An asset SIA may invest through Virgin Australia on Pacific routes: File photo

 

To understand where Singapore Airlines wants Virgin Australia to go it is necessary to keep in mind the strategic agenda of modern Singapore.

Which is to draw economic activity to the finite confines of a city state, or buy as much of the external action as possible, which are very different pursuits to those of a continent sized state which developed from selling its riches and opportunities to others.

Singapore Airlines expressed that strategy very directly during its thwarted bid to take over (for all intents and purposes) Air New Zealand when it owned all of Ansett in the period 1999-2001.

SIA’s then CEO Dr Cheong Choong Kong,  said the plan was to give Singapore Airlines the growth and diversity of earnings it could never sustain from Singapore’s population of 4 million, or even from its preeminence as a financial services, manufacturing and petroleum refining hub.

Cheong did everything that the Singaporean establishment wanted in relation to Air NZ/Ansett, apart from succeeding,  as Singapore, the airline and the city, came to accept that the deal would in reality be a disaster a good three months before Air NZ finished gutting the asset it was perfectly entitled to gut and cast it aside post 9/11 to suffer its inevitable collapse.

His successor, Chew Choon Seng, had to deal with the early impacts of the low cost travel revolution on the legacy values of Singapore Airlines. This was manifested in the early rise of AirAsia and the advent of Jetstar Asia and ValuAir, Australian and homegrown respectively, which were allowed to do by the government of Singapore what it appears to have felt Singapore Airlines couldn’t do, which was to pump new sources of traffic through Changi Airport for the benefit of the Singapore economy, which was clearly being distanced from the future of Singapore Airlines.

Under both Cheong and Chew SIA tried unsuccessfully to make strategic investments in major carriers in India, China and Thailand. But those failures had everything to do with government policy settings not with the merits of the various potential investments.

Provided hindsight isn’t used Cheong and Chew were very successful Singapore Airlines CEOs, but forces for change in the airline game were starting to cause as much havoc for Singapore Airlines as they have for Qantas.

Changi although successful, was no longer as critical a hub for distributing flights into China as it had been before China’s policy settings and better long range airliner capabilities combined to allow it to be bypassed by non-stop flights from major US and European cities into the PRC’s growing spread of commercially important destinations.

And AirAsia was being annoying by being successful as a trans border low fare franchise with the potential…still unrealized…to make Kuala Lumpur a longer term competitor for business Singapore and Changi had come to expect was a birthright.  Ditto Indonesia.

The economic strategies that had made Singapore a preeminent city state economy in SE Asia were becoming successful in Indonesia, Vietnam, the Philippines, Malaysia, and Thailand and of course India, Bangladesh and China.

It is fair to say that Singapore as a whole is more acutely attuned than Australia is to the rising towers that physically and metaphorically will surround it within a few decades at most. It is acutely aware that its cost advantage in many activities is being fast eroded. The rise of economies but their concurrent falls in influence as ‘the neighbors’ catch up is occurring all over the Asia-Pacific hemisphere, not just in the wide brown land at its southern extremity.

By the time the current CEO of the Singapore Airlines business, Goh Choon Phong  was appointed in 2010 it was widely considered obvious in Singapore that a more successful foray into the growth area of low cost air travel was required, but that over the top of that, benefiting from the activities of airlines of any type was more vital to its future than the iconic status of Singapore Airlines.

Which is coincidentally the policy setting in Trade and Commerce that has been apparent in Canberra for all of this century, and supported despite the odd bit of contrary rhetoric by both sides of politics.

Singapore Airlines divested much of its initial stake in Tiger Airways Holdings which had been its response under Chew to Jetstar Asia, and launched its 100% owned wide body low cost subsidiary Scoot.

However it continues to have a strong focus on its legacy business, which is full service airlines operations, which brings up obvious parallels between the businesses owned by Singapore Airlines, and those in which it now has a significant stake and voice, namely Virgin Australia (19.9%), Tiger Airways Singapore (32%) and through the Tiger Holdings company an indirect stake in its 40% share of Tiger Airways Australia plus the benefits or otherwise of indirect participation in the other 60% of that operation through its Virgin Australia investment.

This means that Singapore Airlines will have a vital continued interest in how Tiger does in Australia, notwithstanding control of the operation being held by Virgin Australia.

It also means that its anger at what it has long seen as the dishonoring by Australian governments of assurances that it can have open skies access to the Australia-US market will now focus on its investment in Virgin Australia’s newly profitable trans Pacific operations and the joint business venture it has in relation to them and US domestic traffic with Delta.

Singapore Airlines’s original interest in flying the Australia-US routes with 777s or A380s may thus find its expression in getting such assets into the Virgin Australia operation. If the current ownership structure of Virgin Australia Holdings is any guide, a way will be found.

A point of conflict that may arise between Singapore Airlines on 19.9% of Virgin Australia and Etihad on 9% could be traffic between Australia and Europe.

Virgin’s alliance with Etihad over Abu Dhabi will compete in the minds of Singapore Airlines’ customers with its alliance with Virgin over Singapore, and if Virgin makes it hard for customers to score points to Europe flying there via Singapore the obvious answer the customers will have is just to continue to buy those trips as Singapore Airlines trips.

Sooner, rather than later, Virgin Australia will have to revamp, restate or reorganize its European traffic ambitions and offerings to satisfy Singapore Airlines, and Etihad, and in that order.

The crucial operational advantage for Singapore Airlines in its alliance with Virgin Australia is that it will not only carry Australia originating traffic to Singapore to connect to almost all of Asia, but to Europe.

It’s an advantage Qantas can’t replicate in association with Emirates, posing a problem it urgently needs to solve if its Asia strategies aren’t going to become either unwieldy or ineffective.

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