Aviation Services

Qantas-Emirates tie-up

Sector Overview

The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).

  • Qantas is shifting its European hub from Singapore to Dubai
  • A mix bag for SIA
  • Mildly negative in the near term for SIAEC & SATS
  • We caution against overreacting to the news

What is the news?

Qantas announced a strategic 10yrs partnership with Emirates that would see the Australian carrier shift its European hub from Singapore to Dubai. Consequently, Qantas would terminate their 17yrs long business alliance with British Airways. Qantas would also withdraw its Singapore to Frankfurt route that had been underperforming.

A mix bag for SIA

Strategically, this implies that competition for traffic between Europe and Australia would be stiffer with the new alliance between two of its major competitors. However, we opine that it also implies less competition for European customers travelling to Singapore. Hence, we see this development as a mix bag for SIA.

Minimal near term impact for SATS & SIAEC

This move by Qantas has tactical and strategic implications for the aviation service providers, SIAEC & SATS, under our coverage. We see this as mildly negative for the aviation service providers as the termination of flight services would result in lower work volume for both companies. However, we estimate that the shifting of flights to Dubai would account for less than 2% of flight traffic at Changi Airport and caution against overreacting to the news.

The Qantas Group is the 2nd largest user of Changi Airport, after the SIA Group, but only after including significant traffic from Jetstar Asia. We believe that Asia remains an important market for the Qantas Group and would continue to be an important part of their growth strategy. In fact, Alan Joyce, Qantas’s CEO, mentioned “Qantas will increase dedicated capacity to Singapore and re-time flights to Singapore and Hong Kong to enable many more ‘same day’ connections across Asia.” Bloomberg news subsequently reported this capacity growth to Changi Airport at 25%. Hence, this expected increase in traffic growth at Changi could actually be positive for the aviation service providers!

Strategic implications for SIAEC & SATS

There are also concerns over a potential loss of contracts with Qantas, as the second largest service provider at Changi Airport, dnata Singapore, is part of the Emirates Group. We acknowledge this as a longer term risk, but opine that near term effects are limited. In particular, we see little risk in the near term for SATS as the company had recently renewed their contract (inflight catering, laundry services, ground and cargo handling) with Qantas in 1QFY13. Contract information for SIAEC is not available.

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