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Here Is 1 Reason for Investors to Be Impressed With Singapore Airlines Ltd

I’m not a big fan of Singapore’s flagship carrier, Singapore Airlines Ltd (SGX: C6L), as an investment. But that’s due more to the poor economics that strangles the whole airline industry rather than any poor moves Singapore Airlines has made.

Even the recent sharp decline in the price of oil (the commodity has fallen by more than half in price since June 2014) might not benefit Singapore Airlines much – if at all – despite fuel being a major component of most airlines’ operating cost. This is just another example of the lack of decent business economics within the airline industry.

Yet, I have to give credit when credit is due; Singapore Airlines’ management might be one of the best of any airline in the world.

Here’s why: Last week, Singapore Airlines announced that its KrisFlyer programme (a sort of loyalty progrmme for travelers based on the distance flown with the airline) will be expanded to include Tiger Airways Holdings Limited (SGX: J7X) and Scoot. The duo are considered to be Singapore Airlines’ low-cost carrier arm.

With the expansion of the KrisFlyer programme, KrisFlyer members can now redeem their loyalty points for flights on Tigerair and Scoot as well; in the past, points were only applicable for full-service flights on Singapore Airlines. Although this seems like a minor announcement, it symbolises the fact that Singapore Airlines is willing to support initiatives that can cannabalise its legacy business.

This is similar to the strategy of U.S. e-commerce juggernaut Amazon.com. The company’s constantly on the lookout for its next growth engine and isn’t afraid of cannablising its own existing businesses in the process. In fact, Jeff Bezos, chief executive and founder of Amazon, believes in the adage that others will disrupt your business for you if you’re not willing to do so yourself.

Singapore Airlines’ formation of Scoot, recent big investment into Tiger Airways (the latter is now a subsidiary of the former), and now the expansion of the KrisFlyer programme to the budget airlines shows the determination and willingness of management to cannabilise the full-service carrier’s own business if need be. It is not an easy thing to do and requires huge commitment from management. This kind of effort is truly commendable.

Foolish Summary

But all that said, this isn’t a sign that Singapore Airlines will necessarily go on to thrive. In an indictment of how tough it is to grow an airline’s business, Singapore Airlines’ profit of S$203 million over the last 12 months is a far cry from its profit of S$850 million seen more than 10 years ago in the 12 months ended 31 March 2004.

As Warren Buffett famously said before, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” The management of Singapore Airlines might have been able to achieve great things if not for the poor economics that troubles the airline industry.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any company mentioned above