Singapore Airlines' transformation hit by several challenges

Refocusing to short-haul routes and banking on Scoot for low-cost business put SIA's profitability this year into question.

According to UOB Kay Hian, structural change for SIA increases near-term risks. SIA is refocusing on: a) short-haul vs long-haul routes, and b) increasing exposure to the low-cost carrier (LCC) business via Scoot.

"While embracing change is positive for SIA, we believe SIA’s transformation will face challenges on several fronts. Firstly, there are limitations on raising capacity on short-haul routes through its regional carrier SilkAir as the airline would inevitably face intense competition from LCCs and new regional carriers such as Lion Air’s subsidiary Batik Air (commencing Mar 13) and Thai Airways’ regional carrier Thai Smile (commencing Jul 12).

Secondly, Scoot’s business model is essentially untested and raises questions about profitability. In addition to a high likelihood of cannibalisation of the parent airline’s traffic, execution risks are heightened by weakness in the cargo markets as Scoot, unlike traditional LCCs, will have significant bellyhold capacity from its widebody aircraft to be sold through SIA Cargo.

Finally, the parent airline’s long-haul operation is facing intense competitionbrand differentiation for pricing fares at a premium is increasingly difficult.