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How Long Can Singapore Airlines Continue to be a Holdout on Premium Economy?

May 12, 2014 3:00 am

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With losses mounting, Singapore Airlines may have no choice but to introduce premium economy as analysts argue there is not much of a danger that business class passengers will downgrade.

— Dennis Schaal

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 / Singpore Airlines

Business class seats on Singapore Airlines' 777s. / Singpore Airlines


For years, Singapore Airlines (SIA) said “no” to a premium economy class.

It did not matter that a growing number of carriers had started offering the service to customers willing to pay a higher price than an economy fare for a more comfortable flight.

SIA’s top brass had good reasons to stick to its guns.

Why have a premium economy product when tycoons, top corporate executives and other business travellers with deep pockets are quite happy to splurge on SIA’s world-renowned first- and business-class flights?

And what if the in-between product ends up cannibalising the airline’s lucrative high-end travel business, which used to account for as much as 40 per cent of total revenues?

Even when the 2008 global financial crisis came, bringing with it a major slump in demand for premium long-haul air travel, SIA did not relent.

The management was convinced that the good old days would return — but they have not.

Even after the recovery, not all businesses have gone back to spending big on premium air travel. For instance, executives now have to be on longer flights of at least seven hours to be eligible for business class. It was four hours previously.

And where firms once flew executives only on full-service carriers, a growing number now turn to budget carriers for short-haul flights.

Last year, SIA scrapped its non-stop all-business-class flights to the US. Weak demand and sky-high fuel prices meant that the Airbus 345 aircraft were being operated at a loss.

And from being the undisputed No. 1 premium carrier in the world, SIA now shares top spot with major rivals such as Middle Eastern carriers Emirates, Etihad Airways and Qatar Airways. In the Asia-Pacific, Cathay Pacific is giving SIA a good challenge.

With product and service upgrades over the years, Thai Airways, All Nippon Airways and other Asia-Pacific carriers are also fast becoming a preferred choice for travellers who want to fly business class but cannot afford or are unwilling to pay SIA’s prices.

For the Singapore carrier, the net impact has been an erosion of yields and earnings.

In the three months from January to March, SIA reported an operating loss of S$60.3 million (US$48 million), higher than the S$44.2 million a year earlier. Group profits slumped 60 per cent to S$27 million.

The current year is not looking too good either. Growth will be moderate and yields will continue to be under pressure from massive discounting to retain, and hopefully grow, market share, the airline has said.

So it makes sense for SIA to launch a premium economy product, UOB Kay Hian’s aviation analyst K. Ajith said.

“They have no choice… For a long time, SIA has adopted a wait-and-see attitude but they cannot wait any more,” he said.

Citing the example of Cathay Pacific, he said it has been able to boost yields with premium economy fares that cost as much as double the economy rate. “And travellers are paying,” Ajith said.

Will the decision be the right one for SIA?

Its executive vice-president (commercial) Mak Swee Wah is not too concerned about businessclass passengers downgrading.

“At the fringes, there may be some who may move up (from economy to premium economy) or down but I think it’s becoming an increasingly established market segment,” he said.

Ajith said: “Pricing will be the critical factor here.”

*US$1 = S$1.25 ___

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