SIA's ancillary revenue to get boost from e-commerce joint venture

The e-commerce platform will target SIA’s Krisflyer members and its 30 million passenger base.

SIA’s joint venture (JV) with SATS and Duty Free provider DFASS (Singapore) will allow the three to provide travel-related retail operations in Singapore under the KrisShop and Scootalogue brand names. UOB Kay Hian analyst K Ajith noted that this SIA’s most tangible attempt yet to grow its ancillary revenue. “In effect, SIA will be tapping into the rising trend of e-commerce retail sales and doing so by partnering with key players in the supply chain. SIA will be targeting its existing Krisflyer members as well as its 30 million passenger base. Pricing for duty paid wine & spirits and cosmetics at KrisShop is more attractive than that at local retail stores, mainly due to DFASS’ relatively low bulk purchasing costs,” he said.

Ajith also noted that this could attract non-airline shoppers as well. “For alcohol, SIA offers free delivery in Singapore for items above $100 but select cosmetics are only available for in-flight collection.”

This is also poised to monetise KrisFlyer’s miles programme and improve its margins. “SIA has approximately 3 million Krisflyer members who generally opt to redeem flights. Krisflyer members also have the option to shop for various items, ranging from the latest iPhone, apparel, watches and liquor, using the Krisflyer miles in full or together with credit/debit cards or with Alipay. This could appeal to members whose points are about to expire or those with no immediate plans to utilise such points for travel.

Most of the items are priced at 0.8 S cents per mile and margins could be as high as 30-40%, given that SIA will have very little associated costs aside from the procurement cost and logistics related cost. By teaming up with DFASS and SATS, SIA will boost its margins further by having a stake in the procurement supply chain.”

According to Ajith, if Krisflyer members opt to convert the miles to tickets, then SIA’s margins would be lower. “As at 9M2018F, parent airline’s revenue per available seat km (RASK) matched its cost per km.”

Meanwhile, another way to boost ancillary revenue would be through unbundling fares. UOBKH said SIA had already announced plans to unbundle fares by offering advance seat selection, additional baggage charges, varying miles conversion under Lite, Standard and Flexi schemes, which came into effect on January 18. “This should boost overall ancillary income and will flow directly to bottom-line,” Ajith said.

SATS, meanwhile, will benefit via logistics support at Changi, Marina Bay Cruise Centre and could partner with DFAAS at its other Asian gateways. “In addition, SATS’ 15% stake in the JV will give it a share of the profits. Both SATS and DFASS could subsequently partner other carriers at key gateways, Istanbul, Kuala Lumpur and Beijing.”

According to UOBKH, the incremental fees of $13.3 will not impede outbound travel or even inbound tourism. “Airlines are likely to pass on the cost increase, although low-cost carrier, Scoot could be somewhat impacted. Even so, we believe that SIA’s attempt to raise ancillary income could boost group profits,” Ajith concluded.