Singapore Airlines Swoops In For The Kill

As rival carriers struggle, SIA is going on a buying binge

When Chief Executive Cheong Chong Kong announced in March that Singapore Airlines Ltd. wanted to buy a hefty stake in Ansett, a small Australian carrier, other Asian airline executives could only look on in envy. As most of the region's carriers struggle to keep planes in the air, SIA is spreading its wings. Indeed, the $320 million it's offering to pay Rupert Murdoch's News Corp. for its half of Ansett Holdings Ltd. could kick off a $1 billion buying spree that leaves Singapore's flag carrier with big pieces of other airlines. The idea is to tap SIA's considerable wealth now to position it for regional dominance when Asia recovers.

The carrier has long enjoyed an enviable reputation for service and high profits. But its executives have always wanted to expand. The best way to do that is to buy big stakes in other airlines, then improve service and coordinate flights with SIA's. A passenger on an affiliate can fly to Singapore, then switch to an SIA flight to Europe or the U.S. Result: more passengers on SIA flights and a lot more profit.

AUSSIE GOLD. But wooing partners has been tough. Late last year, SIA approached Thai Airways International Ltd., hoping to benefit from privatizations that the International Monetary Fund ordered as part of a bailout package. In March, Thai rebuffed SIA's offer to purchase a 25% stake for $300 million to $400 million. Thai did not want to sell to a competitor, says a banker close to the negotiations.

But the Ansett acquisition marks a turning point in SIA's quest. It would give SIA membership in the Star Alliance, a global marketing group of several airlines that coordinates schedules and promotes each other's flights. Thai is a member of Star--which means it would be a partner of SIA as well as a rival. Thai is now courting Lufthansa, but the Ansett deal, analysts say, gives SIA new momentum. "If SIA joins Star Alliance, it will be the largest member, and it will be hard for Thai to keep it out," says Ian Wild, aviation analyst at SG Securities (HK) Ltd. in Hong Kong.

Ansett would also give the Singapore carrier access to domestic Australian flights that can now be linked to SIA's hub. SIA expects its popular Australian flights to contribute 12% of revenues in the year ended Mar. 31. The Singapore carrier, which replaces its 90 long-range planes after less than five years' service, will also improve Ansett's efficiency as it sells the airline some of its secondhand jets. "That's one of the obvious synergies you'd expect to see coming out of this deal," says Timothy Ross, regional airlines analyst at Warburg Dillon Reed in Hong Kong.

Air New Zealand Ltd., which owns the other half of Ansett, has almost four months to approve the deal. If it does, SIA is likely to stay right on the takeover trail. South African Airways is next on SIA's list because it is also eager to privatize--and is due to sell a stake comparable in value to the Thai privatization. SAA would provide another flow of customers: Singapore is a hub for Johannesburg-to-Sydney passengers.

PROFIT SQUEEZE. Acquisitions are not the only place where SIA is putting its $1.5 billion cash stash. It is spending $300 million this year on everything from flat TV screens and phones in economy class to gourmet menus and sleepers in first. The investment is paying off. SIA had a 75% load factor in January, up 7% from the year earlier. That puts SIA at the top in Asia--and in the top 10% worldwide.

True, profits are losing altitude. Analysts say SIA will report a 26% decline in profits, to $454 million, for the year to Mar. 31. "But that's still great for any airline these days," says Stephen H. Miller, managing director of Trinity Aviation, a consultancy in Hong Kong.

SIA is clearly seizing the moment. Most Asian carriers have cut routes to Taiwan, South Korea, and Indonesia. Cathay Pacific Airlines Ltd., Hong Kong's unofficial flag carrier, lost $70 million last year and has just announced a partnership with the One World alliance--after insisting it didn't need such a tie-up. Philippine Airlines Inc. needs a partner to put in $200 million in equity just to stay in business. The market is clearly at the bottom, and it's time for SIA to muscle in on new business.

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