Jetstar Asia closure: Are the days of cheap fares over?
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You're listening to a CNA Podcast. Hello everybody, it's Oteli Edwards here. Welcome to another episode of Deep Dive. I'm sure you've noticed by now that there is somebody missing and that's my co-host Steve Chia. Well, he is overseas this week, so I am going to be flying solo. Speaking of flying, I'm sure you've all heard the news by now and that's the impending closure of Jetstar Asia, which is big news. We're going to be flying solo.

Singapore-based airline announced that it will cease operations as of 31st of July. They've cited high costs as well as increasing competition and Jetstar's exit has in fact caused quite a bit of stir among travellers as well as aviation experts. How is this going to affect other low-cost carriers and us travellers?

We're here to break it all down for us. We have Shukor Yusof from Aviation Consultancy Endow Analytics. Nice to be here. And we also have Dr Nitin Pangakar from NUS Business School. Hi, good to be here. Welcome, gentlemen. Let's just start tackling first what exactly happened with Jetstar, right? In a nutshell, was it struggling to make money or is this a sign of things to come that low-cost carriers flying out of Singapore could be affected? Shukor?

Well, first of all, Jetstar has been in Singapore for the past 21 years. It's the only foreign carrier that's based in Singapore, apart from homegrown Singapore Airlines and Scud. It knows the country well. It knows Changi very well.

It was here in an attempt to counter the likes of AirAsia, Cebu Pacific and all the other LCCs in Indonesia and other parts of Southeast Asia. So 21 years ago, 2004, that's when we all first got to know the discount budget airlines. But over the years, it hasn't done very well.

AirAsia was very much the top dog, if you like. They had the first mover advantage and then Singapore came out with ValueAir, with Tiger and a few others subsequently. Over the years, Jetstar Asia has only managed to be solvent for six out of the 21 years that it was operating here. So the writing was on the wall because it was never really competitive, didn't have the competitive advantage anymore.

It had a big brand name behind it, which is Qantas. And then as Singapore also grew more expensive in tandem with SIA and Scoot. Scoot, in fact, I would say has done incredibly well, especially post-COVID. That means Jetstar Asia didn't really have much

role to play. So, Nitin, perhaps you want to jump in here then. Do you think that it was just simply about one airline, just one low-cost airline trying to struggle just to stay profitable? In this instance, it could be. But as Shukur said, it's a matter of having that leadership position. So, Air Asia, it has the volumes and probably because it has good routes. I don't know whether Jetstar's routes were very well-travelled or not.

That's very important. The competition takes place on a route-by-route basis, not on a company-to-company basis. So if you're stuck with less traffic routes, then your costs are going to grow because you just have fixed costs and they don't get spread over. Jetstar, they've basically highlighted is the high costs of running its base out of Singapore. I believe...

Changi is aiming to expand its network to over 200 cities by the mid-2030s. We're talking about airlines will need to pay about 40% more to land and park at Changi. Over time, that is, so is the next thing going to affect Changi's competitiveness as an aviation hub?

Don't you think? It will, but it's a question of who are they competing against, right? They cannot compete on cost versus, say, Bangkok or KL. Probably they are targeting like the Doha's and the Dubai's and so on. Basically, their basis of comparison is that.

When I arrived in Singapore 30 years ago, I must say that based on my impressions as a traveler, Changi seemed a lot more functional than luxurious. So it was very good functioning. I love that, you know, which is... Without the waterfalls and wonderful features. Yeah, without the waterfall, without the jewel. There was only Terminal 1 and 2. 2 was the new terminal at that time. I think Changi has taken a little bit of shift towards luxury.

And when you do that, your costs go up. And Singapore also has become more affluent. So everything is more expensive. Singapore is going to be a high-cost place compared to, say, KL or Bangkok or some similar regional hub. It's worrisome for a large group of people who are used to these $100 and under flight tickets, right? I guess to a certain extent, that is not practical.

because then how does Jetstar, for instance, make money, right? Does that also mean that those days are over, that we shouldn't be expecting to pay such low prices? They are over a long time ago. Post-COVID, I can confirm it's over. It's only low cost in name. But in reality, it's pretty much high fares.

You have ancillary fees, you have a lot of other payments that you are going to be making. So you're saying it has narrowed the gap, what you're paying for? Very much. The so-called low-cost carriers versus the legacy airlines. So what we're seeing now is the legacy airlines, the flag carriers,

are in fact becoming low-cost or budget airlines. If you look at what Malaysia Airlines or Thai Airways or Philippine Airlines... Economy class, right, that is. Yeah, so those days when you can fly for, you know, a plate of chicken rice, for example, $10 thing. At the hawker centre, you can fly to Bangkok, you can fly to...

Jakarta. I've done that before in 20 years ago. One, because I'm a lot older. And I was at the forefront of when all these budget airlines were coming into the business. But now it's very different. It was more competitive. Previously, AirAsia had the first mover advantage. They were the only

one running around. And then subsequently, all the neighbors next to Singapore started getting very excited and they came out with their own low-cost carriers. So Indonesians are very active now in the discount carrier segment.

So at the end of the day, I mean, the traveller, they're just going to be looking at what is the final cost, right? What sort of minimum standards should we set? Because a lot of times, you know, when you sit for the budget plane, right, there's always a delay. So do we realistically expect it? Oh, you know, if you're going to take budget, it should be late up to two hours. You should take that as it is because that's what you're paying for. Both legacy airlines and budget carriers are guilty of being late, having delays. But what's with legacy though? Well, not...

Well, let's put Singapore Airlines aside because they are the exception more than the rule. Because all these other secondary carriers, our neighbours in the region, they are guilty of being frequently delayed and delayed. At the same time, there's always cancellations and all that. So not just the discount carriers are guilty of that, but full-service airlines are too because...

Sometimes, you know, there are technical issues. We're seeing a lot of issues coming out these days. It's a very complex industry. People who want to fly cheaply expect it to be seamless and all that. So they enjoy doing that. But it's a lot of work goes into one flight.

It's very, very complicated. So I want to bring up the fact that one of Jetstar Asia's gripe was the fact that they had to move from T1 to T4 away from Qantas and they said that disrupted its connectivity. Do you think that was a straw that broke the camel's back? Probably, yeah. I don't know what is the connecting traffic there. What percentage of traffic is connecting? So there are point-to-point flyers and there are people who connect to that and it would definitely affect the people who are making that transfer. So...

Many budget airlines are essentially point-to-point. A large proportion of their customers are point-to-point, but some could be transferred and those could be affected.

One of the things that we talked about before this started was that there is a perception that there's a lot more money to be made in full service carriers. And maybe as Qantas probably decided that, look, my capital is better served. As Sukur said, they have made money six out of 21 years, which is roughly one in three every three years.

In that case, I better put my money where the prospects look rosy, at least to them. So in other words, you're saying Qantas is just sort of focusing Australia, New Zealand, maybe not in Asia so much now. Or full service operations, you know, wherever they fly, yeah. With the base being Australia. In a nutshell, would you say that for a lot of these carriers, you know, who are subjected to higher costs,

operational fees and all that, they have no control over that, right? So it's just a way of just being competitive. But coming back again to the concept and this idea of investing in an airline, it's never a good idea to invest in an airline. If you...

have followed what Warren Buffett has been saying all these years. I mean, he got bitten very badly before when he invested in American carriers before. And so his advice to many wannabe investors in airlines is don't do it. It's just very difficult and very time consuming. So you are not optimistic that much either because, you know, like Singapore, we're expanding, we're building another terminal, we're going up to Terminal 5. You know, we're expecting a lot more flights and connecting all the routes and all of that.

How should I read into what you're saying? I'm also pessimistic about airlines. And actually, I have no idea where all this wonderful traffic, which is paying a lot of fares, is coming from. I have two kids. One is very young, has started a job about two, three years back, and the other is slightly older. And they both like routinely worry about the layoffs, right? We hear all the time about the tech people getting laid off and so on.

today's younger generation has a lot more uncertainty about their job security but I think what probably had changed is their behavior in terms of how much they spend so they're willing to for that today's gratification they are willing to spend a lot more maybe that's what is keeping the airlines going in that sense so but will that continue I don't know I mean on the

plus side, you know, when they let go 500 people, well, the news has it like SIA, they're going to scoop these guys up and, you know, give them a job. And there was a runway of six to seven weeks, right, before the operation totally ceased. Was that a decent timeframe for any airlines to shut down like that? Well, from what I'm hearing, Jetstar Asia's flights are already, since the last few days, since they announced there were cancellations, a lot of re-timed flights at Changi. So,

I don't think we need to wait until July 31st to see the total departure or exit of Jetstar Asia. They're already doing it. So I think that they want to quicken the process so that the unfortunate staff will have more time.

to be absorbed, if they are, eventually into the SIA group, for example. But I also want to say that I don't think SIA is doing it purely for national service. It's a very commercial-focused airline. They need the people. They need the people. They need the pilots, especially. But then that's a good sign, right, for aviation? Unless we forget that we are watching every day, as I'm sure you are, what's happening in the Middle East. And that's likely to...

before it can get resolved. So that's going to hurt aviation. So again, like what Dr. Nitin said just now, I agree very much. So it's a very pessimistic outlook. So even though like, you know, the fact that for leisure travel, right, not a lot of people are actually heading that way, like whether it's Iran, Israel and those kinds of places, but it will affect in terms of the cost of petrol and that oil. So my daughter is a consultant and she's...

She is a banking consultant and nowadays her clients say that don't travel because it costs us more money. And two years back, she used to like every Monday she would fly to New York, stay there till Friday and fly back on Friday.

And nowadays the clients are saying, stay put. Just stay there so that our costs are less. But the outlook, as we both agree, is not rosy. But clearly airline executives disagree with us, right? They're placing orders for a lot of places. Well, they are. As we speak in Paris, they're announcing various orders, hundreds of orders. In fact, Indigo has also affirmed some orders. That's a very good airline, I have to say, Indigo in India. But budget at travel is...

discretionary travel, meaning people only fly when they have some money left in the pocket, right? So the outlook, I'm a bit of a contrarian here.

If you look at what's happening around the world, things are very bad. And I think what the Singapore government has been saying, has always been telling citizens here that things are not going to get better, right? In fact, it's going to get worse. So that is why certain things are in place, there are preparations in place. I think Singapore is one of the very, very few countries who understand geopolitics very, very well.

But the airlines, and this is an issue because the airlines are not looking at what's happening in Ukraine, what's happening in Iran and Israel. A large swathe of that airspace is...

It's no-go now. So when you fly to Europe from Southeast Asia, you're going to incur a lot of costs because you're rerouting, you're burning more fuel, basically. So at the rate that this conflict is happening, you foresee our flight charges, our airfares to go up in the near to medium term? It depends very much on... So give me an example and by how many percent, what are we talking about here? Well, if you... Singapore Airlines, for example, on an A380 flight from Singapore Changi to London Heathrow, for example...

Just take a guess how much jet fuel

You would need to fly from Singapore direct 14 hours to London Heathrow, for example. A lot of fuel, you would imagine, right? So it's a big plane, four engines. And what is it today? 70 something dollars. So jet fuel has a different price because it's refined fuel and all that. But it requires many, many tons. At the back of the envelope calculation, you're looking at at least 200,000 to 250,000 tons.

US dollars one way just to pay for the fuel. This could very well have some variables to it, right? Depending on the price of oil. But if you are flying from Singapore and you need to fill an aircraft with 450 passengers and try to make money and therefore flights daily from Changi to London every day,

So it's not easy. But the fact that SIA has been exceptionally profitable, so it says a lot about how... Yeah, I mean, the bonuses they've been giving out. I mean, it's been quite generous. But then again, it's to make up the COVID years, maybe. But SIA is unique in the industry. So if everything else goes badly, I bet that SIA will still be a formidable carrier, but it will suffer in terms of

in terms of profits. And it's not going to be making as much as it did the last two years. But you know, Chukar, going back to what you said earlier, Singapore government is warning citizens that things will get worse. But that doesn't apply to the airport expansion though, right? There are big plans for expansion. That's a very good point because I don't know, were you at T5 groundbreaking? No, I wasn't. So I was there and it was really fancy. And this again is a

a sign of how the government do not see short term. So it's what's going to happen in 2035 and beyond. And the anticipation that Changi, which is about 90 million in traffic today, will add another 50 million. Like you, I think we're thinking, you know, where is this coming from? But that's what we said 10, 15 years ago when they built T3 and all that. So,

The industry is very resilient. The industry is very strong. But we are, I think, about to enter a phase where it's going to be very, very, very different from what we have. But then wouldn't that mean like low-cost carriers, this is the time for them because, you know, where people might consider, okay, maybe I won't go to London because it's going to cost me so much, but maybe I'll go to Bali instead. I'll do a few more short trips around. Going back to one of the points Shukur mentioned earlier,

I just booked a flight within the U.S. on Southwest today. Southwest is the quintessential destination

Well, actually, it was not cheaper, you know. So the only reason I chose Southwest was that the timing was better for me. It was a 1 p.m. flight instead of an 8 a.m. flight. 8 a.m. flight is painful. The point is that budget and the full service are very, very similar. The second is that we talk about fares. The fares is a bit of an ambiguous concept in airlines because...

each seat could be sold at a different price. So even when the costs go up, some people will bear disproportionately that increase, whereas some others might still get a bargain. Okay, so those bargain people might still not be worse off if they can find, but maybe those bargains would be harder to find. So I just want to go back to the traveler again and talking about the low-cost carriers, right? So

We talked earlier about how sometimes there's overbookings, poor communication, you know, all of that when their flights are delayed. Is that something that this is what you paid for, this is what you're going to get? I mean, is that fair to the traveller? Let me remind you, the most successful airlines in the world is the one you've just... where you're going to fly southwest and in Europe it's Ryanair. It's the most profitable carrier in Europe. It's a low-cost airline. I don't know if you've tried flying it before. Ryanair is excellent...

Because the price is excellent, is it? It's cheap. I think, you know, what my friend, my British friend said, he can fly from, let's say, from Newton in the UK to Mallorca or somewhere, you know, in Spain for the price of a pint of beer, he says, you know. Yeah, so...

And that's still the case. But you see, this is never going to come to Singapore in that sense. It did. It was there before. I mean, Air Asia was there, like I said. You missed it. You were too young then. 25 years ago, you can fly on Air Asia for like a plate of chicken rice. But just moving forward. It's no longer the case today because things are very different. The price of money has gone up. The same dollar today is very different from 20, 25 years ago when the low-cost carrier emerged in this area.

So in a nutshell, right, if Singapore, they are going to be, you know, increasing the cost handling fees and all of that, right? Do you think that they can remain competitive as an aviation hub, which is what the whole intention is? I think yes, because Singapore has proven to be very creative in many aspects. There have been many times when you thought, you know, COVID might destroy everything here because Singapore is very much dependent on aviation.

As a livelihood, without aviation, everything's gone, right? Yeah, and we still have to maintain our best airport in the world status as well. Correct, yeah. So there's a price to pay for all that. And there's a price to pay to have good people running Changi Airport Groups, running Singapore Airlines. And you need to always come up with new ideas on how to be two steps ahead of the competitors, especially in the Gulf, where they have very, very deep pockets. The missing piece in your analysis is that our conception of what is cheap

or what is inexpensive keeps changing over time, you know. I remember when I used to buy cars at a depreciation of $6,000 a year was the kind of the going rate, you know.

Today, that is $13,000, $14,000. So it's relative to what you earn, what your bonuses are, and then you can determine what cheap is. My suggestion is don't drive and save your money and fly because it's the safest mode of transportation. You're more likely to get into an accident if you drive. But then we are getting autonomous vehicles. We are. That's good. I welcome that. Yeah, I'm too old to walk in this hot weather and get sweaty. You know, you've both raised a really good point.

to say the aviation industry. I mean, what you can afford, what cheap is, you've really made us analyse and rethink those concepts. So thank you very much for your time and thoughts, gentlemen. Thank you so much for watching Deep Dive. I also want to say a big thank you to the team, Tiffany Ang, Junaini Johari, Joanne Chan, Saye Win, Ho Painting, Shaza Dalila, Alison Jenner, as well as Ili Mansour. Thank you so very much. All right, see you next week.

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