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Morningstar | SIA Maintains Its Premium Edge Among Legacy Carriers, but Not Enough in an Commoditized Industry

Singapore Airlines, or SIA, is Singapore’s flagship carrier. Widely recognised for its superior in-flight service offerings, SIA indeed differentiates itself from its peers. However, the company’s dominance has been weakened by low-cost carriers and the aggressive overseas expansion of Chinese airliners.To defend its share, SIA is actively developing its own low-cost carrier--SilkAir--and investing in Tiger Airways, a regional LCC. We applaud SilkAir’s lofty growth trajectory, but we don’t believe SIA can maintain its market share and margins at the same time. Adding new routes comes with transition woes. SilkAir’s load factor is under pressure and will remain so for the near future, in our opinion. Indeed, the company has announced medium-term plans to upgrade SilkAir's fleet and eventually to integrate it into SIA.SIA is making inroads into the Australian market, with a 19.9% stake in Virgin Australia. By code-sharing, SIA reinforces its position in the so-called "Kangaroo route." At the same time, SIA runs its own long-haul LCC, Scoot, which connects destinations in Australia, China, and Japan. However, Scoot's income contribution is still low, with a long runway for capacity growth.SIA has a 49%/51% Indian joint venture with Tata, Vistara, which launched in January 2015. We like SIA's profit potential in the growing Indian market. However, SIA has never operated in such a regulatory environment as India’s and has rarely found itself competing in a cutthroat price war. For a legacy carrier, SIA remains very innovative in providing a best-in-class passenger experience, though such things as upgraded seats, entertainment devices, and its signature service quality, in our opinion. But in the airline industry, costs drive profitability and air travel has always been and will remain commoditized.