Singapore Air's New CEO May Shed Virgin Atlantic Stake
Singapore Airlines Ltd.’s 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 percent stake in Virgin Atlantic after the U.K. 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 Ltd. and Korean Air Lines Co. to lure lucrative business-class travelers. Middle East carriers Emirates Airline, Qatar Airways Ltd. 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 percent 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 SA. Singapore Air bought its stake in a 600 million-pound ($930 million) investment concluded in 2000.
Singapore Air 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.
Whether Singapore Air 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 Singapore Air 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.
Singapore Air 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 Singapore Air, 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 Ltd.’s chairman on Jan. 1.
Chew’s predecessor, Cheong Choong Kong, bought stakes in Virgin and Air New Zealand Ltd. 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 Singapore Air’s investment, Chew said in 2006.
Singapore Air, which operates 110 planes, fell 1.5 percent to S$15.30 in Singapore trading today. The carrier posted the third-worst performance in the Bloomberg Asia Pacific Airlines Index this year, rising 2.4 percent, amid increasing competition for premium and low-cost travelers. The 15-stock index jumped 28 percent in 2010.
Competition is intensifying in the premium market, which accounts for about 40 percent of Singapore Air’s sales. Hong Kong-based Cathay Pacific is working on a HK$1 billion ($128 million) business-class upgrade to lure executive travelers.
Korean Air, which aims to get 50 percent 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 Singapore Air’s A380s. Emirates is building a fleet of 90 A380s.
“Singapore Air 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 Singapore Air shares, at Aberdeen Asset Management.
Singapore Air has responded to budget competition through a 33 percent stake in Tiger Airways Holdings Ltd. 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 Ltd.’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 percent of passengers in the first 10 months of the year at Singapore’s Changi airport. That compares with 12 percent 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 percent 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.
Singapore Air’s corporate travel base and reputation will be an asset as Goh faces the new competition, said Steven Lim, who manages about $200 million at Daiwa SB Investments Ltd. 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, Singapore Air 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 Singapore Air has as a premium airline.”
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