The Lufthansa SIA joint-venture; context, bold rationale, who’s who & cards at play

 

Singapore Airlines (SIA) and Lufthansa have signed a wide-ranging partnership agreement that will see the two airline groups operating key routes between Singapore and Europe on a joint-venture basis, in addition to significantly expanding codeshare ties and deepening commercial co-operation by revenue-sharing/optimization and joint-marketing programs, in order to co-operate in key markets predominantly in Europe, Southeast Asia and Australia, co-ordinating schedules to provide customers more convenient connections between route networks, offering joint fare promotions, aligning corporate programmes to strengthen the proposition to corporate customers, and exploring enhancements to existing frequent-flyer programme ties.

  • The agreement includes SIA subsidiary SilkAir, and Lufthansa subsidiaries Austrian Airlines and Swiss.
  • Flights between SIN-FRA/MUC & SIN-ZRH under revenue-pool sharing programs
  • SIA-DUS announced by Singapore Airlines (July 2016)
  • Tentative freight-proposals and agreements under consideration, but Singapore Airlines Cargo and Lufthansa Cargo have made no mutual announcements as of yet. For first-class passengers, a partnership between Singapore Airlines long haul services to Frankfurt and Munich is service-combined (through inventory/product/service alignments and agreements) with Lufthansa Private Jet spanning 100 airports across Europe, Russia, North Africa and niche TATL services.
  • Future feasibility-consideration of new/current long-haul services (SIN-VIE, SIN-BRU, capacity/frequency growth, and product diversification, LCC operations by Scoot, Eurowings and Edelweiss). Mutual JV-airline’s spoke co-mingling for revenue-management can also be observed as the JV deepens, allowing expansion of LH in the Middle East and the subcontinent from secondary ports, and allow Singapore Airlines to operate to grow in the subcontinent and Middle East, while feeding traffic to its start-up Indian carrier Vistara.
  • Currently limited JV, subject to growth upon approval of domestic and international competition/trade/economic-organizations based upon respective ratified acts and regulations
  • “We are very pleased to have reached agreement for this extensive partnership, which will bring about significant benefits to consumers through enhanced connections and more codeshare destinations. Singapore Airlines has had longstanding ties to Lufthansa, which is an ideal partner with an excellent network and strong customer focus. This agreement deepens ties with the wider Lufthansa Group, providing a solid foundation for numerous commercial co-operation opportunities. This is yet another example of how partnerships can result in more for our customers, as we can jointly provide benefits that we would otherwise not be able to provide on our own,” said Singapore Airlines CEO Mr Goh Choon Phong.
  • Carsten Spohr, Chairman of the Executive Board and CEO of Deutsche Lufthansa AG: “We can look back already on a long and fruitful partnership with Singapore Airlines. And we’re now intensifying this close collaboration between two world-leading premium air carriers with a new joint venture that is in the best interests of all our customers, in Europe and in Southeast Asia. Because by working even closer together, we can both offer even better connections and even better services. Our intensified partnership with Singapore Airlines is an excellent addition to our global joint venture network, and is a cornerstone of our Asia Strategy. And all these strategic partnerships will help the Lufthansa Group further consolidate its leading position in all key markets.”
  • Expanded SQ codeshares on LH/LX/OZ services (mostly short haul intra-European, limited Latin American, Caribbean and high-yield US destinations not/limited operated by SQ (solely based on timings)
  • Expanded LH codeshares on SQ/MI services on directional OR proximate services from LH/subsidiary operations. Mostly South-East Asia, Australia, New Zealand (with possible LH codeshares on NZ), and few high-yield Asian destinations not operated by LH/subsidiaries/partners upon convenient schedule observance

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The rise of the Gulf carriers, and expanding competing European airlines to the financial hub of Singapore, continues to pressure airlines that were once upon a time competitors, into aligning businesses beyond multi-airline alliance groups (in this case Star). And so the Lufthansa and Singapore Airlines groups have been forced to compromise their previous independence, to pave sustainable premium/yield generation, succinct operations, and expanse of virtual-airline catchments tangibly through the JV.

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  • Although Lufthansa and SIA account for about 27% of non-stop Western Europe-Southeast Asia capacity, their share of flown passengers is around 13%. Emirates alone has 12%; adding Etihad and Qatar now has 27% of the market transiting via the Gulf. But SIA and Lufthansa are the only airlines operating non-stop service between their respective countries.
  • The proposed JV will grow the passenger 27% share to 33% (under conservative figures), while also even further growing the revenue share thanks to premium placements for both airlines.
  • Regulatory structures have placed both companies to limited cost-management capabilities within the mainline, forcing premium-placement in the marketplace, while creating inherently disharmonized subsidiaries. This partnership will also enable further diversified products of these subsidiaries through growth in capacity transfers between Europe and South East Asia.
  • New products into the marketplace, with new-delivery aircraft or order backlog, rebranding, product optimizations and improvements, and cabin refits for variety of 5th freedom and direct carriers between Europe and ASEAN.
  • Oneworld presence improving with British Airways (high capacity A380 and 77W services non-stop to LHR hub from SIN), Qantas (with European onward connections), Qatar Airways and Finnair lifting the bar with the A350s currently from DOH-SIN, DOH-FRA and DOH-MUC, and soon into service for HEL-SIN respectively. Cathay Pacific also fight for market presence in SIN. Numerous carriers in Europe, the Middle East and Asia operate to Germany (FRA, TXL, MUC, DUS, HAM).
  • Skyteam presence inherently strong and rapidly growing catchments within the ASEAN and Europe. China Eastern and China Southern continue to expand mainland China destination counts, while increasing capacity to PVG, PEK, and CAN, while also announcing and growing European long haul routes and services with growing fleets. Air France and KLM also operate to Singapore, with very high O/D oriented presence to much of the ASEAN regions and China. Garuda Indonesia and China Airlines also play pivotal roles in capacity transfer to Europe in competition of Star carriers. Strong partnership structure consolidates traffic to stream.
  • Turkish Airlines, Ethiopian, Thai Airways and Air India largely, and willing to retain as uncooperative to LH and SQ to shuttle and contribute to JV operations between the ASEAN and Europe despite large presence in Asia, and even larger presence in Europe.

 

The new agreements announced between SIA and Lufthansa should provide additional weaponry in the two Star Alliance members’ competition with the Gulf carriers on routes between Western Europe and Southeast Asia. It should also strengthen Lufthansa’s access to Australia. The Gulf airlines’ extensive networks of secondary cities in both Europe and South East Asia still mean that Lufthansa/SIA will often be trying to combat their rivals’ one-stop services with a two stop proposition, but their deeper cooperation will give them better access to markets and customers and an enhanced ability to use schedule and price to enhance their position. Moreover, Lufthansa/SIA will also be better placed on the main trunk routes between the regions. Gulf carriers serve more European points than SIA, and more Southeast Asian points than Lufthansa. The proposed JV between SIA and Lufthansa does not solve all their problems on between Europe-Southeast Asia. To reach its potential the JV will need two elements of :

  • 1) Wider geographic scope through opening inventories, accessibility and codeshares (despite both LH and SQ culturally reluctant to interact amongst themselves (let alone other Star and non-Star partners)
  • 2) Cultural alignment, scope and joint placement between Lufthansa and SIA. The assets, route networks and anything physical can be aligned, but a mismatch between managements can be a deciding factor for growth.

 

There is an undeniable trend from this JV and other strategic moves from both Lufthansa and SIA: long haul low cost operations (Eurowings/Scoot), greater group integration (Silkair outreach, and Vistara flow-traffic uptake) and a focus on partnerships, to name a few. The trend is that Lufthansa and SIA are also demonstrating a greater willingness to take on competition beyond the product, and price (where few airlines successful, and a bitter example of Malaysia Airlines, Thai Airways and other ambitious airlines next door) thanks to capital accessibility, inventory, outreach, corporate accounts pooling and capability to be flexible over paper changes in internal management.

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Concerns associated to this is as follows:

  • How this joint-venture will demand for bitterness and consolidation of partnerships with other carriers. One significant example may be Turkish, which play a huge role for Singapore in allowing codeshares on services unable to be operated by its own metal in Europe, North Africa, regional Africa and South America, while also in return feeding traffic from IST onwards to Australia/NZ via SIN. On the other hand, TK aligns much of its operations with LH on African services for TATL ops (give and take respectively). How the relationships develop through analysis of inventories will certainly be interesting.
  • Likewise, it will be interesting how this plays out in negotiations for joint-venture operations between Lufthansa and Air China. Maybe SQ can have its place in the negotiations (although very wishful thinking!).
  • With the order of the 280T MTOW A350-900ULR by SQ for direct North American services, this joint venture is sure to not impact the airlines’ relationship with Star Partners United (and possibly neither Air Canada), in favour of LH. As previously stated, the focus on LH is simply between Europe, SE Asia and respective geographically proximate regions.
  • Product placement capability. Despite opportunities of LCC operations, it is quite far-fetched and unreasonable at this point in time, leaving just the full service carriers. This can be concerning as it limits the mutual-beneficiary carriers to price and product discriminate amid high-premium operations and high costs (despite both carriers having to feat robust premium-economy products on-board). Similar to Virgin Australia’s Airpass program to allow leisure-traffic fare restrictions inventory requirements to transfer onto partners, a development of a product with all the restriction requirements and cost-cutting capability needs to be in place to ensure greater outreach.
  • Aligning respective cultures to contracts, business accounts and third-party sales-contracts. LH’s in-house sales bypassing major GDS’ and online service providers in stark contrast of SQ, requires lots of giving and taking alone in the revenue sharing programs currently in place.
  • Altering aircraft routings (layover, turnaround and aircraft-utilization), aircraft types (fleet turnover) and crew rosters (cross airline crew pooling, type ratings) to facilitate highest demand/catchment/product-value outreach, and operational robustness (especially time-sensitive high-yield inelastic premium passengers).
  • LH’s SIN-CGK operations and SQ’s MUC-MAN & SIN-DME-IAH services.
  • Protectionist Singaporean and German authorities which may block expansion of JV and capacity exchange (similar to Air Berlin’s affairs with major equity-partner Etihad Airways

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This announcement has surely been an interesting but anticipated response to the competitive atmosphere (especially in rise of 5th freedom airlines and stronger liberalization in today’s ever changing skies). This is surely in line with industry trends of mass consolidation and partnerships for scale development, operational streamlining and mutual benefits. All in all; WATCH THIS SPACE!

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