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Singapore Airlines Ltd Is Going Gangnam Style

After setting up its own low-cost carrier arm in Scoot and then becoming the largest shareholder of another low-cost carrier in Tiger Airways Holdings Limited (SGX: J7X), Singapore Airlines Ltd (SGX: C6L) announced yesterday that it may boost its presence even further into the budget airlines space.

This time, Singapore’s national carrier is looking at a possible investment into Jeju Air, a low-cost airline based in South Korea. Both parties are currently in talks regarding the investment and there’s no guarantee that any transaction will result from the discussions.

Flying with Jeju Air

But if the deal is successful, it will be Singapore Airlines’ maiden investment into the North Asian aviation market. It is a rather unexpected move by the airline as South Korea is not even a key geographical market for it currently.

According to a ranking provided by CAPA, a research outfit for the aviation industry, Singapore Airlines only has a seat capacity of around 22,000 for this week (for the period from 16 March 2015 to 22 March 2015) in South Korea; in comparison, Singapore Airlines’ total capacity for the same time period is nearly 1.5 million.

In any case, an investment into Jeju Airline would give Singapore Airlines a much-needed (though currently still small) exposure to the Korea-China air route with Jeju Airline predominantly running a point-to-point short-haul business model.

Jeju Air is currently the largest low-cost carrier operating in South Korea in terms of fleet size. The airline has about 18 aircraft currently and had flown 5.5 million passengers around in 2014. Jeju Air’s passenger traffic had also grown at a very impressive annual rate of 25.7% from 2010 to 2014.

But while Jeju Air has size and has displayed strong historical growth,  the low-cost carrier space in South Korea still seems to be very competitive. At the end of this year, the country will see the launch of its sixth budget airline,  Seoul Air.

A reality check

Although the deal may allow Singapore Airlines to gain a foothold in the fast-growing South Korean aviation market, there might not be any other strong benefits.

There would probably be only very limited synergies that can be achieved between Singapore Airlines and Jeju Air. Furthermore, the investment in Jeju Air likely wouldn’t move the needle much for Singapore Airlines.

For some perspective, Jeju Air had served 5.5 million passengers in 2014 but Singapore Airlines has a seat-capacity of some 1.5 million just this week alone. Even at a passenger load factor of 75% (what Singapore Airlines had achieved in February this year) it would take Singapore Airlines only 5 weeks to serve the same number of passengers Jeju Air did for the whole of 2014.

Foolish Summary

But all that said, taking everything into consideration, if the investment does go through, it’d likely still be good news for Singapore Airlines.

We might even see more of such deals in the future for the airline as it tries to transform itself in order to remain relevant in the ultra-competitive aviation landscape.

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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 writer Stanley Lim does not own any companies mentioned.