Lee Lik Hsin has achieved what few airline bosses have done: turn around a loss-making carrier, merge it with a relatively new player in the market and make the combined unit profitable.
The Scoot chief executive describes the last four years of his career as a "wild ride". Before being tasked to manage the integration of the two Singapore Airlines (SIA) low-cost units, Scoot and Tigerair, he was given the heavy responsibility of turning around the latter, which was bleeding both at home and in its overseas ventures.
Plans to integrate the two carriers began in March 2016, when SIA took full ownership of the struggling Tigerair after it sold off its investments in Australia, the Philippines and Indonesia. The takeover saw it delist from the Singapore Stock Exchange before Tigerair and Scoot came under one roof with Budget Aviation Holdings. The duo then merged in July this year, retaining the Scoot brand.
Bryan van der Beek
Lee says it was clear to the SIA Group that the two would become one, to drive economies of scale with a single brand. It also did not take long to make the decision to drop the Tigerair brand.
He elaborates that while Scoot, launched in 2012, may be the younger airline, the SIA Group felt that it had better brand equity among passengers.
"Despite its longer history, the sensing was that Tigerair did not have the same brand equity that Scoot did," Lee tells FlightGlobal in an interview at Scoot's open-plan office at Changi airport. "All of the brand values of Scoot enabled it to, within such a short period of time, build up that following. From that perspective, it was a clear choice."
Despite the seemingly quick and smooth integration, Lee points to three major components that had to be ironed out prior to the merger: regulations, customers and internal processes.
Getting Singapore's regulatory approval to merge the two carriers was top priority, followed by gaining similar approvals from the countries to which Scoot and Tigerair operate. Most regulators were supportive, Lee says, and the go-ahead was secured without much difficulty.
Scoot then had to ensure that marketing efforts were aligned towards eventually dropping the Tigerair brand. Joint promotional campaigns were launched to give Scoot greater exposure in Tigerair's markets.
To give customers a taste of the Scoot "flavour", Tigerair's cabin crew underwent training to understand the level of service engagement that was expected. They were then encouraged to engage passengers more casually.
Lee is confident that the markets have accepted the change: "Our booking numbers have been holding up and are positive. There were no situations where because we did the brand switchover, Tigerair's customers were unfamiliar and decided not to book with us as Scoot."
What has been most challenging, however, is the internal integration of staff from the two units and getting them all to "adopt" the new organisation.
"Organisational culture is a very funny thing. You cannot just tell people 'it is what it is' and expect it to pervade. It is a process of evolution. It is persuading staff this is the best way for the organisation, and [then] getting their buy-in and commitment," says Lee.
He adds that while Scoot has achieved "some success", changing organisational behaviour is "an ongoing process" that will take time.
FRUITS OF INTEGRATION
Asked what had led to Tigerair's downfall, Lee says the matter was "water under the bridge". A grounding in Australia, as well as strong competition from fellow low-cost players added to the weight of high fuel prices, which had caused Tigerair years of financial inconsistency with more full-year losses than profits.
The airline chief shares that Tigerair's point-to-point strategy was a struggle, but the SIA Group views its fleet of Airbus A320s as complementary to Scoot's Boeing 787 fleet.
"That was the rationale behind putting two and two together. Individually on their own, there was a limit to how they could grow."
Bryan van der Beek
As part of the integration, the two carriers' networks have come together, allowing better connections and a flexibility in aircraft management. As two separate airlines, the duo risk losing a flight schedule if they want to use a Scoot aircraft on a Tigerair flight. As one airline, however, it has the flexibility to make such changes.
"Intuitively, it gives you much more ability to improve and optimise your profits. Anytime a flight is not doing so well, you can [operate] it with a smaller aircraft. Or, if a flight is doing much better, you can get more profits by upgrading."
Lee shies from disclosing how much feed there is between the A320s and 787s, but says that while the figure is improving, it is "not yet up to Scoot's desired level". This, he believes, will improve with the selling of through tickets and scheduling better connections.
An example is its daily Sydney services which depart from Singapore at 01:45. The timing does not allow for good connections from the group's short-haul services arriving at Changi and it has since switched three flights to a 10:00 departure.
With a single brand, Lee also expects to drive further synergies such as cost savings through joint contracts, and more pertinently, better returns.
"The real power of the single brand is found in the top line. The returns can be much more attractive for one brand when you factor in the amount of energy and resources invested."
Scoot also wants to grow its ancillary revenue, which currently accounts for 20% of its total earnings. Lee adds that the carrier has dedicated teams exploring new opportunities and ways to improve the take-up rates of existing products.
There is, however, no "silver bullet", but a lot of trial and error before a successful product is born.
One product Scoot is adamant it will not feature is lie-flat beds in its business class cabin, which its nearest low-cost long-haul rival, AirAsia X, has on its Airbus A330s.
"For the kind of real-estate space that a lie-flat bed occupies and the relatively premium charges that are needed to earn a return... we think it would not sit [well] with our customers," Lee elaborates, since leisure travellers are its main target audience.
Unsaid, however, is the fact that Scoot also needs to be careful not to cannibalise SIA's premium market.
CO-ORDINATION PROCESS
Despite being wholly owned by SIA, Lee says Scoot has the autonomy to make its own decisions and yet benefit from being part of a larger group.
One such example is in working together in what SIA calls a "route co-ordination process" – an exercise that, it said, is only achievable by having a portfolio of various business units which also include regional arm SilkAir.
In May, SIA vowed to "leave no stone unturned" as it reviewed its business to better position the group for future growth. Its chief executive Goh Choon Phong said: "Our portfolio now allows us to fundamentally re-look at our network, product and deployment of aircraft."
The review was flagged as the airline announced an 8.5% drop in operating profit to S$623 million ($448 million) for the year ended 31 March, as pressure on yields continued. Attributable net profit meanwhile plunged 55% to S$360 million.
Scoot's membership under the SIA Group has since allowed it to take over the legacy carrier's Singapore-Jeddah services, as well as Tigerair's Singapore-Chennai route.
In the coming months, Scoot will also take over SilkAir's services to Kuching and Palembang.
Another benefit of being backed by SIA is the ability to leverage on the group for cost savings in aircraft purchases and fuel hedging.
Bryan van der Beek
"We are able to enjoy the technology of 787s because of [the economies of scale that] SIA has. An independent low-cost carrier going to buy a brand-new 787 will never find the capital and buy it at the price we did," Lee says candidly.
Scoot turned profitable in 2016, four years after it launched, and SIA has said that it was in a large part thanks to the efficiencies of an all-787 fleet. The airline now has a CASK of S$0.049 including fuel.
Prior to that, Scoot operated old 777s belonging to SIA. Scoot and Tigerair recorded a combined operating profit of S$42 million for the financial year 2015-2016 and S$67 million for 2016-2017.
EXPANSION PHASE
With the core of the integration completed, next on Lee's agenda is to drive Scoot's expansion.
The low-cost carrier plans to double its fleet over the next five years. Flight Fleets Analyzer shows that it has 39 A320neos (previously procured through Tigerair) as well as two 787-8s and four 787-9s in its orderbook.
Scoot currently operates 23 A320s, eight 787-8s and six 787-9s. Over time, the carrier's narrowbody fleet will comprise only A320neos. For its widebodies, Lee says that while there are no intentions for the carrier to take on 787-10s, Scoot will leverage on its parent's order of 30 787-10s and convert them to more -8 and -9s if needed.
In 2016, Tigerair and Scoot's capacity grew 22%, and Lee expects the airline to continue with "double-digit growth" over the next few years. The fast growth means there was little staff attrition during the integration, with Scoot now having about 2,000 staff on its payroll.
In terms of network, Scoot will "remain anchored in Asia" as it views the continent as its "most important market".
FlightGlobal schedules data shows that Scoot's routes are concentrated in Southeast Asia and North Asia, as well as to India. It also operates to four points in Australia: Gold Coast, Sydney, Melbourne and Perth.
Lee sees China and India as key engines of growth within Asia, where it can launch more services. Closer to home, it sees opportunities in Malaysia and Indonesia where it can increase its presence.
The carrier recently announced plans for new services to Harbin, Honolulu, Kuantan, Kuching and Palembang, all still subject to regulatory clearances. Honolulu represents Scoot's first destination in the USA and its second ultra-long-haul route after Athens. Later this year, it also expects to announce a third long-haul route.
Despite his optimism in expansion, Lee anticipates that yields for Scoot will continue to come under some pressure due to externalities beyond its control – fuel prices, currency exchange rates and expiring airport incentives.
"Logically, our unit cost should be going down as we grow. Those three uncontrollable aspects had caused our unit cost to go up quite a bit... Had we not merged, those three elements would still be there and the situation would have been even worse. By merging, we helped mitigate some of these rises in unit costs."
Lee says "competition is par for the course" when asked about Norwegian operating direct London-Singapore services in September. He also concedes that some markets in Southeast Asia may be saturated with little room for new players. A possibility, though not without risks, would be to partner with existing players, he adds.
Scoot's only business outside of Singapore is its 49:51 joint-venture with Nok Air in the form of NokScoot. Lee says Scoot is committed to and will continue to build up the Bangkok Don Mueang-based carrier, despite its poor performance so far. He attributes this to the unfortunate timing of NokScoot's launch – just days after an ICAO audit revealed serious safety concerns with Thailand's aviation regulators – calling it "poor luck".
The ICAO red flag precluded NokScoot from starting flights to South Korea and Japan, the two key markets it was designed to serve. It now flies to Tianjin, Shenyang, Qingdao, Nanjing and Taipei with just three 777s in its fleet, which Lee calls "subscale".
KEY INGREDIENTS
Besides having a low unit cost, the other two key tenants of being a successful low-cost carrier, Lee says, is for aircraft utilisation rates and load factors to be high.
"Without [them], you do not deserve to survive. [It takes] discipline and execution but it is not rocket science."
Scoot has an average daily utilisation of about 12 hours across its combined fleet, while load factors are "in their mid-80%" – figures he says are "hard to push any further".
Lee does not see a "sweet spot" in terms of flight hours for the airline, saying it depends highly on the city pairs, market conditions and the aircraft deployed.
"We have proven with Tigerair and Scoot that it can work well with a one- to two-hour or a five- to six-hour flight, respectively, under the right circumstances. We are now testing the 10- to 12-hour range [with Athens and Honolulu], and are confident we can make it work, especially with brand-new technology in the 787 and low fuel prices."
He concedes, however, that the economics of a long-haul flight are different from that of short-haul, but that the airline is "going into it with our eyes open" and confident of making it work.
"Double the distance doesn't mean you can charge double the fare... which means that as the route gets longer, the unit yield tends to get lower. By the same token, the unit cost also gets lower because you are using the aircraft longer. The crux is how to balance the unit yield and unit costs... and we acknowledge that it is challenging."
The differences between low-cost and full-service flights are becoming increasingly blurred, and the aviation sector is primed for low-cost carriers to dominate, Lee says. A passenger who wants the frills can easily add them on a low-cost flight, and he believes that passengers' mentalities are essentially determined by what is in their pockets.
"Fundamentally, your main value proposition to the customer is very attractive low fare or value fare. You cannot run away from that. You build brand affinity and loyalty along the way, but your entire product [is built] on the basis that it is affordable – lower than anyone else."
Source: Cirium Dashboard
