HONG KONG (Reuters Breakingviews) - Asia’s aviation hub model is showing signs of wear and tear. Chinese competition is hitting both Singapore Airlines and Hong Kong rival Cathay Pacific, and neither has a big domestic customer base to rely on. At least the Singaporeans have a smarter-looking approach to budget travel.
On Thursday, Singapore Airlines reported annual earnings down 55 percent to S$360 million. That missed analysts’ expectations by a long shot and triggered a share drop of more than 6 percent.
Graphic: Pockets of turbulence: reut.rs/2qxFH1p
Just as worrying was the fact that the carrier is not filling up its aircraft. Its passenger load factor was a mere 79 percent for the year, below the breakeven level of 80.4 percent. It has languished at these levels since at least 2012. Rival Cathay has been running fuller flights, but has had to slash ticket prices to lure customers. In March it posted its first annual loss since 2008.
The duo suffers two common problems. First, the rapid growth of direct flights from China to a raft of international destinations has done away with the need to stop in either city en route to a third destination. That is especially painful because China's outbound tourist market, by number of visitors, is already the biggest in the world. And second, a rising Asian middle class wants to fly cheap.
There are ways to alleviate such existential threats. Diversifying into the booming budget travel market is one. Singapore Airlines is embracing that approach with some success. Operating profit from its no-frills carriers - SilkAir, Scoot and Tigerair - rose in the year, although this only make up 27 percent of the group's total operating profit.
On the other hand, Cathay has only tentatively moved downmarket. Its Cathay Dragon unit is pricier than the more aggressive budget carriers. The Hong Kong-listed airline has admitted it needs to change tack and is in the middle of a strategic review. It has yet to unveil details.
An overreliance on low-cost subsidiaries, if not handled carefully, could cannibalise the main carrier’s business. But standing still is not an option. Budget travel offers something of an escape.