tight as the recovery begins.

Other airlines have also upgraded their business class services, so Singapore Airlines and Cathay Pacific face competition from cheaper premium offerings.


Furthermore, company travel departments with a “lowest logical fare” policy will choose a cheaper competitor over one of the two flagship Asian brands.

Because of its location in Southeast Asia, Singapore’s flag-carrier faced earlier competition from Gulf airlines and budget carriers.

It responded by embracing budget travel; the Singapore company launched Scoot, a low-fare unit, in 2012 and took full control of no-frills airline Tiger Airways last year.

Ms Png said: “Singapore Airlines has done a few more things right. Cathay didn’t see a need to launch a budget carrier — but there’s only so much you can do cutting your cost base.”

Singapore’s budget fleet will grow from 35 operational aircraft to 40 by next March, a 15 per cent increase in passenger capacity. By contrast, the parent brand will add just 0.4 per cent more capacity over the same period.

The mix of budget and premium offerings allows Singapore Airlines to return to destinations where there is less profit to be made from business travel.

Next month, Scoot will launch its longest flight to date, a service to Athens, a city that the parent airline retreated from in 2012.

The airline may need to swap budget flights for its premium service on more routes, or prune others to shore up profitability, analysts suggest.

Singapore Airlines announced last week that it has set up a dedicated “transformation office” to review its network, fleet, product and service.

Cathay Pacific has slashed managerial jobs as part of a broader revamp. Pressed at a post-results briefing last Friday, Singapore Airlines’ chief executive Goh Choon Phong declined to give a firm commitment that no jobs would be lost.

“It’s a politically sensitive question which is why SIA did not directly address it, but I think it’s inevitable,” said K Ajith, an analyst at UOB Kay Hian, referring to job losses.

Much of Singapore’s future strategy remains unclear. The UOB Kay Hian analyst said: “We don’t know how they’re going to manage costs, manage the network and routes — or what role the budget holdings are going to play.”

For both of Asia’s premium airlines, the bumpy ride looks set to continue.