Distress call: Why SIA’s new revenue schemes won’t take off

The airline’s profits are in for a rough flight.

Struggling Singapore Airlines is venturing into new platforms to gain more revenues. But all its efforts may be in vain, as the carrier continues to bow to political uncertainties and intense competition.

According to OCBC, a myriad of challenges await SIA’s foray into new revenue sources, which include launching an online shopping mall and entering a JV with NokScoot, a Thailand-based LCC.

“We think the initiatives’ boost to profits in the current environment will be limited, if any at all. NokScoot’s fate might be adversely affected by prolonged political uncertainty in Thailand and competition with close peer Thai AirAsia X; Tata-SIA JV might not be able to operate international flights until five years later while coping with a market where all except one is expected to be profitable,” stated OCBC.

Here’s more from the report:
Singapore Airlines (SIA) has been seeking new revenue through geographical expansion as well as ancillary sources, of which some will start contributing modestly in FY15.

We note that equity participations (through JVs) are in home region whereas codeshare partnerships are formed to improve connectivity in other regions.

We think the initiatives’ boost to profits in the current environment will be limited, if any at all. Easing of pressure, albeit insignificant, will come from: 1) cessation of loss-making Tigerair Mandala operations (though there will be one-off impairments and write-downs first), and 2) Changi Airport’s GAIN programme which will alleviate airlines’ operating costs.

We expect adverse operating environment for NokScoot due to: 1) political uncertainty 
ahead in Thailand might depress tourism traffic, and 2) newly established medium- to long-haul LCC Thai AirAsia X, a direct competitor, likely engaging in aggressive pricing and marketing that NokScoot will have to keep up with at the expense of profitability. 

As for the Tata-SIA JV, we acknowledge it will allow SIA to tap on India’s growing air travel volume.

However, we think the JV will have a rocky start given that: 1) political inertia to change current regulations will prevent it from operating international flights until five years later, and 2) an additional player will only add on to the intense competition among current players; according to CAPA, IndiGo is expected to be the only carrier in India to report profit for FY14.