SIA faces long battle to be global player

Singapore, Aug 21: YOU might think loss-making carriers in Asia would welcome deep-pocketed Singapore Airlines Ltd (SIA) as a partner at a time when the industry is facing a global downturn. Not so in India or New Zealand.

The governments of both countries will decide soon on whether to allow the world’s third most profitable airline to buy into state-owned Air-India and boost its stake in Air New Zealand.

Judging by the rhetoric thus far from Wellington and New Delhi, the chances of the SIA proposals going through are slim, analysts said.

“It looks very unlikely they will succeed in either place,” said Andrew Tan, analyst a ABN Amro Securities. “It is going to be a long haul, though it would be great if they can accelerate the process.”

The issue is not so much about money. SIA made net profit of S$1.55 billion ($885 million) for the year ended March 2001, a 33 per cent increase over the previous year, and has deep cash reserves.
The problem is more that airline mergers and acquisitions generally are rare due to heavy protectionism in the industry.

Carriers must be majority owned by citizens of a country to enjoy landing rights, which are often negotiated bilaterally between governments.

Despite the constraints, SIA has been aggressive on the acquisition front, mainly to broaden its horizons beyond the city state’s tiny domestic market of four million people.

After buying significant stakes in Virgin Atlantic and Air New Zealand, SIA is now ranked as the fourth-largest carrier in the world in terms of passenger traffic volume.

Analysts said SIA has been unique in pursuing a strategy of using equity stakes to build up a group of airlines, apparently with an eye on the day deregulation will allow it to merge the businesses into a single global carrier.

“The industry needs to liberalise but that probably won’t start in Asia. Consolidation has already started in Europe and the US,” said Mr Tan.

“It needs a change in political mindsets and also the regulatory framework. That won’t happen overnight.”

Timothy Ross, aviation analyst at UBS Warburg in Hong Kong, said the Indian market — with its big and growing middle class — would offer strong potential for SIA.

In New Zealand and Australia, there were still good margins despite recent tough price competition, he said.

Securing stakes in Air New Zealand and Air-India would give SIA a very strong South Asia network, increased control of regional traffic flow and broader route development options.

“Its network strength would be considerably increased. Each acquisition of this nature gives SIA a new plank to its foundations,” said Ian Thomas, an analyst at the Centre of Asia Pacific Aviation.

“Essentially, it would cement a stronger force in the region. Assuming it goes ahead, it will enable SIA to do a great deal more than it has done in the past in terms of extending its influence in the region.”

Rejection in India and New Zealand would be nothing new for SIA, which has been working for more than a decade to get into the two markets.

SIA tried to enter Indian the market in the mid-1990s by way of a joint venture with the Tata group to set up a new airline. But SIA gave up after almost three years and several changes of government.

Earlier this year, it decided to team up with the Tatas again to bid for loss-making Air-India, which some analysts gave an initial market worth of $1 billion, although that value has fallen because of weak market conditions.

It is estimated that SIA could invest anything from S$500 million to S$1.5 billion depending on the structure of the final Air-India proposal.

But many analysts felt it could be a blessing in disguise if SIA did not get the Air-India deal, pointing to the enormous risks of buying into an unprofitable business exposed to political interference. “It is going to be a contentious national asset,” said one analyst who declined to be identified. “I really hope that they lose this bid.” (Reuters)