Discover why the undervalued SIA-Virgin Australia alliance is a big game-changer

Stop being overly negative, analysts warn.

The country’s national carrier has been rather troubled lately, grappling with declining passenger volumes and tougher competition from the Middle East. But SIA’s overlooked efforts at capturing the Australian market is a potential game-changer.

According to Maybank Kim Eng, SIA’s strategic alliance with Virgin Australia inked in 2011 will make the airline better positioned to benefit from growing traffic in the so-called Kangaroo Route.

“With this partnership, We believe that the market is overly negative on Singapore Airlines (SIA) and is ignoring the strategic alliance with Virgin Australia (VA) that has entrenched its position in Australia. With this partnership we believe that SIA is better positioned on the Kangaroo route (Australia-Europe) than other Asian carriers. Over time, we expect foreign carriers (Emirates, Etihad and SIA) that have forged strong partnership with domestic carriers (Qantas group, VA) to gain market shares over other players on this route. The Southwest-Pacific route accounted for 17% of its passenger airline operation sales in FY3/14,” noted the report.

Here’s more from Maybank Kim Eng:

SIA formed a strategic alliance with Virgin Australia in 2011 to entrench its position in Australia. The comprehensive partnership aims to weaken Qantas group’s stronghold in Australia with a competitive product.

This is achieved by having codeshares to fill gaps in their network, coordinating schedules and having reciprocal lounge and frequent flyer programmes. The partnership is also aimed at winning over market shares in corporate and government accounts that have long been dominated by the Qantas group.

The Australian market is important to SIA with the Southwest-Pacific route accounted for 17% of its passenger airline operation sales for FY3/14.

With this partnership, we believe that SIA is better positioned on the Kangaroo route (Australia-Europe) than other Asian carriers. On our estimate, there is demand for 5.1m journeys between Australia and Europe every year.

However, only 10% of these journeys are fulfilled via direct flights between these two regions with the balance completed via various air hubs. In particular, Singapore, Dubai, Kuala Lumpur, Hong Kong and Thailand are important transit hubs on this route.

Apart from Emirates and Etihad, SIA is the only foreign carrier that can benefit from traffic feed from their domestic partners. Over time, we expect foreign carriers (Emirates, Etihad and SIA) with strong partnership with domestic carriers (Qantas group, Virgin Australia) to gain market shares over other players on this route.