Singapore Airlines’ Goh Choon Phong, who takes over as chief executive officer tomorrow, may shed the last major remains of the carrier’s global expansion strategy as he confronts rising competition in Asia.
Goh, 47, may get offers for the airline’s 49% stake in Virgin Atlantic after the UK carrier said this month it had received tie-up inquiries. Outgoing CEO Chew Choon Seng called the investment “underperforming” two years ago and has said the airline would consider a sale.
In Asia, Goh faces low-fare competition on long-haul routes from Jetstar and AirAsia X Sdn., as well as renewed efforts by Cathay Pacific Airways and Korean Air Lines Co. to lure lucrative business-class travellers. Middle East carriers Emirates Airline, Qatar Airways and Etihad Airways have also ordered close to 300 planes since 2007 as they build hubs linking Europe and the Asia-Pacific region.
“Goh has a tough job ahead of him,” said K. Ajith, a UOB-Kay Hian Research Pte analyst in Singapore. “The environment is drastically different from five or 10 years ago, when SIA managed to fend off competition by focusing on its branding.”
Virgin, 51% owned by billionaire Richard Branson, hired Deutsche Bank AG to explore options as British Airways Plc boosts cooperation with American Airlines across the Atlantic and completes a merger with Madrid-based Iberia Lineas Aereas de Espana SAtigert. Singapore Air bought its stake in a 600 million-pound ($1.2 billion) investment concluded in 2000.
SIA would consider “interesting opportunities” for the stake, Nicholas Ionides, a spokesman, said in an e-mail. Goh, who joined the carrier as a cadet administrative officer in 1990 after graduating from the Massachusetts Institute of Technology, declined interview requests, he said.
Virgin Offer
Whether SIA will sell the Virgin stake will largely depend on what price is offered since the carrier isn’t short of funds, said Rohan Suppiah, an analyst at Kim Eng Securities Pte in Singapore.
“SIA isn’t in a hurry to sell, but if they get a fair price they will,” he said. “Virgin hasn’t provided any significant synergies over the years.”
Delta Air Lines Inc. and Middle East airlines are among carriers exploring a Virgin tie-up, Sky News reported this month, without saying where it got the information from. Singapore Air’s stake complicates a deal as local ownership rules limit non-European investors to minority stakes.
“Either SIA sells or Branson loses effective control by selling part of his stake,” said Andrew Miller, chief executive officer of CAPA Consulting LLC, which advises airlines.
Very Supportive
SIA is “very supportive of our business strategy including the review by Deutsche Bank,” Greg Dawson, a Virgin spokesman, said without elaborating. Virgin operates 38 twin-aisle planes, according to its website.
Chew, who has spent almost four decades at SIA, sold a leasing arm and spun off a ground-handling unit while CEO to focus on the carrier’s main flying business. He will take over as Singapore Exchange’s chairman on Jan 1.
Chew’s predecessor, Cheong Choong Kong, bought stakes in Virgin and Air New Zealand to expand overseas. The value of the Air New Zealand investment was written down in 2001, and the remaining holdings were sold off three years later. Virgin was expected to hold an initial public offering within three to five years of SIA’s investment, Chew said in 2006.
Shares Trailing
SIA, which operates 110 planes, was unchanged at $15.54 as of 11:04 a.m. in the city-state. The carrier has trailed the 15-stock Bloomberg Asia Pacific Airlines Index this year amid rising competition for premium and low-cost travellers. The shares have climbed 4% this year, compared with the index’s 27% advance.
Competition is intensifying in the premium market, which accounts for about 40% of SIA’s sales. Hong Kong-based Cathay Pacific is working on a HK$1 billion ($165 million) business-class upgrade to lure executive travellers.
Korean Air, which aims to get 50% of passenger sales from premium classes by 2019, will receive its first five Airbus SAS A380s next year. The superjumbos will each be fitted with 94 business-class seats, compared with the 60 found in SIA’s A380s. Emirates is building a fleet of 90 A380s.
“SIA needs to think about how to position for the longer-term given the competitive landscape,” said Christopher Wong, who oversees $45 billion of assets, including SIA shares, at Aberdeen Asset Management.
Budget Competition
SIA has responded to budget competition through a 33% stake in Tiger Airways Holdings. The low-cost affiliate, which operates from Singapore and Australia, plans to form a budget airline in Bangkok next year with Thai Airways International Pcl.
Tiger, Qantas Airways’s Jetstar and AirAsia Bhd. are leading discount carriers’ market share gains in Asia as they add new planes. Budget airlines accounted for about 22% of passengers in the first 10 months of the year at Singapore’s Changi airport. That compares with 12% in 2008, according to data from operator Changi Airport Group.
Low-fare carriers are also adding intercontinental routes. Jetstar started flights to Melbourne from Singapore this month, touting fares 30% cheaper than full-service airlines. It plans to add more long-haul services next year. AirAsia’s long- haul affiliate is offering flights to Australia, London and Japan from its base in Kuala Lumpur.
SIA’s corporate travel base and reputation will be an asset as Goh faces the new competition, said Steven Lim, who manages about $257 million at Daiwa SB Investments in Singapore. The carrier, among six airlines with Skytrax’s highest five-star rating, has also been profitable every year since going public in 1985.
“As a business hub, SIA does enjoy the advantage of business travel,” Lim said. “Goh’s immediate challenge is to continue Chew’s good work, keep the company’s profit record intact and maintain the reputation SIA has as a premium airline.”
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