For decades, Singapore Airlines and Cathay Pacific Airways set the global gold standard in service quality and customer satisfaction. In the process, shareholders of Asia's leading premium carriers were handsomely rewarded. Singapore Airlines was the second-highest valued airline globally as recently as 2011.
But something has changed. On Dec. 4, Cathay was dropped from Hong Kong's benchmark Hang Seng Index. Singapore Airlines' market capitalization is now barely a third that of European budget carrier Ryanair.
Shareholders of both Asian carriers have had a torrid time. Total shareholder returns over the past five years for Singapore Airlines and Cathay were 1.2% and negative 0.9% respectively. Compare this with the global airline industry average shareholder return of 25.3% over the same period and it is clear that the Asian premium carrier strategy is struggling to deliver.
Have passengers fallen out of love with Cathay and Singapore? On first glance this does not seem to be the case. Passenger numbers for Singapore Airlines are up 7% over the past five years and the airline continues to bag industry accolades, suggesting that its brand is as strong as ever. Cathay saw even better performance in these terms, with passenger numbers up 19% over the past five years, driven largely by booming demand from China.
But a closer look at some of the underlying drivers tells a different story. Of particular interest is passenger yield, a measure of how much customers pay per unit of distance flown. Over the last five years, Singapore Airlines witnessed a decline in yield of about 10%. The decline for Cathay was 28%, concentrated in the past two years.
It is no wonder that Cathay recently announced its worst half-year results in 20 years and initiated a major restructuring, including a cut of a quarter of its management staff. Singapore Airlines reported a loss for the previous quarter and also announced a strategic review.
Increased competition is generally seen as the main culprit. Low-cost airlines, premium carriers from the Middle East and aggressive expansion by Chinese airlines all have contributed to a more competitive environment. Over time, the premium differentiation enjoyed by Cathay and Singapore Airlines has been eroded too as other airlines have worked to catch up.
The carriers have framed their business options as a competitive battle to carry passengers from A to B, hopefully at a favorable rate. Since it is becoming increasingly hard to differentiate between providers, the fallback option in case of sluggish demand has become yield management. In other words, cutting prices to sell seats. This is not a particularly clever approach because it conditions passengers to look for the best deals regardless of premium status.
A different battleground
Carriers need to find new ways to connect with their customers and to recreate enduring relationships that are less dependent on the price of their product. The way to do this is to focus on passengers' overall travel needs, using smart technology to elevate the customer experience.
Having grown up with their eyeballs glued to their smartphones, millennials expect seamless, personalized and instantaneous interaction with service providers. They want choice at a reasonable price and they want it now. Whether it is an on-demand bike or car trip, ordering meal delivery or streaming the latest Netflix episode, people's expectations for corporate interactions have fundamentally changed.
But airlines, and especially the legacy carriers, simply do not "get" digital technology and how it should be used to engage effectively with their customer base. A benchmarking study of airline apps showed Cathay scoring very poorly compared to best practice in terms of functionality and user interface. The premium carriers are leaving the door open for other players to win customers based on superior mobile experience.
Singapore Airlines has started to address this issue, but it has a long way to go. Its "companion app," launched last year, allows passengers to take control of in-flight entertainment systems ahead of and during flight. Its recent 70th anniversary campaign introduced a set of digital games to unlock promotion codes for flight discounts. My 7-year-old child enjoyed the games, but the impact on their target audience is questionable.
The real competition for Cathay and Singapore may not be other airlines but the online travel platforms and internet companies that are increasingly taking over the customer relationship. Companies like Ctrip and Agoda offer customers a huge range of choices, price transparency and booking convenience across a wide range of travel categories, including accommodation and car rental, all from a single platform. This is exactly the kind of experience that passengers are looking for.
The next wave of competitors is just around the corner, with Google, Amazon.com and other internet leaders moving into the travel sector. If airlines lose their connection with customers, they will lose the data and insights they need to sell ancillary services and products, which are key profit drivers. U.S. carriers generate more profits from such revenue streams than from traditional ticket sales.
Risk of relegation
Unless Cathay and Singapore Airlines find ways to retain and build on their customer relationships, they risk being relegated to commoditized basic service providers, a fate that has befallen many railways. This is not a viable business model given the capital intensity of aviation and the carriers' relatively high cost bases.
The premium airlines need to reimagine their customer relationships. They will need to take on a much broader role, adding products and services that are consistent with and strengthen their brands, that are relevant to their customers and add incremental and profitable revenue streams. They will also need big-data analytical skills to know exactly what services to offer to which passengers at which times.
The premium carriers will also need to increase the relevance of their apps, both as channels for adjacent products and services and to enrich the travel experience. The options here are endless: think, for instance, about communicating flight delay information or ordering meals in airport lounges while waiting in line for passport control.
This change involves a subtle shift in thinking, but one that requires a huge change in strategy and organizational capabilities. The biggest challenges come from within. The leadership teams of both Cathay and Singapore Airlines are filled with company men with decades of experience in the business. This is great in the context of the complexity of running airline organizations, with their interdependencies and razor-thin margins. But it is not clear that it allows for sufficient fresh thinking to challenge the status quo and develop a new vision for the sector.
Michel Brekelmans is managing director at SCP/Asia, a Singapore-based consulting firm that supports companies in business strategy development, organizational improvement and M&A services.