Yes, Singapore Airlines is no longer the most profitable airline in the world (Cathay Pacific took over that title), and yes they’re losing market share to the likes of Emirates and AirAsiaX (to a lesser extent), but to go with a business model that’s hardly proven was a surprise move for a brand that’s been risk-averse of late.

While the initial reports stated that a good amount of analysis has gone into the decision and a “largely untapped market” exists, it’s safe to say that SIA is playing catch up in a market carved out in its backyard by AirAsia X and Jetstar. While the key success factor for SIA till date has been its endearing Singapore Girl brand, that’s exactly the dilemma they need to address – whether to extend the brand to the low cost airline or not.

Will the Singapore Girl fly budget? Probably not.

One big question everyone is wondering about is whether the Singapore Girl would fly this new airline. For those who’re familiar with SIA, they know that the airline is very protective of its brand icon. And multiple questions will be raised if the same Singapore Girls walk the aisle of the new airline.

1. How to ensure that people know SIA and the new LCC are different, yet have the same flight attendants?
2. Will service failures like flight delays or cancellations be dealt in an SIA manner, or Tiger Airways manner?
3. Will SIA Economy Class passengers transferring on to the LCC be offered free meals and amenity kits?
4. What baggage allowances will people get if they are transferring from one airline to another?

Close brand association between the two airlines might prove to be too risky for both brands. Hence, it’s likely that SIA will dis-associate itself completely from the new brand. For example, when things went bad for Tiger Airways in Australia, no one boycotted SIA – the latter still holds its reputation for impeccable service. SIA’s greatest leverage will be that they’ve run a long haul airline successfully, with a very low cost base.

Learn from the competition, then fight on your own turf

While SIA’s track record is an asset, it is also a reason for concern. The airline already has a very low cost base – how would they reduce it further, if operations are to be based in Singapore? One of the reasons for the success of AirAsia X and Jetstar have been the feed from their short haul operations. Interestingly, SIA is a purely-long haul airline, hence feeding the network for this new long-haul airline would depend on SilkAir and Tiger Airways. These and other factors will require SIA to re-think its commercial strategies for the new airline, learning from the competition.

1. SIA till today only sells airline tickets on its website (trying to book a hotel will take you to an external site). Whereas on AirAsia’s RedTix website, I can even buy Justin Beiber concert tickets! So the new LCC SIA sets up must re-evaluate what businesses it gets in and how best to leverage the brand
2. SIA’s frequent flyer program, Krisflyer, also currently only allows burning or miles on SIA flights. This is in stark contrast to Qantas’ Frequent Flyer program, where I can redeem and earn miles by shopping for groceries! Krisflyer will also have to evolve, just like Jetstar has been introduced into the Qantas’ program.
3. SIA’s new long-haul LCC can expect very stiff competition from AirAsia X and Jetstar. Moreover, the competition has one year to sharpen its knifes before SIA launches the new airline. While Jetstar would want to start routes Melbourne-Singapore-Athens flights sooner, the Malaysian government has even more reasons to grant AirAsia X coveted routes like Sydney. SIA needs to run two steps ahead to out-think the competition.
4. SIA also needs to learn from mistakes made in its Tiger Airways venture – running the new airline like a Ryanair may not work, especially in long-haul. They need to ensure high customer service standards, like they have with themselves.

A golden opportunity to co-create the brand with the customers

To provide exceptional customer service, SIA will also need to understand that the customers of the new airline more like those of Tiger Airways’ than its own. And they need to deal with them in a different manner. What do I mean?

Currently, SIA has no official Facebook fanpage. No official Twitter account. Or any other new medium engagement channels. All this when AirAsia, right next door, has become the first airline outside the US to reach 1 million Facebook fans. Tiger Airways’ social media interaction isn’t something to speak of either.

SIA needs to hire manager who believe that the brand is no longer about control. Rather, it’s about influencing a certain behaviour, and engaging with customers using mediums they’re familiar with (I still have to fax in certain requests to Krisflyer!). They can no longer be in a state of educated nonchalance about these new ways of building a brand, as I had mentioned earlier.

Singapore Airlines has a rare opportunity to involve the potential customers in the brand creation process of its new low-cost long haul airline brand. For starters, they can look at how the best airlines in the world are crowd sourcing ideas. And then wholeheartedly embrace the customer.

Given their track record, I think Singapore Airlines is going to do a good enough job setting up this new airline – what remains to be seen is whether they are able to sustain profitable operations in the face of changing customer realities and fierce competition. Exciting times ahead! What do you think?

(Special thanks to Khoa Huynh and Anthony Prsakasam – my two aviation geek friends who helped seed some of the ideas in this article)

• Australia’s Qantas Airways – the world’s most agile airline brand?
• AirAsia X: a brand with a huge potential, but remember, “you’re only buying the flying”
• Five reasons why budget airlines in Asia are successful
• Malaysia Airlines launches FireFly to Singapore – a community airline brand. Interview with Head of Marketing
• Is Premium Economy here to stay? A brand review of All Nippon Airlines

Grant McHerron (aka Falcon124) is an opinionated aviation enthusiast & co-host of Plane Crazy Down Under, Australia’s only aviation podcast. He is an online/digital project manager and perpetual student pilot who can often be found crewing hot air balloons, working airside at Avalon Airshow and plane spotting at airports around the world. He graciousouly hosted me when I visited Melbourne last year, and we almost watched the sunrise in his hot-air balloon Enjoy!

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The latest half-yearly results from QANTAS continue to show an airline that is hemorrhaging cash on its mainline, full service routes. While QANTAS are certainly showing signs of agility, the primary factor keeping the group afloat is the success of their Low Cost Carrier brand Jetstar.

The creation of Jetstar

Towards the end of the 1990′s, QANTAS saw the writing on the wall as customers moved towards the Low Cost Carrier (LCC) model, sacrificing as much as possible to chase cheaper airfares (yet still complaining strenuously about lack of service despite paying next to nothing, but that’s a whole different article Like other airlines they decided to create their own LCC, launching Jetstar in 2004 by rebranding the Impulse Airlines LCC operation that QANTAS had previously purchased in 2001. Re-branding Impulse Airlines was important as it allowed QANTAS to utilise their equipment and, most importantly, their staff agreements.

These agreements have allowed Jetstar to pay their crew less and utilise them more than QANTAS mainline staff who are covered by agreements that are the result of decades of union strength and bargaining. This low cost base provides Jetstar with more room to reduce fares and compete against other LCCs.

Image Courtesy of stuff.co.nz

Jetstar complementing and competing with Qantas

Low fares have not been the only factor that has allowed QANTAS’ baby to survive & grow, unlike other LCC offshoots, such as MetroJet & Song. Competing with Virgin Blue and Tiger Airways, Jetstar are also taking over unprofitable routes from the QANTAS mainline brand, including the routes run by Australian Airlines, the low cost international operation that QANTAS had launched in 2002 but eventually folded in favour of Jetstar.

In response to Tiger Airways starting a Melbourne to Sydney service in 2009, QANTAS allowed Jetstar onto the route in direct competition with their own “City Flyer” high-frequency services. The route between Melbourne & Sydney is the world’s third busiest and features high numbers of corporate travellers commuting between the cities. QANTAS reasoned that with fares falling further thanks to Tiger’s arrival, they might as well try to capture the discount travellers and keep them “in house” rather than lose them entirely.

It was this introduction of Jetstar onto one of QANTAS’ domestic cash cow routes that spurred Alan Joyce to famously state there would be “no further Jetstarisation of QANTAS.” If only that were true.

The Jetstarisation of Qantas

Jetstar’s growth has survived challenges such as the Bird Flu epidemic, Swine Flu and now the global financial meltdown. In fact, the current crises appears to have helped drive more traffic to Jetstar as business travellers and other frequent flyers have had to face reality and reduce the size of their travel budgets.

QANTAS recognised the surging “flight to value” as their First Class cabins drained down into Business Class while business travelers wound up back into Economy Class. Many passengers were lost to other airlines on some routes in the mid 2000′s, apparently fuelled by QANTAS’ lack of any Premium Economy offerings. Many of us in Australia were wondering why QANTAS was slow to realise that frequent travelers often want space & comfort, something certainly not encountered in the cramped conditions of cattle class.

QANTAS did eventually introduce a premium economy service in April 2008, slowly expanding to most of their international routes by the end of 2008. While this helped retain customers, it was becoming clear that high-end premium traffic was not only down but may, in fact, never come back to QANTAS. With high end premium traffic down and growing competition from the top quality First Class offerings at Emirates and Singapore Airlines, QANTAS have taken the wise step and are removing first class from their remaining 747-400s and 8 of their A380s (those arriving in 2012 & beyond). They will still have a First Class offering on 12 of their A380s but are reducing the number of Business Class seats on those aircraft to provide space of more Premium Economy and Economy seats.

This is yet another step along the Jetstarisation of QANTAS, even though the aircraft are still under the mainline QANTAS brand. Additional steps towards Jetstar’s dominance include their current push into Asia and their intended use of 787s to open up Europe. It is perhaps no surprise that all the new jet services & routes that QANTAS is adding (or re-opening) appear to be under the Jetstar brand, not QANTAS itself.

Qantas for Business, Jetstar for everyone else?

Over at the Plane Crazy Down Under podcast, this ongoing movement towards Jetstar has us making reference to “QANTAS, a member of the Jetstar group.” We have also joked that the ultimate end point for Jetstar will be flying JQ branded high density A380s across the Pacific and into Europe. As Ben Sandilands has pointed out in a recent Plane Talking entry, this may very well become a reality if the 787-9 does not live up to original expectations.

If current trends in domestic & international airline passenger transport continue, it is clear that Jetstar will continue to gain market share as QANTAS reduce their mainline aircraft to only those routes that still have a good market for business class. It seems likely that Alan Joyce will eventually regret his comment that the Jetstarisation has ceased as it appears to be, if anything, speeding up.

• Australia’s Qantas Airways – the world’s most agile airline brand?
• Is Premium Economy here to stay? A brand review of All Nippon Airlines
• Five clever ways to earn frequent flier miles for upgrades
• Is business-class travel going extinct? Part 1 of 2
• The business of business class

Qantas announced today a net profit after tax of A$58 million for the first half of the financial year, down from $210 million a year earlier, although the airline did recover from a loss in the second-half of last financial year. This 72% dip in profits resulted in the shares falling by up to 7.2% in early morning trades. However, Alan Joyce, the CEO, says the carrier has done better than most of its rivals. And it has, indeed, thanks to its agility.

Agility through smart cost-cutting

Although revenues dipped by 13.4%, costs were slashed by 16.2%, which shows Qantas’ diligence and discipline in reducing expenditure in the past year. The cutting of frequencies to unpopular routes and grounding of older aircrafts was key to these cost savings.

Load-factors have been the highest in five years – at 82.4%, on flights that carried a lesser number of total passengers as compared to the past year.

This simply means that flights were more full than in the past, despite the recession. Of course, the downside was that this was achieved by offering very low fares on certain routes, which are unsustainable in the long run. Alan Joyce eluded to this fact as well, by indicating that the industry’s survival depends on higher fares.

Agility in re-configuring the cabin

Qantas was one of the first airlines to add a Premium Economy cabin to their flights. Now, they’re standing by their decision by overhauling their cabins. Qantas will be removing First Class on most of its long-haul routes, with the exception of London and Los Angeles, and adding Premium Economy to their widebody jets.

This not just reflects the growing sentiment that Premium demand will change in the coming years, but also the fact that there are more First Class seats in the market than required. For example, from Sydney to London, a passenger has the choice to fly on First Class Suites on board Singapore Airlines, Emirates, Etihad, Qatar Airways and Qantas. Certainly a case of over-capacity.

Qantas is one of the first airlines in the world to remove the First Class in a systematic fashion, and change their long-haul plane configuration to Business, Premium Economy and Economy classes. This effectively increases the number of seats and hence reduces the cost per seat even further. Such agility will pay off for Qantas in the long term.

Leveraging on Jetstar

It’s a known fact that the two brand strategy, growing Jetstar aggressively, gives Qantas Group a very valuable option that few others can match. Jetstar’s profits tripled in the past year and continue to provide Qantas a very valuable asset to leverage on low-yielding routes. The two-brand strategy has also ensured that the Qantas Group doesn’t lag behind LCC competition from Virgin Blue and Tiger Airways.

Moreover, the recent Jetstar-AirAsia cost alliance should also help the airlines reap additional benefits in the near future through by tapping on each other’s scale and synergies.

In conclusion, even though profits have dipped, Qantas remains one of the most agile airline brands in the world and it’s this quick-thinking that will keep them ahead of most competition in the coming times. What do you think? Let’s discuss in the comments, and over on Twitter (@simpliFlying)

• The “Jetstar-isation” of Qantas is not over yet. Is the LCC taking over the legacy parent brand?
• Is Premium Economy here to stay? A brand review of All Nippon Airlines
• Five clever ways to earn frequent flier miles for upgrades
• Why a Qantas and British Airways merger is good (and why Qantas + Cathay Pacific will be even better!)
• The business of business class

What the AirAsia and Jetstar “budget alliance” means

The most significant difference is the departure from Star Alliance – type marketing or revenue driven alliances. Air Asia and Jetstar have formed a cost alliance, or what I’d call a “budget alliance” (pun intended). Here is the nitty gritty.

1. The airlines will pursue joint procurement of aircraft – This means that they will be able to leverage economies of scale while buying from Airbus.
2. Joint design specifications – since they’re going to order a lot of planes, they can demand from Airbus things like a twin-aisle A320 or more efficient engines suited for their own operations. I think this is HUGE!
3. Pooling of inventory and spare parts – both airlines operate only A320s and A330s, so this was an easy one
4. Combining Airport passenger and ramp handling services – this is crucial for cost savings as during an emergency, the airlines can use one another’s planes to carry passengers.
5. It’s a non-equity partnership – so both will work on reducing costs together, but will not share revenues.
6. There is no maintainance involved – this can get tricky, with different safety regulations in different countries and result in safety lapses. And I think Qantas has learnt its lessons with the failed partnership with Malaysia Airlines last year.

For the consumers, this means lower costs for both the airlines and benefits for all of us. Hurray!

Though, if I was working at Tiger Airways right now, I’d be worried. Especially with the upcoming IPO!

Why it’s a genius move, as shared Live at CNBC studios in Singapore

I spent this morning with CNBC’s Martin Soong & Sri Jegarajah sharing my thoughts about the joint venture Live on SquawkBox. The interview now available on CNBC’s website and I’ve embedded it here for your convenience. (Click here if you can’t view the video interview).

So, what do you think about this budget alliance? Is this the beginning of a new era for airline alliances? Will other LCCs or legacy carriers follow? Let’s discuss in the comments or over on Twitter (@simpliflying)

• SimpliFlying in The Media: CNBC, The Straits Times, Asia News Network, AirObserver’s Blog, DrDaveHaleOnline, Travel Reviews, Travel Industry Wire, Facing the Street
• SimpliFlying in the Media: FOX 7, Today, Air Transport News
• SimpliFlying in The Media: Reuters, CNBC, Channel News Asia, FlightGlobal, TODAY, Aviation Indian, Ole Kassow Inc, UpTake Travel Industry, Columbia Business School…
• Five reasons why budget airlines in Asia are successful
• Why the Southwest and WestJet alliance is good for both the brands