CNA Explains: Beyond the Air India stake, how have SIA's other investments fared?

CNA Explains: Beyond the Air India stake, how have SIA's other investments fared? One analyst says Singapore Airlines' track record of investments in other airlines has been "pretty underwhelming". SINGAPORE: Singapore Airlines’ (SIA) stake in Air India is under scrutiny after the Indian carrier asked its owners last month for a further US$1.5 billion in support following a record annual loss. The bet is the latest in a series of “underwhelming” investments that Singapore's flag carrier has made in other airlines as it seeks exposure to other markets. SIA said its investments in India have been and will continue to be funded through internal resources. It owns 25.1 per cent of Air India. Transport Minister Jeffrey Siow told parliament that SIA’s ability to serve Singaporeans is not affected by its stake in Air India. In response to CNA's queries, SIA said its investments generally aim to strengthen its network and market access, deepen commercial partnerships and support long-term growth beyond Singapore. What happened with SIA's other investments? In 1999, SIA paid £600 million – equivalent to around US$1.6 billion in today's money after accounting for inflation – for 49 per cent of Virgin Atlantic. Reports at the time said the airline had hoped the deal would help it secure approval for transatlantic routes from London, which it did not receive. By 2008, SIA was inviting offers for the stake, noting that the investment had generated poor returns. It eventually sold out for £224 million in 2012. SIA’s 25 per cent stake in Air New Zealand was also heavily diluted after the New Zealand government stepped in to rescue the airline. It sold its 6.3 per cent stake in Air New Zealand for US$336 million in 2004, Reuters reported. Separately, SIA subsidiary Tiger Airways set up an Australian arm that racked up years of losses, Reuters reported. Virgin Australia bought a 60 per cent stake in Tiger Airways Australia in 2013, then acquired the rest of the company for A$1 in 2014. SIA also took a stake in Virgin Australia in 2012 and added to it the following year. The investment was written off after the carrier entered voluntary administration during the COVID-19 pandemic. Budget carrier Scoot, an SIA subsidiary, formed a joint venture with Nok Airlines in Thailand in 2014 but liquidated NokScoot in 2020 amid the pandemic, recording a S$123.6 million (US$97 million) one-off charge, mostly from the impairment of planes leased to the venture. Why have SIA’s investments been lacklustre? DBS Group Research analyst Jason Sum said SIA’s track record of investing in other airlines has been “pretty underwhelming financially”. COVID-19 played a big part in the more recent failures, he said, but not all the investments were affected by external shocks. SIA said it assesses every investment on its own merits, weighing strategic fit, potential long-term value, the operating environment, risk profile and alignment with strategy and capital requirements. "Investment decisions are subject to the appropriate board approvals and the group's disciplined capital allocation framework," a spokesperson said. Mr Sum said one challenge is that SIA often takes minority stakes without full strategic or operational control, meaning it shares in the financial downside without being able to control fleet, network, capacity, costs or management. Airlines are difficult investments to begin with, he added, being capital-intensive, cyclical businesses with high fixed costs, volatile fuel prices and heavy regulatory constraints. SIA's stakes have also tended to be in challenging markets or airlines already in need of substantial improvement, he said. OCBC equity research analyst Ada Lim made a similar point about SIA repeatedly entering structurally difficult markets. “The carrier has attempted, time and again, to enter the domestic aviation market in Australia, which is reportedly one of the most lucrative in the world due to an effective duopoly structure between Qantas and Virgin Australia,” she said. However, the duopoly structure is what makes it difficult for new entrants to break in, she added. What about the Air India investment? India’s market is “politically and commercially complex” even though it is growing quickly, Ms Lim said. Unexpected shocks followed the merger of Vistara – which SIA had initially invested in – with Air India, she said, pointing to Pakistan's closure of its airspace to Indian carriers and the Air India Flight 171 crash that killed more than 240 people on board. SIA said its investment in Air India is a long-term strategic commitment aligned with the group's multi-hub strategy, noting that Air India holds valuable slots and air traffic rights at key domestic and international airports. "This investment differs from SIA’s previous equity holdings, which were undertaken in different contexts and for different strategic objectives," the airline said. How else can SIA grow? Singapore's small size means it has no domestic aviation market and SIA cannot rely on a baseload of domestic traffic, Ms Lim said. This makes overseas expansion a strategic driver as part of its multi-hub strategy. The airline is also pursuing other avenues for growth, she said, including fleet renewal and premiumisation to target higher-yielding customers, with next-generation first- and business-class seats expected to roll out in the first quarter of next year. It can also grow its portfolio of network partnerships and tap the ongoing maintenance, repair and overhaul upcycle through SIA Engineering, she added. Mr Sum said SIA can still grow by increasing transit traffic through Changi Airport, including using Scoot to provide feeder traffic into the network. Scoot can also expand further into price-sensitive markets or add frequencies and destinations, he said. Is there a model SIA can follow? Few examples exist of clearly successful airline acquisitions, especially cross-border minority stakes, Mr Sum said. "Qatar Airways is probably the clearest example SIA can learn from," he said, noting its sizeable minority stakes in Cathay Pacific and the International Consolidated Airlines Group, parent of British Airways and other carriers. "Both have generated decent returns while also delivering strategic benefits," he said, adding that a key difference is that Qatar invested in strong airline franchises with valuable hubs, rather than taking minority stakes in businesses requiring major turnarounds. Want an issue or topic explained? Email us at digitalnews [at] mediacorp.com.sg. Your question might become a story on our site.