October 13, 2004

Star trekkin'

While Qantas' Geoff Dixon once equated Singapore Inc with the darker quadrants of airspace, he now covets an alliance with its more lucrative enterprise. By Eric Ellis

As air travel revolutions go, the event was more Gattaca than great deals. There was Qantas CEO, Geoff Dixon, in Singapore last month to launch Jetstar Asia, his joint venture with Singapore Inc – those same rich, scheming evil geniuses he accused not so long ago of displaying “imperialistic tendencies” toward Corporate Australia.

All that was forgotten three years later but a launch it was not. Dixon and Temasek Holdings, his government-owned partners at Jetstar Asia, had little to say about their new carrier – one in a firmament of start-ups shooting for Asia’s budget flyers. There were no routes, no cheap ticket bonanzas, not much at all. About the most exciting thing Dixon presented was Jetstar Asia’s space-age uniforms, collarless orange-black garb that said more Klingons and Kirk than Kuala Lumpur and Kota Kinabalu.

But unveiling liveries aren’t the point of Dixon’s recent forays into Singapore, the only country with reasonable claims to a stock exchange listing. Australians are often accused of picking bad business partners in Asia but they don’t come much better than Madame Ho Ching, the woman who runs Temasek, the $200bn giant that controls, by some estimates, up to 60% of Singapore’s economy. At 51, Ho’s no Singapore Girl and her record as a profit-maker is spotty. More technocrat than tycoon, to foreign suitors Ho’s attraction is Temasek’s billions and her connection to Asia’s ultimate power family: her hubby is Singapore’s new prime minister, Lee Hsien Loong, and her father-in-law is Singapore’s strongman, Lee Kuan Yew, a man who takes a particular interest in the affairs of Temasek’s crown jewel, Singapore Airlines (SIA), of which it owns 60%.

Dixon seems to have had a Damascene conversion on his road to Singapore – one with profound implications for Qantas’ future. In 2001, Temasek’s Singapore Inc was the evil empire threatening Dixon’s beloved Flying Kangaroo. “Imperialistic tendencies? Did I say that?” Dixon asked with mock shock when The Bulletin reminded him recently. “Yes, I admit I said that but I don’t think I was rude to Singapore back then. My point was about government ownership in both the airline industry and regulation anywhere and I still hold that view.”

But three years on, the pragmatic Dixon seems to have drunk thirstily of the proverbial Kool-Aid Singapore’s technocrats lavish about the city-state, where government and business are often one and the same and don’t see any conflict in that. Temasek’s government connections are precisely the appeal to Qantas, if Dixon chooses to move it closer to a tie-up with Singapore Inc.

Jetstar Asia will take off, probably around Christmas, into a regional budget market that really didn’t exist a year ago but is suddenly very crowded. Tiny Singapore alone will have at least three such carriers, Valuair, Tiger Air and Jetstar Asia, the latter two part owned by Temasek and SIA. Temasek has also been talking to Kuala Lumpur-based AirAsia about a possible stake. Beyond that there’s AirAsia Thailand, a joint venture between AirAsia and a company owned by Thai Prime Minister Thaksin Shinawatra. And in Indonesia, there’s Lion Air, Air Paradise, Bouraq Airlines – everyone in Asia it seems wants to start a budget carrier.

Dixon told The Bulletin recently that Jetstar Asia can’t and won’t compete with all that but insists “we intend to be profitable in year one”. The budget sector has analysts worrying that established airlines eager not to be sidelined by this new (for Asia) phenomenon, may partly be cannibalising existing franchises. SIA already has SilkAir as its lower-cost secondary carrier around the region and Qantas has Australian Airlines. Dixon has said that Jetstar Asia’s routes will be within five hours’ flying time of Singapore. That brings Perth, Cairns and Darwin into play – all centres served by Qantas, Australian Airlines and SIA. But that distance can also access centres in booming China and India, both now lightly serviced by Qantas.

It’s not just the Jetstar Asia tie-up that has the market musing about closer relations between SIA and Qantas. Singapore Inc has been clearly keen to expand its involvement in Australian aviation for some time. Temasek recently picked up about 3% of Qantas, and is adding to that holding. It stood in the market last month when British Airways sold its strategic stake in Qantas. Temasek’s sister investor, the Singapore Government Investment Corp, had some money staked in Impulse Airlines – later subsumed by Qantas – around the same time that SIA plunged $500m on its ill-fated foray into Air New Zealand in 2000. Urged by Lee Kuan Yew to be globally competitive, SIA bought 25% of Air NZ to get access to the Australian market via Ansett, Air NZ’s then offshoot. Ansett failed in 2001, almost taking Air NZ with it. Wellington stepped in to keep the flag carrier in the air, a bailout SIA was unwilling to follow. Its diluted stake dropped to 6%, which it was finally able to be rid of last week.

A direct investment in Qantas and Australia seems a better bet. Singapore Inc’s cuddling-up to Qantas has a wider, more compelling context for the city-state. September 11, the Bali bombs and Jemaah Islamiyah’s rise, and a Free Trade Agreement have all combined to tightly bind Australian and Singaporean regional interests. Australia is famously the region’s “odd man in” and Singapore a self-described red (Chinese) dot in a green (Islamic) sea. And both are US allies in the war on terror, much to their neighbours’ distaste.

The market, conditioned by years of Singapore-watching experience, takes the view that Temasek and SIA’s strategy is to advance Singapore’s wider national interest. The city-state is now under threat in the sectors that propelled it to wealth – manufacturing, shipping and aviation – and it’s doing what it can to soften the impact of fundamental shifts in the world economy.

In manufacturing, Singaporean workers have simply become too expensive. The high-tech manufacturing that helped create modern Singapore is moving to cheaper-wage nations like China and Vietnam, at a 10th of the cost, while the value-added end is moving to India – also a low-wage country but with an English-capable workforce that is less averse to taking the intellectual risk required in developing new products.

Despite its 40-year emphasis on technology manufacturing, it is an indictment on well-funded Singapore that it has no Nokia, no Wipro or Infosys. Today’s mandarins urge their docile subjects to “think out of the box” and “challenge the teacher”. Singapore’s big spend to develop an arts scene is less to encourage 100 flowers to bloom, as Mao’s maxim puts it, but to prevent a local brain-drain and make Singapore more attractive to free-spending, job-creating foreign investors.

Its role as a trading entrepot is also threatened by its geography. Singapore liked neighbouring Indonesia better under the certainty of the Soeharto dictatorship and neither Jakarta nor Kuala Lumpur has traditionally ever been fans of Singapore investment. But rising oil prices, increasing Islamist unrest in Indonesia and piracy around the region’s crucial oil-trade routes have shippers worried about using the Straits of Malacca that feed into Singapore, which earns a third of its economy from shipping.

As it booms, China will soon be the world’s biggest oil consumer and Beijing is actively looking at alternatives to ensure supply. Beijing, too, worries about blockages around Singapore and is backing a Thai plan to cut a $40bn canal through the Kra isthmus that would shave a week off the trip to and from the Middle East and Europe and cut Singapore out of the world’s busiest trade route.

Singapore’s status as the region’s air hub is also under threat by longer-haul aircraft and airlines that use them such as Dubai’s Emirates. The airport being built in Dubai is the world’s biggest construction project. Dubai’s emirs expect to triple by 2012 the 17 million passengers that already pass through Dubai, suggesting travellers between Europe and Asia-Australia won’t need to make two stops, with the loser likely to be Singapore.

Singapore Inc famously likes to pay big dollar when it needs something to fit with the national plan – known as “the Singapore premium”. In Australia, it was most lavishly exercised when state-owned Singapore Tele­com paid Britain’s Cable & Wireless about double Optus’ worth, that 2001 deal coming again as the Lees were urging Singapore business to expand outside the island’s mature market. The Australian-ness in Dixon may have been famously offended by that at the time, but not the businessman.