Airlines over time build up reputations for superior service and garner passenger preference. But over time, consumer preferences change, and once they do, carriers must adapt to the more competitive environment.
Singapore Airlines has for years had the highest ratings for customer service in the industry from a variety of rating sources, and for many years was considered the preferred choice for business and leisure travelers who wanted a little extra. That customer preference resulted in the ability of the airline to earn slightly higher yields than most carriers, as it did not have to discount as high a proportion of its fares to fill its seats.
But times have changed, and Singapore Airlines is now in a position that it has to sacrifice yields in order to maintain market share against growing competition from both low fare and high service level carriers.
Part of the customer preference has been Singapore’s Changi Airport, one of the best in the world. But the Gulf carriers are moving into new facilities that are also world class, and are competing on a more equal level than in the past
We’ve seen this happen before in the industry. American Airlines, once known for innovation and superior service within the US, lost its preferential position, and then lost its yield advantage once it could no longer command a higher value perception than its competitors. While American rode that preference as long as it could to avoid bankruptcy, it could not hold off indefinitely and has now been acquired by USAirways.
While we don’t believe anything that dire will happen to Singapore Airlines, there are a number of factors that are contributing to its falling yields. While the carrier remained profitable in the last quarter, a fourth consecutive quarter of declining yields is noteworthy.
Premium class travel is under pressure from several factors, a sluggish economy, the rising Singapore dollar against other currencies, and increased competition on its medium to long-haul routes from Emirates, Etihad and Qatar from the Gulf and Cathay Pacific and Malaysian Airlines in Southeast Asia. All now offer world class passenger service, with the “Singapore Girl” the remaining service differentiator. Cabins are now similar, meals are similar, seats are similar and entertainment systems are similar. Singapore has been the model of excellence other carriers emulated, successfully, and are now able to compete on an equal basis.
Singapore Airlines, like Cathay Pacific, still operates with 9 abreast seating in economy on its Boeing 777 aircraft, with 19 inch wide seats in economy — wider even than the 18 inch width touted by Airbus in its recent campaign. But the economy cabin is under pressure from low cost carriers, including AirAsia and Lion Air, and Singapore Airlines has increased its investment in Tiger Air for regional low fare presence, and started Scoot, a long-haul low fare operation. With erosion from low fare carriers, both owned and competitive, Singapore has to rely more on the front cabin for profitability.
Yields in the premium cabin have also fallen, although yields at competitor Cathay Pacific have remained higher. This raises the question as to whether the historic preferential position Singapore Airlines has enjoyed as been eroded by Emirates, Etihad, Qatar, who are aggressively expanding. We believe the answer is yes, and it will be difficult for Singapore Airlines to maintain preference-based higher yields in an extremely competitive environment. Bear in mind going further upmarket may not be a solution as costs of producing the seat is what ensures financial success. Singapore Airlines’ cost structure is not as flexible as its competitors given the strong Singapore dollar.
When Qantas shifted its European connecting hub from Singapore to Dubai last year, the first signs of a more difficult environment for Singapore Airlines became clear. Today, with continuing disappointing results, Singapore is not delivering the type of return its owner, Temasek, the large Singapore-based private equity firm, would like to see.
Regaining premium customer preference is difficult, particularly in an environment in which pressure to cut costs is a natural reaction. But cutting costs, if it results in declining service levels for premium class passengers, can erode competitive position. Just ask American Airlines. The preference advantage once enjoyed by Singapore Airlines appears to be gone, and the Gulf carriers are now formidable competitors. This will require a new strategy that balances service levels, yield premiums, schedules and costs in the most competitive environment than Singapore Airlines has faced in the last two decades. Can Singapore Airlines turn things around? They can, but they need to remember what brought them to the top in the first place, and aggressively focus on their core strengths that they appear to be pulling away from.
Excellent analysis Ernie, Addison.
Thanks!
Excellent analysis Ernie, Addison. I however disagree with your assessment “Etihad and Qatar from the Gulf and Cathay Pacific and Malaysian Airlines in Southeast Asia. All now offer world class passenger service, with the “Singapore Girl” the remaining service differentiator. Cabins are now similar…..”. Etihad and Emirates fly 10 abreast 17 inch 777s compared to the 19 inches of Singapore Airlines. Even Cathay flies only 18.5 inches, as does Qatar on the 77Ws. However, Qatar is not a patch on Singapore in terms of attitude. A key pointer to the huge attitude difference is the arm-rest. Singapore Airlines allows the arm-rest to be FULLY raised and flush in to the gap between seats allowing passengers to benefit from any empty seats. Qatar locks the arm-rest at 30 degrees. A clear signal to the passenger, “if we do not benefit from the seat, neither do you”. As long as this gap remains, the Gulf carriers will never beat Singapore Airlines.
Companies fail because they continue doing whatever made them successful in the first place. In the 80s Gulf Air was the 5 Star airline of the Gulf, the standard every airline in the region aspired to. Then in the late 90s things just did not work out, Emirates, Qatar, other MENA and International airlines got better and more productive and efficient. As the market expanded GF market share just went down, their passenger numbers just hovered around 5 million. When Singapore Airlines introduced the A380 on their London route amid the 2008 Financial crisis, they refused to reduce their first class fares, and passengers would not fly. One has to remember premium airlines make their money on First and Business traffic, that is why these two classes physically occupy more than 40% of an aircraft. Economy revenue is the icing on the cake.
Singapore Airlines need to reinvent not only its product but the way it operates. Singapore is being bypassed just like Bahrain was bypassed with the introduction of the B747-400 and B777, of course the rise of Dubai did not help.
I am not predicting a fate similar to Gulf Air’s but the similarities and players are almost the same.
Very enjoyable read, great work, thank you. But, could you please clarify your concluding statement: “They can, but they need to remember what brought them to the top in the first place, and aggressively focus on their core strengths that they appear to be pulling away from.”.
What exactly should they aggressively focus on? Are you inferring they should focus on improving customer service to even higher levels while trying to cut costs, and if so, how would they do that? I’m not clearly capturing the solution path you are recommending Singapore follow at this stage of the game within the context of the rising competitve pressures of the Middle Eastern and upstart low-cost airlines. Thanks for any clarity!
Singapore can have the best service quality.They may still not be able to match the numbers of the Gulf Big 3. The differentiation comes due to geography.
– Singapore relavant only to Kangaroo route.
– Gulf carriers relavant there + asia-africa, asia – europe, asia-americas. The network effects help improve load factors which improve yields.
– Flying distance to Europe is about 6-8 hrs from the middle east but about twice that from singapore. Thus ME carriers can provide additional frequncies and increase the number of destinations served for the same number of aircrafts.
– Also a thinner seat is of not as much concern due to shorter flying times. Thus geography also helps better seat mile costs for the gulf carriers.
– Strong Base of premium travellers in the home region for the gulf carriers.
-Strong finacials of the promoters.
– Japanese, Chinese and Korean airlines as well as american carriers have also increased capacity and quality which takes away traffic on the trans-pacific route from SA.
These are things that quality cannot offset and results in the gulf carriers taking a lead over most other good airlines.
I’m a loyal SQ economy customer – you can’t beat that seat (I’m tall). It is noteworthy that SQ don’t have premium economy so it isn’t possible to pay more towards the back of the plane. The danger is people downgrading from business to premium economy, but other airlines seemed to have managed this.
Other things they do are infuriating such as a slow minimally functional website. Their frequent flyer program also appears pointless unless you live in Singapore.
Thank you for this highly insightful review. I’m a university student preparing a presentation on the airline industry, and the information regarding cost efficiency analysis is very helpful.