Published November 19, 2009

How SATS can still rule the roost

By VEN SREENIVASAN

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THE announcement by Changi Airport Group (CAG) that it was inviting tenders for the third ground services provider at Changi Airport must have come as a surprise to the folks at Singapore Airport Terminal Services (SATS).

After all, it comes barely seven months after global giant Swissport pulled out of Changi after an unhappy three-year episode which saw it losing some $50 million.

CAG says that the tender invitation was in response to 'interest received from several parties and changing industry dynamics in the last three to six months'. It gave no indication on who these parties were.

Still, why would companies want to wander into a business where its very experienced predecessor drowned in a sea of red ink?

CAG's CEO Lee Seow Hiang provided a hint when he said that interest was stoked by the divestment of SATS by Singapore Airlines, among other reasons.

Ferrovial-owned Swissport was the sole new entrant into Singapore's airport ground services businesses after the industry was liberalised in 2005. It started off promisingly, pulling off a coup by snatching SIA associate Tiger Airways from SATS, and becoming the sole operator at the Budget Terminal in the process. In 2006, it invested in a new $15 million warehouse with a throughput capacity of 250,000 tonnes. Its entry is said to have reduced ground services rates at Changi by about 15-20 per cent. But the rest is sad history.

Although the official reason for its failure here was the small market size and global downturn in the aviation industry, Swissport officials privately cited a much bigger challenge. This was the advantage and influence of incumbency.

SATS and longtime rival Changi International Airport Services (CIAS) controlled 80 and 20 per cent respectively of the Changi market, and already had considerable assets on the ground. CIAS, first as a Temasek group subsidiary, and now owned by Dubai's Dnata (which also controls Emirates airlines), remains a formidable player.

But SATS had an even bigger advantage as the 81 per cent-owned ground services subsidiary of SIA. Besides dozens of clients, including SIA and Qantas (the two largest operators in Changi), SATS also enjoyed what some folks the industry called 'reciprocity'.

When SIA engages ground services providers in overseas airports, airlines owning those outfits would be obliged to sign up with SATS at Changi. And given that the SIA group flies to 99 destination in 40 countries, it doesn't take a genius to work out the advantage that SATS enjoyed. This is likely to be what one Swissport official referred to as 'political' hurdles that the company faced.

But the scenario is different today. SIA has divested its 81 per cent stake in SATS to its shareholders, leaving it an independent company.

While SATS recently renewed its five-year contract with SIA and SIA Cargo, the separation means that the airline is not obliged to use its former subsidiary after the five years. More critically, SATS' lucrative 'reciprocity' advantage ends.

So as CAG's Mr Lee hinted, potential entrants must be calculating that the 'Giant of Changi' is no more as imposing or invincible as it once used to be.

What does all this say about SATS' prospects? A lot has changed at Changi since Swissport exited in March.

SATS is a different animal. The aviation industry, beaten and bruised, is essentially going for low cost and fast turnaround. Loyalty is a thing of the past.

Following its $509 million takeover of Singapore Food Industries (SFI), SATS' income from the food services business has risen to two-thirds, from less than half a year ago. Its latest quarterly results also show that contribution from non-aviation revenue surged from just 2.1 per cent to almost 40 per cent. Also, with SFI's significant presence in the United Kingdom, revenue from overseas surged to 22.4 per cent, from just 0.5 per cent a year earlier.

Still, aviation remains a key business for SATS. And going forward, one segment - the low-cost carriers (LCCs) - will grow in importance.

LCCs currently account for 20 per cent of the traffic at Changi Airport, up from around 10 per cent in 2007. With the appetite for cheap fares stoked by the economic crisis, this business segment can only grow.

Swissport's customers included Tiger Airways and AirAsia - the two most successful low-cost carriers in the region. When it exited, SATS picked up Tiger, while CIAS picked up AirAsia.

Since then, SATS has built up significant expertise and capabilities in handling low-cost operators. This is critical.

The Changi ground services market will become more fragmented over time. If SATS can retain its big clients and maintain its margins, it will still rule the roost.

Meanwhile, it can count on its significant food business, which gives it bottom line stability and growth while also cushioning it from the vagaries of the aviation business cycles. And if it clinches the IR contracts (which will be announced soon), SATS will have one more feather in its cap, even if rivals continue chipping away at its dominance at Changi.