Useless rantings of a few disgruntled S'poreans...

On a wing and a prayer …

I hope this isn't another disaster in the making...

Will China Eastern Airlines become the proverbial albatross round SIA's neck?

Prithpal Singh

If Singapore Airlines' track record of management and investment deals with other airlines is anything to go by, the sceptics among us are going to throw up their hands and say "here we go again".

SIA's many attempts to go global have been patchy at best: Its first known effort was a management contract with Air Lanka in the early 80s, meant to be converted into partial ownership eventually.

Unfortunately, SIA managers' working relationship with their Air Lanka counterparts turned sour and the contract was not renewed. Emirates later bought into Air Lanka.

In the 1990s, SIA had an-ill timed foray into India when it did a deal with the Tata group. The airline thought it had a blue chip partner, but it turned out that its partner had very little political clout.

The proposed partnership was countered by the full force of the collective political clout of India's first privately-owned airline, Jet Airways, and others in the industry. This effectively killed the deal.

SIA lost this one great window of opportunity to enter India's now booming aviation industry and has little hope of moving in there in the near future.

In New Zealand and Australia, SIA got a little further, taking a stake in Air New Zealand and Ansett Airways. Both ventures ended with SIA suffering a lot of red ink and a bruised ego.

For one of the world's most successful airlines having to beat a hasty retreat from a potentially lucrative market was truly a humbling lesson.

Then, there was the 49 per cent investment in Richard Branson's Virgin Atlantic. Instead of seizing a foothold for further expansion into the Americas, all SIA did was hand over a $1 billion war chest on a silver platter to Mr Branson. The British businessman used that money to set up Virgin Blue in Australia, an airline which has become so immensely successful that it eliminated any hope for SIA to successfully re-enter the Australian domestic market.

Perhaps, even more disastrously for SIA, Virgin Blue has now staked its claim on the transpacific route thus denting chances of SIA flying across the Pacific Ocean from Australia to the US for many years to come.

The optimists will say that these were in the past when SIA was still on a learning curve with foreign forays. They will say that with China Eastern it will be different. That SIA paid its expensive tuition fees and learnt the lessons, that the environment is more liberal, that China is a huge market and an early entry is a must.

Granted that it's difficult to ignore China in this day and age and that there are many opportunities and benefits to be reaped. But one must be mindful that this is not just any industry.

First, it's a very high profile industry which attracts lots of attention and is still highly regulated. And in China, an airline can very quickly become a focus of nationalistic emotion if the fires are stoked.

So, what steps can be taken to protect the investment? The other big question is why is SIA making this purchase? And does it really know what price it may have to pay eventually? Or is SIA prepared to make this foray at any cost, because it's China?

From the preliminary information available, it looks like SIA is just too anxious and overly eager to enter the China market. Many different approaches can be made but jumping into bed with a high profile and well established airline there raises a few red flags.

First, it's easy to get carried away by the "China-cannot-be-wrong" syndrome being manifested in the hype and euphoria of SIA's planned 25 per cent stake in China Eastern.

Any investor will tell you that taking a 25 per cent stake in an airline in China without taking some effective management control (unless one wishes to be a passive investor) is pure folly.

Presumably, SIA's involvement is not just the injection of funds. It's there to make that vital difference: That its involvement will provide much needed management expertise, improvement to product quality, know how, economies of scale to turn this loss-making airline into a profitable one. This is a very crucial point and SIA needs to reveal details of the extent of its involvement in managing the airline.

Second, China Eastern is Shanghai based, 20 years old and well established with 30,000 employees and an extensive domestic and international network boasting more than 100 aircraft.

It's no novice to the business and has an ingrained management style.

Recently, three senior managers were sacked for corruption. It can easily be seen that SIA's management culture is as different from China Eastern's as chalk is from cheese.

"Face" is a huge factor in China and the SIA's corporate style, a la efficiency-at-allcost style of SQ is not likely to sit well with the working culture of the Chinese even with the best of intentions on both sides.

And with such a high profile business as an airline and a management structure which has been in place there for sometime now, I foresee many issues which will sap SIA of its time, energy and resources while it tries to turn around the proverbial giant oil tanker in mid stream. It's the sort of thing that can derail the very best of plans and intentions.

Third, even with the supposed liberalisaton of the aviation industry worldwide, the pace is still slow and patchy.

In China, it's worse. Nobody really understands the complex aviation regulatory environment: It's in constant flux and as murky as the Yangtze River at low tide and as deceiving as any minefield.

Presumably SIA is buying into China Eastern to secure access to domestic air routes, gain market share and achieve more international traffic rights to grow quicker than it could organically. But this is where it could very well get unstuck.

Other Chinese carriers may cry foul due to China Eastern's partial foreign ownership and may put a cap on future expansion plans and traffic rights assignment.

Traffic rights belong to the government. What guarantee is there that after landing a stake, SIA will not get the short end of the stick when it comes to traffic rights as the other Chinese airlines lobby against it citing its partial foreign ownership.

There are indeed many questions which need to be answered. But most important of all is this: Does SIA really need to buy into a Chinese airline when it can instead start with a management contract for a number of years with the option to buy a stake later?

With SIA facing challenges like longer-range aircraft that can skip Singapore, bigger airlines being born out of mergers and posing a serious challenge to SIA and the rise of the mega cash-rich Middle East carriers, is this the best way forward for SIA?

Taking a stake in China Eastern, far from providing it the next wing to take it higher, could potentially become the proverbial albatross round SIA's neck distracting it from being what it's good at: Maintaining SIA's pride of place as the best and most profitable airline in the world.

It can only continue to do so by sticking to what it knows best and becoming an even better world airline. One would have thought that after so many unsuccessful attempts to go global, SIA would have learnt its lessons. But it seems it has not and is hoping it will get lucky this time round.

Prithpal Singh is an aviation, tourism, travel and hospitality veteran.

posted by at82 @ 5/29/2007 12:06:00 AM