Singapore Airlines (SIA) has announced a S$100 million cabin revamp of its regional subsidiary SilkAir.

This will pave the way for an eventual merger in several years' time.

Aircraft cabin upgrades are expected to start in 2020, and will include new lie-flat seats in Business Class, as well as seat-back in-flight entertainment devices in both Economy Class and Business Class.

These changes are supposed to ensure closer product and service consistency across the SIA network.

Brief history of the SIA portfolio

SilkAir was launched in 1989 as Tradewinds the Airline, focusing largely on regional holiday destinations.

It was given a new corporate identity when it was rebranded as SilkAir in 1992.

The airline largely flew to regional destinations, such as Phuket, Phnom Penh and Jakarta.

In 2003, at the height of the budget travel boom in Southeast Asia, SIA launched Tigerair.

There were already questions about the operations of SilkAir then, since Tigerair operated similar routes.

However, SIA stated that the two airlines were fundamentally different.

While Tigerair was a low-cost budget airline, SilkAir was a full-service regional airline.

Scoot is born

In 2012, SIA introduced Scoot as a low-cost, medium to long-haul airline. But confusion remained as Scoot was operating shorter routes as well.

There was a need to quickly differentiate the different airlines in the SIA portfolio, as there were many route overlaps.

SIA, Tigerair and Scoot operated flights to Bangkok.

SIA, Tigerair and SilkAir operated flights to Bali.

All four airlines operated flights to Kuala Lumpur.

SIA consolidates operations

In November 2016, it was announced that Tigerair and Scoot will be merged into a single airline. The two airlines were both placed into the same holding company, Budget Aviation Holdings (BAH).

In July 2017, the merger was complete. The two airlines began operating under the Scoot brand, taking delivery of several new aircraft.

In August 2017, SIA announced that it will merge financial operations with SilkAir, in an attempt to stave off competition in the industry.

This immediately prompted speculation that SilkAir will be become one entity with SIA soon, given that the merger between Tigerair and Scoot was only completed a month before this announcement.

However, SIA stressed that there was no parallel between these two events.

SIA spokesman Nicholas Ionides said:

At present, we continue to see benefits in retaining separate operations and separate branding for SIA and SilkAir.

However, it would appear that less than a year later, SIA does see benefits in bringing both airlines under the same umbrella.

Implications of the merger

The merger, when complete, will simplify SIA's operations.

It will be split between a full-service airline in SIA, and a low-cost subsidiary in Scoot.

There will be no regional distinctions between SIA and Scoot, given that both airlines have a mix of short-haul and long-haul routes.

One net positive will be an increased consistency in experience. This is especially important as there are several routes that are operated by both SIA and SilkAir.

SilkAir provides an arguably less premium experience, although it is supposedly a full-service airline as well. SIA boasts seat-back in-flight-entertainment on all its planes, while Silk-Air does not.

By bringing SilkAir into the fold and upgrading the planes, SIA can provide a more consistent experience for its customers.

Merging the two airlines can also bring about increased economies of scale, as it is easier to negotiate greater discounts as a larger airline.

Combining the two airlines will also bring the fleet size to approximately 140 planes, which is larger than regional rival Cathay Pacific's fleet of 126 planes.

Operating under the SIA name will also reduce confusion among customers.

Although SIA and SilkAir share little branding similarities, they are in fact the same company, which is confusing to many customers.

In addition, SilkAir is not a household name even within Southeast Asia, so the merger may drive more traffic to SIA, given the latter's considerably more premium reputation.

Merger a front to raise prices?

A possible concern of the impending merger is that the merger is a ploy for SIA to increase prices. After all, consolidation in the marketplace often leads to rising prices, due to decreased competition.

However, one must note that even without SilkAir, SIA must contend with other airlines, including budget airlines such as AirAsia and regional rivals such as Cathay Pacific.

The removal of SilkAir as an airline will not significantly lead to less competition, since competition is still keen both regionally and internationally, and SIA was arguably competing with itself the entire time.

This is perhaps a long overdue move for the airline to reduce inefficiency in an attempt to stave off intense competition in the airline industry.

A move to help a stagnant SilkAir

SIA has recently announced their fourth quarter profits, with a S$893 million full-year profit, which is approximately 148 percent higher than the previous year.

While the SIA group has mostly reported an increase in profits, a notable exception is SilkAir, which saw its profits plunge 57.4 percent to S$43 million. This is despite a 14 percent increase in passengers carried.

This plunge in profits has been attributed to higher expenditure, mainly fuel-related costs.

On the other hand, the parent airline SIA has posted a remarkable increase of 82.1 percent in profits, from S$386 million to S$703 million.

While a significant portion of this increase can be attributed to better passenger revenue and initiatives to save fuel, SIA's three-year Transformation Programme also had a part to play.

Ever since SIA posted a S$138 million net loss in the fourth quarter of 2016/17, it has undergone a drive to cut costs and also discover new revenue streams.

Some measures have been lauded, such as the procurement of new Boeing 787-10 aircraft, which are more fuel efficient than older generation aircraft. This move is expected to bring about significant fuel savings in the long run.

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Other measures have not been as successful though.

On Jan. 3, 2018, SIA introduced a new credit card fee for all flights departing Singapore.

It then made a u-turn and retracted the fee a mere day after due to intense consumer backlash.

Top photo via SilkAir