Family ties: Why SilkAir can’t rescue SIA from its troubles

Here’s a glaring flaw in SIA’s best bet.

Beleaguered SIA has been counting on its subsidiary SilkAir in the fight against low cost carriers. But SilkAir has a long, long way to go before it can truly help its struggling parent carrier.

According to CIMB, SilkAir’s small fleet does not provide sufficient network connectivity to support the SIA’s needs.

“In light of the heavy competition in the region, we think that SilkAir will continue to struggle with profitability in the near term. We think that this lack of capacity relative to the market will continue to put pressure on SilkAir going forward,” the CIMB noted.

Here’s more from CIMB:

We believe that SilkAir lacks the ability and desire to compete purely on ticket prices. Its superior cabin offering almost mandates that it has to charge a premium over its peers.

We believe that, in general, the increased connectivity of an airline gives it scope to charge passengers more for a particular route.

In contrast, the lack of connectivity means that an airline is likely to have to utilise the organic point-to-point demand to raise loads, and this in turn will probably result in cheaper fares.

However, the ability of LCCs to use their various associates and subsidiaries to transit passengers using a one-stop strategy gives them additional options.

AirAsia Bhd, for example, flies 57 point-to-point destinations from Kuala Lumpur, while Thai AirAsia and Indonesia AirAsia fly 37 and 11 point-to-point destinations from Bangkok and Jakarta, respectively.

While there may be overlaps in routes, there are also other point-to-point routes that they fly outside of these hubs. We believe that the multitude of one-stop transit possibilities from LCCs significantly lowers SilkAir’s competitiveness, especially in light of its premium fares.