Singapore Airlines Case Study

_________

___________ O K O

T H E SING AP OR EAIRL INES INESGR GR OU P'

* Nitin Pangarkar 2 *

In November 2000, the Singapore Airlines group was at a critical juncture in its history.

Over the past two years, the company had undertaken a series of strategic initiatives. It had made the most expensive product launch in its history, acquiring acquiring a 49 per cent stake in Virgin Atlantic Airways and a 25 per cent stake in Air New Zealand. It had also joined the Star Alliance, a broad-ranging alliance comprising 11 airlines. The outside environment, especially within East Asia had improved, with many countries such as South Korea, Thailand and Malaysia, rebounding off economic lows. This favourable external environment cou pled with the new initiatives was expected to open up many new opportunities. There were, other challenges, however. SIA's regional competitors such as Thai Airlines and Malaysian Airlines were recovering from the impact of the Asian economic crisis and competing vigorously for a share of the market. The Singapore dollar remained weak against the U.S. dollar thus raising the costs denominated in U.S. dollars such

1

as aircraft procurement and fuel. Many observers were also wondering if SIA had taken on too much uncertainty. One cause for concern was its inexperience in undertaking acquisitions. Even the Star Alliance represented a significant departure from SIA's time-tested strategy of internal growth and partnerships on a limited basis so as to protect its brand reputation. Finally the recent crash of flight SQ006 might tarnish SIA's excellent reputation for safety.

History Malayan Airways, the predecessor of Singapore Airlines, was started in 1947. The airline operated flights between Singapore, Kuala Lumpur, Ipoh and Penang, all within the-then Malaya. With the formation of the Federation Federation of Malaysia in 1963, the Airline was renamed Malaysian Airways and then Malaysia-Singapore Airlines (MSA) in 1966 when the governments of Singapore and Malaysia acquired joint control. By then MSA had successfully developed a

© 1998 by National University of Singapore. Updated and reproduced with permission from Asian Case Research Journal (September 1998): 211-237. Also published in Business Strategy in Asia: A Casebook (2001), Singh, Pangarkar and Lim, Thomson Learning: pp. 67-84. This case was prepared as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. 2 Nitin Pangarkar is Associate Professor of Business Policy with the NUS Business School, Fac ulty of Business Administration, National University of Singapore, 17 Law Link, Singapore 117591, Tel: +65-8745299, Fax: +65-7795059, E-mail: [email protected]. Not to be reproduced or used without written permission.

Case 8 • The Singapore Airlines Group

route structure encompassing most of Southeast Asia and turned its attention to expanding its intercontinental network. On October 1, 1972, MSA ceased operations and Singapore Airlines became its succes sor. The new airline continued to serve the international network of MSA and retained all its B-737 and B-707 aircraft. The sub sequent growth of the airline paralleled the economic development of Singapore in par ticular and the Southeast Asian region in general. In 1978, SJA placed an order worth US$900 million for 13 Boeing 747 and six Boeing 727 planes, one of the largest or 3 ders at the time. Soon afterwards, the Los Angeles Times acknowledged SIA as "one of the world's best managed and fastestgrowing airlines". 4 The aircraft acquisition of the most modern and youngest fleets worldwide. By March 31,2000, SIA was op erating 613 passenger flights per week out of Singapore, up from 572 weekly passen ger flights 12 months earlier. The airline's intercontinental route network, including freighter-only destinations, spanned 92 cit ies in 42 countries (See Exhibit 1). In 2000, the SIA group was Singapore's largest pri vate sector employer. It was also routinely one of the most profitable airlines in the world. (See Exhibits 2 and 3) SIA's broad goals and objectives had not changed since its earliest days. Its goals were: To deliver customer service of the highest quality that was safe, reli able and economical.

3

-

-

-

619

To generate earnings that provided sufficient resources for investment and satisfactory returns to share holders. To adopt human-resources manage ment practices company-wide that attracted, developed, motivated and retained employees who contrib uted to the company's objectives.

-

To maximise productivity and uti lisation of all resources 5.

-

-

Since the beginning, SIA had been a strong proponent of deregulation and free compe tition within the global airline industry under which airlines could choose their route structure and other aspects of serv ice without government intervention (See Appendix 1). SIA's chairman, J.Y. Piliay, had once said: "We fear no airline and wel 6 come competition from them all". Singa pore's top leaders had made it clear that SIA could not expect any subsidies from the government and had to make profits if it was to survive. 7 Many Asian countries, which formed important destinations for SIA, however, heavily regulated the flights to and from their airports with a resulting reduction in the "supply" of airline seats. Consequently, the airlines operating on these routes were able to charge higher prices and also enjoy higher load factors. A discounted economy round-trip ticket for a 4.5 hour flight from Singapore to Bom bay costs, anywhere between S$800S$1000, 8 the same prices as a round-trip

The SIA Story. http:l I www.singaporeair.com I The Pursuit of Excellence: An Island and its Airline, 1978, Singapore Airlines. 5 Chang Zeph Yun, Yeong Wee Yong and Lawrence Loh 1996. The Quest for Global Quality: A Manifestation of Total Quality Management by Singapore Airlines. Reading Mass: Addison Wesley Publishing. 6 Mr J.Y. Piliay quoted in SIA, Take Off to Success, p. 118, Singapore Airlines, 1987. 7 Ibid. 8 In September 2000, the approximate exchange rate was S$1.75 = US$1. 1

-

620


Exhibit 1

Geographic area

North and South East Asia Americas

Geographical Analysis of SIA's Revenues and Load Factors

Revenues (S$ millions) 99-00 98-99 97-98

Overall load factor (%) 99-00 98-99 97-98

Passenger Seat Factor (%) 99-00 98-99 97-98

2453

2060

2207

65.2

59.2

57.9

71.2

66.1

63.0

1903

1625

1572

72.6

69.4

70.6

79.1

73.5

72.6

Europe

1674

1554

1512

75.3

75.0

76.8

74.7

76.4

76.1

SouthWest Pacific West Asia

1090

909

796

70.6

71.1

71.2

75.6

77.0

75.1

822

710

663

67.8

65.4

63.8

- 72.4

10.0

66.6

7942

6858

6750

71.23

68.8

69.1

74.9

72.5

70.5

and

Africa Rvstprnwide

Sources: SIA Annual Reports, 1999-2000 and 1997-98.

ticket from Singapore to Los Angeles. Simi- nance centre and catering centre, among larly a round-trip ticket from Singapore to others. 10 Kuala Lumpur costs S$290, though the flying time each way was less than one hour. Though it did not provide any direct Strategy assistance to SIA, the Singapore GovernDeployment of Technology ment helped it gain fair access to other markets. The then Prime Minister of Sin- SIA maintained the youngest fleet of airgapore, Mr Lee Kuan Yew, had intervened craft of all the major international carrion SIA's behalf so that it could receive fair ers. The average age of SIA planes was treatment for serving routes in Australia, about five years and two months as of March 31, 2000, compared to the industry Malaysia and Indonesia (e.g., Bali). 9 The Government had also not hesi- average of 13 plus years. Being younger, tated to build the necessary infrastructural SIA's planes were more reliable, quieter facilities. It spent almost S$1.5 billion (at and roomier. SIA was also the first airline 1981 prices) for completing the first phase to recognise the demand for more non-stop of the ultra-modern Changi Airport. SIA services that offered travellers, especially also had substantial investments in Changi businessmen, uninterrupted travel to longAirport, to the tune of S$500 million. These haul destinations. On October 14, 1995, SIA took delivinvestments, however, were mostly related ery of its 34th 747-400 and became the largto its facilities such as hangar, mainte-

9

Dr Doug Sikorski 1990. Singapore Airlines Ltd. (SIA). In Business Strategy and Management, Text and Cases for Managers in Asia, Singapore: Times Academic Press. Ibid.

10


Exhibit 2

621

SIA's Financial Results* 1999-2000 1998-99

1997-98

1996-97

1995-96

Total revenue

8,899

7,796

7,724

7,222

6,890

Total expenses

7,759

6,942

6,725

6,326

5,845

Operating profit

1140

854

999

896

1045

Surplus on sale of aircraft

98

211

157

174

34

Share of profits of joint ventures

21

14

7

2

1

Share of profits of minority interests

33

23

9

4

2

Profit on sale of investments Surplus on liquidation of Abacus Distribution System Profit before tax

171

1,464

14 1,117

1,172

1,076

1,082

Profit after tax and minority interests

1,164

1,033

1,039

1,032

1,025

Profit attributable to shareholders

1,164

1,033

1,035

1,032

1,025

1,351

1,283

1,283

1,283

1,283

7,421

8,652

7,844

7,312

6,566

2,286

2,286

2,254

1,947

1,947

Shareholder's funds

10,958

12,188

11,380

10,542

9,796

Fixed assets

11,882

11,667

11,398

11,054

9,792

Associated companies

306

223

103

95

73

JV companies

188

153

126

73

43

Long term investments

547

943

937

840

812

3,528 16,451

4,181 17,168

3,145 15,707

2,459 14,521

2,476 13,195

567

566

523

464

442

Current liabilities Total liabilities

3,741 4,307

3,370 3,954

3,171 3,695

3,073 3,537

2,521 2,962

Net liquid assets

1,647

2,493

1,512

844

1,101

Cash flow through operations

2,429

1,773

2,070

1,975

1,976

Internally generated cash flow

3,239

2,798

3,144

2,345

2,006

Capital expenditures

1,912

2,053

2,121

2,450

1,573

Per share data Earnings before tax (cents)

115

87

91

84

84

Earnings after tax (cents)

91

81

81

80

80

,. I tip n ,~ nn .C .U . j.,L 1 i U1i*il

________

. .

Distributable reserves Non-distributable reserves

Current assets Total assets Long term liabilities

___

________ ________

Cash earnings ($)

1.86

1.72

1.64

1.57

1.52

Net tangible assets ($)

8.76

9.50

8.87

8.22

7.64

Unless noted otherwise, all figures in S$ millions. Source: Singapore Airlines Annual Report, 1997-98.

622


Exhibit 3

SIA's Operating Statistics 1999-2000

1998-99

1997-98

1996-97

1995-96

Yield (c/ltk)

66.0

63.7

67

67

70

Unit cost (c/ltk)

43.7

42.6

44

44

44

Breakeven load factor (%)

66.2

66.9

65

66

63

Aircraft no.

92

89

86

80

71

Aircraft age (Months)

62

57

62

63

68

118

110

77

77

77

13,782

12,777

11,957

12,022

11,057

Passnger seat factor (%)

74.9

72.5

71

74

73

Cargo carried (mil-kg)

905.1

768.5

736

674

604

Cargo load factor (%)

68.8

66.4

69

69

68

Overall load factor (%)

71.2

68.8

69

71

69

Average strength i^Nuts;

13,720

13,690

13 506

13,258

Destination cities (No.) Passengers carried (OOOs)

l?.9fi« 1

Value added per employee a

290,160

226,304

235,451

220,440

209,332

Average strength refers to the number of employees in the core airline operations and excludes the employees in related operations.

Source: Singapore Airlines Annual Report, 1997-98.

est operator of this most advanced version of the jumbo jet. This plane offered a greater flying range and better fuel efficiency than the 747-200 or the 747-300. SIA was one of Boeing's leading customers for large commercial aircraft. In 1994, the airline purchased 22 per cent of the total production of the B747-400. In 1996, SIA became the launch customer for the A340300E which was said to have the quietest cabin in the sky. 11 In March 2000, SIA's operating fleet comprised 92 aircrafts. SIA was also at the forefront in the area of in-flight entertainment. For ins t an c e, i t s e n te r ta i nm e nt s y st e m, Krisworld, offered a six-inch video screen and a combination remote control unitcum-telephone, fitted at every seat

11

throughout the aircraft. Key features of the system included 22 video channels, video games and Reuters Teletext news updates hourly. In May 1999, SIA became the first airline in the world to offer Dolby Headphone "Surround Sound" as a new feature of its in-flight entertainment. 12 The group also embraced the latest technology for its remaining operations. In 1988, it became the first airline in the world to install a B747-400 flight simulator for training pilots. It was also the first commercial airline to use Learjet 31s to train its cadet pilots from the ab-initio stage to the First Officer rank. 13 Through these measures, SIA ensured that its pilots were extremely well-trained. Jointly with the Government, it invested in highly auto-

A Corporate Profile of SIA 1997. Public Relations Department, Singapore Airlines. SIA Annual Report, 1999-2000. 13 Chang, Yeong and Loh, The Quest for Global Quality, op. cit. 12

Case 8 » The Singapore Airlines Group

mated systems at Singapore's Changi Air port that dramatically expanded passenger handling capacity and facilitated the provision of hassle-free customer services. SATS Catering, a division of SIA, operated the largest completely integrated ware washing system under one roof in the world. It also constructed a S$215 million kitchen complex with a capacity to produce 45,000 meals daily.14 Customer Conveniences and Facilities

SIA has always maintained the philosophy of putting the customer first. In the words of Mr Michael Tan Deputy Managing Director (Commercial) of SIA: We believe that to succeed, an airline must be a service innovator rather than a price-leader. Being customeroriented means introducing innovative features and setting new standards. It is difficult to imagine travel today without choice of meals, free drinks and free headsets in economy class. All were SIA's innovations in the 1970s. 15

In 1991, SIA introduced the world's first global satellite inflight telephone service, Celestel and also the world's first conventional in-flight fax service. It also provided a complimentary bag of toiletries including toothbrush, toothpaste, socks and a comb to all passengers on long-haul flights. Several unique conveniences and facilities, such as the following, awaited SIA customers: Singapore's Changi Airport, the home of SIA, had a gymnasium, a conference hall, an exhibition hall,

14

623

two business centres, four full-service banks, 20 restaurants, more than 100 shops and a host of other services. SIA operated the Blue Lane APIS (Advanced Passenger Information System) facility for passengers travelling to selected destinations in the U.S. The travellers' particulars were transmitted to the U.S. Immigration offices well before the flight landed. The Immigration officials could, thus, screen the passengers and the actual time taken to finish immigration formalities at the destination airport was shortened. 16 Since October 1993, SIA had been offering Japanese cuisine to iirst class passengers flying to Japan. The cuisine was served on a range of Japanese 17 Shokado Bento serviceware. In November 1996, SIA introduced Internet check-in for First Class, Raffles Class and Priority Passengers flying out of Singapore. It also operated a centralised information system known, as Centralised Baggage Tracing unit, which enabled more effective management of mishandled baggage. 18 By the end of 1999, all SIA aircraft were equipped with automatic external defibrillators — life saving equipment that could revive passengers experiencing sudden cardiac arrest.19

Ibid, p. 205; and www.singaporeair.com ^Perspectives 1998. Forging A Competitive Edge: The SIA Experience, April, pp. 89-91. 16 Ibid. 17 Chang, Yeong and Loh, The Quest for Global Quality, op. cit. p. 201. 18 Ibid. 19 SIA Annual Report, 1999-2000.

624


By March 2000, SIA had launched local websites in 16 countries and SIA's e-ticketing facility was available in 24 overseas stations. In June 1999, SIA introduced a new generation of Wisemen audio- and video-on-demand service to its First and Raffles Class customers. The Wisemen system offered a choice of 25 movies, 50 short features and 50 audio-CDs.

Marketing SIA had been running the highly recognised Singapore Girl campaign for several yoprp. Independent studies had consistently rated the SIA advertising as having an extremely high recall rate among customers.20 SIA's advertisements also routinely stressed the fact that its fleet was the youngest in the world. Cargo and Related Operations

Cargo revenues constituted almost 20 percent of SIA's revenues. With revenues of S$l,909 million for the year ended March 2000, SIA was the third largest cargo airline in the world in terms of international freight tonne kilometres. During the 1999-2000 fiscal year, SIA's other activities, besides transport of passengers and cargo, accounted for about 15.8 per cent of its total revenue. These activities included airport operations, kitchen operations and maintenance operations (see Appendix 2). Related operations also contributed 26 per cent of SIA's total profits. 21

20 21

Alliances and Acquisitions

Over the years, SIA has signed several alliances. The following discussion, however identifies only a few major cooperative ventures. In 1989, SIA entered into a trilateral alliance with Delta Airlines and SwissAir to form a global network spanning 300 cities in more than 80 countries. From SIA's point of view, the alliance offered opportunities to service a greater number of destinations in both the U.S. and Europe. Though the alliance led to some synergies through joint purchasing, sharing of airport facilities and exchange of personnel, there were several problems. Owing to its different geographical focus (primarily the U.S. and Europe and Latin America, to a leaser extent"), Dcltn T.va? not too committed to the alliance. Though Swissair was comparable to SIA in terms of service reputation and image, it did not have a major presence in any of the important European hubs such as Paris, Frankfurt or London, With the formation of the European Union, SIA believed that it would be better-off forging a relationship with an airline that belonged to one of the EU member countries, SIA pulled out of the trilateral alliance in 1997. In November 1997, SIA and Lufthansa announced the formation of a comprehensive alliance. The alliance would cover a wide area of commercial cooperation, including code-sharing, network and schedule development, frequent flyer programmes, product development, groundhandling, customer service, information technology and cargo operations. Lufthansa would use Singapore as a primary hub in Southeast Asia and Australa-

Singapore Airlines (A), Harvard Business School Case no. 9-687-022. SIA Annual Report, 1999-2000.


sia, while SIA would use Frankfurt as its hub in continental Europe. "This alliance brings two of the world's top airlines together with one objective: to give our passengers an even better travel experience," remarked Lufthansa's Chairman Juergen Weber.22 In October 1999, SIA announced that it would join the Star Alliance "as a part of its global strategy to provide improved services and benefits, including seamless air travel worldwide". Other members of the Star Alliance included Air Canada, Air New Zealand, All Nippon Airways (ANA), Ansett Australia, the Austrian Airlines Group (comprising Austrian Airlines, Lauda Air and Tyrolean Airways), Lufthansa German Airlines, Scandinavian Animus System ^tiAtij, Thai Airways International, United Airlines and VARIG Brazilian Airlines. In December 1999, SIA announced that it would acquire a 49 per cent stake in Virgin Atlantic, the holding company for Virgin Atlantic Airways, Virgin Holidays and Virgin's cargo operation, Virgin Aviation Services, for £551 million. SIA had the following comment regarding the acquisition of the stake: "The synergies derived from linking the complementary route networks of SIA and Virgin, in particular Virgin's transatlantic network, will allow both airlines to grow faster than either can manage on its own." On April 25,2000, SIA announced that it had reached an agreement with Brierley Investments Limited (BID to acquire 16.7 per cent of Air New Zealand Limited (Air New Zealand) in the form of "B" ordinary shares for NZ$285 million. The investment

22

came on the heels of SIA's purchase of 8.3 per cent of the share capital of Air New Zealand in the form of "B" ordinary shares. With 25 per cent of Air New Zealand, SIA would have a strategic stake in both Air New Zealand and Ansett Holdings Limited (Ansett). The New Zealand carrier owned 50 per cent of Ansett and would acquire the other 50 per cent soon. SIA deputy chairman and CEO, Dr Cheong Choong Kong, had the following comment: "As evidenced by our recent 49 per cent stake in Virgin Atlantic, SIA's ultimate objective is to become a global group of airline and airline-related companies. This stake in Air New Zealand and, indirectly, Ansett is another important step towards that goal." 23 In July 1997. Singa pore Airlines, Air New Zealand, Ansett Australia and Ansett International announced plans for the creation of the largest international alliance of airlines based in the Asia Pacific region. With its recent acquisitions, SIA had extended its combined reach (with its partners) to more than 200 cities around the world. Previous SIA alliances included a codesharing agreement with American Airlines (Singapore-Chicago route), 24 Delta Airlines (Singapore-New York route) and Austrian Airlines (Singapore-Vienna route) and joint cargo services with British Airways, KLM and Lufthansa, among others. 25 SIA had entered a partnership with SAS which allowed joint marketing of an all-cargo service between Copenhagen and Singapore. It h ad a ls o f or me d a n a ll ia nc e w it h Aerolineas Argentinas to offer one of the cheapest round-the-world economy fares for a trip via the South Pacific.26

http://www.singaporeair.com/ Singapore Airlines and Lufthansa Sign Alliance Agreement, Singapore Airlines' stake in Virgin Atlantic, http://www.sinagporeair.com 24 http: I / www. Singapore Airlines and American Airlines begin code sharing flights, singaporeair.com I 25 Singapore Airlines and Lufthansa Cargo Expand Cooperation.. http: 11 www.singaporeair.com I 26 http://www.singaporeair.com/ Information regarding alliances from SIA website, 23

625

626


SIA was the pioneering member of the group that created Abacus, the Asian Com puterised Reservation System. Realising that, by itself, it did not have the critical mass, it enlisted eight partners including Cathay Pacific, China Airlines, DragonAir, Malaysia Airlines, Philippine Airlines, Royal Brunei Airlines, Tradewinds and WorldSpan Global Travel Information Services to form Abacus.

Internal Organisation Policies Labour Relations

Almost 37 per cent (9,000 out of 24,000) of SIA's employees were members of the SIA C 2 7 ^ lationship between the union and the management had been neither very cordial nor very adversarial. There were occasional strains in the relationship. Some major points of contention included flying allowances, staying and other arrangements in overseas locations and the workload especially during packed flights. In May 1997, 1,000 copies of an anonymous circular went out to the cabin crew. The circular listed grievances such as a proposed cut in meal allowances and a drop in the number of crew on some flights. SIA's cabin crew meal allowances had come down from $2,500 per month before 1987 to $1,700 by March 1996. Despite these conflicts, SIA had

27

never faced a strike and the union management relations were considerably better than in many U.S.-based carriers. 28 However, in July 1997, NTUC (National Trades Union Congress) chief Lim Boon Heng, who was also the Minister without Portfolio in the Government, joined the SIA Board of Directors. He said that the management culture must change to rally every SIA worker to help meet global competition.29 He promised to help the unions see the big picture—mainly issues relating to the airline's competitiveness. Soon afterwards, there was improvement in union management relations. The management was able to implement several changes. They included a cut in cabin crew pi7.p for first class and requiring supervisors to serve meals, which they were not required to do before, for a S$300 allowance. The three deputy managing directors and the union leaders sought to reach out to the company's 24,000-strong workforce, meeting small groups of 20 managers each time to show how serious they were about working together. 30 SIA's labour costs formed only 16-17 per cent of its revenues, by far the lowest figure among all major airlines (See Exhibit 4). For other carriers such as Lufthansa, American Airlines, United and Swissair, the corresponding percentage was in the region of 35-37 per cent. 31 The only major carrier that came close to

SIA employed about 14,000 people in its airline operations. The remaining were employed by the group's subsidiaries. 28 In 1997, American Airlines' pilots rejected, by a 2 to 1 margin, a contract characterised by the company and Wall Street as the most generous in the industry. American at Bay, Air Transport World, March 1997, pp. 28-40. Also see, Air Transport World 1997. Will the real United please stand up? August, pp. 26-34. 29 NTU C was, by far, the largest union in Singapo re. It had a good relationship with the govern ment and the NT UC chief served as a Minister without Portfolio in the Singapore Cabinet. 30 T h e S t r a i t s T i m e s1 9 9 8 . T h e N e w F a c e o f L a b o u r M a n a g e m e n t R e l a ti o n s a t S I A . M a y 3 , p p . 4 2 4 3. 31 For the four major U.S. carriers, labour costs varied from 35.5 per cent of total (United) to 37.4 per cent (Delta). Air Transport World, 1997. American at Bay, op. cit.

Case 8 * The Singapore Airlines Group

Exhibit 4

SIA's

Cost

Structure

Category of costs

% of total costs for the year 1999-2000

% of total costs for the year 1998-99

Staff costs

16.5

17.

Fuel costs

16.4

4

Depreciation charges

15.1 3.1

14.

Rentals on lease of aircraft

11.7

6

Sales costs Handling

11.4

16.

charges

6 7.1 7.0

Aircraft maintenance and overhaul costs

6.6

Inflight meals and other passenger costs

5.1

2.6 11. 8 12.

Landing, parking and other overflying charges Other costs

627

0

3

7.8 7.5 6.8 2.9 a

Other costs comprise expenses, company accommodation, communication expenses, aircarft license and insurance, net interest receivable and gain/ loss on exchange.

Source: SIA Annual Report, 1999-2000.

matching SIA's cost advantage was Brit ish Airways whose labour costs constituted 24 per cent of its revenues. SIA's steward esses' starting salaries were comparable to many U.S. carriers but did not increase as rapidly with seniority. SIA stewardesses also tended to be young and were given a maximum of four five-year contracts, after which they could assume ground positions. If a stewardess became pregnant, she had to leave her job. The compulsory retirement 32 age for male stewards was 55 years.

-

self'. 33 Crew management also put forward a theme for an annual service campaign. In 1993, the theme was "Let's prove we are the best". SIA's training programme for its crew members was extremely rigorous. A new in-flight/ cabin crew member was put through three months of training before the new crew member could start serving as operational crew. Speaking about SIA's training philosophy, Dr Cheong Choong Kong, CEO of SIA said:

Training SIA in-flight crew members were taught the motto "Unless you can make the oth ers happy, you can never be happy your-

32

Lim Gaik Eng and Ng Seok Hui.

-

Singapore Airlines.

Training is a necessity, not an option. It is not to be dispensed with when times are bad. Training is for every body. It embraces everyone from the office assistant and baggage handler to the managing director. We do not

Faculty of Business Administration, Na

-

33

tional University of Singapore. Chang, Yeong and Loh, The Quest for Global Quality,

op. cit., p. 185. '

628


stinge on training. We'll use the best in software and hardware that money can buy. Because we take a long term view of training, our investments in staff development are not subject to the vagaries of the economy. Training is for ever. No one is too young to be trained, nor too old. 34

To maintain eye contact during our transaction. Customer service is what we are out to give.37

In 1992, SIA spent S$84 million on training or around $5,000 per employee which was 12 times Singapore's national average. There were several rules regarding In 1993, SIA opened a $80 million train personal grooming, uniform care, poise and ing centre, thus bringing all SIA's training personal conduct. For instance, cabin crew needs under one roof.38 It conducted reguwere instructed not to eat onions or drink lar reviews to ensure that its salaries were alcoholic beverages for ten hours before market-competitive. flight time. There were specific rules regarding laundering uniforms, makeup and hair styling. Crew members had to report Customer Feedback to the SIA clinic to have their teeth checked To supplement the informal channels of and cleaned every six months.35 communication, vSTA conducted rpgiilpr SIA had also launched the "Outstand- passenger opinion surveys to monitor the ing Service on the Ground" programme to quality of its services. Passengers were motivate the airline's frontline staff on the asked to rate the quality of SIA's in-flight ground to provide genuine innovative serv- service, food and beverages, in-flight enterice.36 Most of SIA's ground service opera- tainment, aircraft interior, airport operations were handled by SATS, a sister com- tions, reservations and ticket office opera pany. Every* SATS Airport Services tions. The survey forms were designed to frontline staff member was required to take take only five minutes of a passenger's time the following pledge: and were printed in five different languages to cover the widest spectrum of We, the staff of Terminal Two Pledge by passengers. The survey results were anathese qualities towards service excellence: lysed and past and present performance To greet each passenger at the begin- regarding the Service and Performance ning and at the end of their journey. Index was circulated to key personnel in To address them by name, rank or the organisation. SIA's decision to invest S$52 million in a cabin management and title. interactive video system was prompted by To give personalised service with a the relatively lower ratings scored by the friendly smile. in-flight entertainment compared to other areas of in-flight service.39

34

Perspectives, 1998. A Symbol of SIA's Training Philosophy, April, pp. 58-59. Singapore Airlines (A), Harvard Business School Case no. 9-687-022. 36 Lim Gaik Eng and Ng Seok Hui. Singapore Airlines case. 37 C h a n g , Y e o n g a n d L oThh, e Q u e s t f o r G l o b a l Q u a l oi ty p ., c i t . 38 Perspectives 1998. Forging a Competitive Edge: The SIA Experience, April, pp. 89-91. 39 Ibid. 35


SIA paid careful and prompt attention to each customer complaint or compliment it received. The market research depart ment conducted regular focus group stud ies to predict future customer require ments.

-

Total Involvement To promote greater autonomy in decision making and a sharper focus on quality and customer services, SIA formed 21 subsidi aries and five associated companies. Its management systems and training were designed to ensure that staff at all levels were empowered and encouraged to make independent decisions. SIA practised job rotation by moving executives between resulted in several benefits. Staff acquired an understanding regarding how the en tire organisation worked. It also promoted a corporate outlook among staff and mini mised sectoral interests. This practice also created an appetite for change and inno vation as people constantly brought new ideas with them to new jobs. Corporate-wide business meetings and briefings were held regularly to keep staff informed of the latest developments. Cor porate newsletters and circulars helped promote information sharing. Interaction between staff and management was en couraged through regular staff meetings.

play at the SIA Control Centre. Under a profit-sharing scheme, employees received special bonuses based on the profitability of the company. The bonus could amount to a significant percentage of the annual salary of an employee.

Performance Accolades and Awards

-

-

-

-

Incentives

SIA had instituted the Winning Ways Award to recognise and reward crew mem bers who provided excellent service to pas sengers. The award was based on customer compliments and was given quarterly. The yearly winner received a distinctive Omega Constellation timepiece. The top WWA win ner's name was carved in gold on the Roll of Honour, which was on permanent dis-

629

SIA was routinely recognised as one of the world's premier airlines. During the 19992000 year, SIA received over 60 awards worldwide in a range of categories. It was named Asia's Best Managed Company of the Decade by the Asiamoney magazine and Asia's Most Admired Company (for the Conde magazine. In a survey, readers of the Nast Traveler magazine declared SIA as the best airline in the world, for the elev enth time in 12 years.

Financial Position The SIA group's financial position was ex tremely strong. In March 2000, the group's shareholders' funds stood at S$9,707 mil lion, enough to pay for most of its purchases of aircraft in the foreseeable future. In the recent past, the shareholders' funds had grown at a rate exceeding S$500 million every year. The group had no debt.

-

Load Factors and Yields -

-

SIA maintained load factors of about 7374 per cent, five to six points better than the industry average for international serv ices and comparable to a few carriers such as Air France, KLM and Cathay Pacific. The load factors were, however, higher than several other reputed carriers such as Lufthansa (68.6 per cent), American (67.8 per cent), United (70.6 per cent) and North-

-

630


west (69 per cent). 40 In terms of cargo op - stakes in Virgin Atlantic and Air New Zea erations, SIA maintained load factors of 68 land represents the first of such moves by per cent. SIA's overall break-even load fac - SIA. In the past, it had always grown in tor varied between 65.9 per cent (1996-97) ternally or through alliances. The acquisi and 62.6 per cent (1995-96). In 1999-2000 tions pose a significant challenge to SIA and 1998-99, SIA's passenger yield stood since it means managing people in coun at 95.3 and 90.4 per cents respectively, tries that are culturally distant to Singa whereas the cargo yields were 33.7 and pore. There are also significant differences 32.6 per cents. The slight improvement in between SIA and Virgin, in terms of their the Financial Year 2000 was attributable corporate culture. SIA has always been to the recovery of many of the crisis-af - innovative but cautious, especially when fected Asian economies. In general, SIA's its reputation is at stake. Virgin is more passenger yields were lower than most open to trying risky ideas. Hence the inte other close rivals, possibly because SIA had gration of the new acquisitions is likely to neither a domestic market that it could pose a significant "challenge. dominate nor highly regulated routes (e.g., There are also concerns about the Star within Europe). Alliance. While the alliance enhances the possibility of offering seamless travel to passengers, the number of partners could Future Issues be an issue. With so many involved, the SIA faces several challenges in the near probabilities for divergence and disagree future. First, several other airlines in the ment multiply. In addition, there are con region are trying to imitate SIA's success. cerns that if even one of the alliance part These include Malaysian Airlines and Thai ners does not provide adequate levels of Airlines. Cathay Pacific was already com - customer service, the reputation of the parable to SIA in terms of service reputa - other members will be tarnished. tion. Malaysia and Hong Kong have new On October 31, 2000, Singapore Air airports that rival Changi Airport in so - lines flight SQ006, carrying 159 passen phistication and amenities. New hubs in gers, tried to take off in bad weather (heavy Manila, Taipei and Seoul are competing rains and gusty wind) from the Chiang Kai with Changi for air cargo volume and Shek Airport in Taipei. Seventy-nine pas threatening Changi's position as a pre - sengers and four crew members died after 41 eminent transshipment centre. Another the Boeing 747 crashed into construction challenge comes from within Singapore it - equipment and broke in two. The runway self. With increasing affluence, the salary had been closed for construction for sev levels within Singapore are rising rapidly. eral months (Fate of SQ006; http: 11 It is also harder to recruit good employees The cna.mediacorpnews.com/sq006'). in Singapore due to a tight labour market, plane, bought in January 1997, was less forcing the airline to turn to foreign coun - than four years old and had no apparent tries. defects. An investigation by The Austral In addition, several internal issues ian found that even though some flight at have come up recently. The acquisition of tendants risked their lives to save people,

40

S I A s t a t i s t i c s f r o m w e b s i t eh ,t t p : 1 1 w w w . s i n g a p o r e a i r . c o mI n/d u s t ry a v e r a g e f r o m Air T rans port World, 1/1995. 41 Changi Looks to the Future, http:11web3.asial.com.sgI


others failed to help passengers open emer gency doors, fleeing the plane before all inside had been rescued. The incident was likely to tarnish SIA's reputation for safe travel. On the day of the crash, SIA's stock price dipped slightly but rebounded to its pre-crash levels quickly (The Tragedy of Flight SQ006, http: I1 www.singa.porewindow.org/swOO/001216au.htm).

Appendix 1: The International Airlines Industry Major competitors in the airline industry include American Airlines, United Airlines, Delta Airlines and Northwest Airlines (all from the U.S.), Air France, Lufthansa (Ger many), British Airways (U.IO, Swissair (Switzerland), Singapore Airlines, Cathay Pacific (Hong Kong), Japan Airlines and Qantas (Australia). This industry is a major component of the travel and tourism industry. With in creasing affluence, people around the world are spending a larger percentage of their income on travel and tourism, thus enhanc ing the sector's p tuspects. Between 1987 and 1996, the number of passengers car ried by all the airlines increased by 31 per cent whereas the number of passenger kilo metres increased by almost 51 per cent. 42 The emergence of new technology, includ ing more fuel-efficient flying equipment and inexpensive, yet powerful, information technology is leading to new opportunities for cost reduction. Airlines around the world face several threats, however. Regulatory barriers are coming down allowing competitors to ply new routes and exerting a downward pres sure on prices in the process. IATA (Inter national Air Transport Association), an

42

43

631

association of more than 250 airlines, has said that revenues per passenger for its member carriers fell 2.5 per cent in 1996. Operating cost reductions, however, amounted to only 1 per cent thus narrow ing already thin margins. 43 The Asian economic crisis, which erupted in July 1997, added a new dimen sion to the competitive dynamics. Before the Asian economic crisis, travel to and from Asia was the fastest growing segment of the travel industry. With the crisis, how ever, these growth rates are expected to moderate considerably.

Industry Economics Airline profits are a function of the followin^ EuCbOrS. L.iC [Oau caCLOr, CriG ' iciu ..._n* the costs. Airlines try to maximise both the load factor and the yield but try to mini mise costs. Load factor can be defined as the percentage of seats that are occupied in a flight. Yield is the revenue derived by an airline for each kilometre travelled by each passenger. Unit costs are calculated on the basis of available seat kilometres (that is the number of seats on a plane times the number of kilometres) rather than the number of seats occupied. This is because most of the expenses of an airline vary by capacity offered (available seats) rather than by the number of passengers served. To maximise revenue, airlines try their best to identify the willingness and the ability of the passengers to pay varying fares. At a broad level, travellers can be divided into business and leisure travel lers. Leisure travellers are, in general, more sensitive to prices and will switch to alter native modes of transportation (e.g., cars or not travel at all if the fares seem higl .

Air Transport World, 2/97. Yahoo Business New 1 9s 9 7 . W o r l d A i r T r a v e l G r o w i n g S l o w l y , O c t ohbt et pr :9 I. / w w w . y a h o o . r o r n I

632


They also travel, most often, by economy class. Business travellers, on the other hand, often travel by either business or first class. The price differential between economy class, on the one hand, and business and first classes, on the other hand, is very high. Since 1980, this differential has widened considerably, due to both falling economy class fares and rising business and first class fares. Industry analysts estimate that 55 per cent of an airline's costs, mostly interest and depreciation, are unrelated to the number of flights flown. According to the Asia Pacific Airlines Association, only 16 per cent of an airline's costs are tied to traffic (number of passengers in a particular fliyU). Since the remaining costs ^b^ «
i4 45

have very little control over their fuel costs. Maintenance and ground services also constitute a substantial percentage of an airline's expenses. Airlines often perform routine maintenance at the home base but contract with local airlines for local maintenance capacity. As a rule, in-house maintenance is scale-sensitive but, if the utilisation is high, it could be considerably cheaper than contract maintenance. In general, the larger an airline's presence in a particular location, the higher is the feasibility of maintaining in-house repair operations in that location. Regulation and Government Intervention

Though the extent of government intervention in the airline industry was declining, it is still higher than most other industries. In the international arena, the route structure as well as the frequency of flights is governed by agreements between the two concerned countries (origin and destination). For instance, an agreement between Thailand and Singapore might stipulate the number of weekly flights between Singapore and Bangkok.45 Such agreements might also not allow a SIA flight to Bangkok to continue to some other destination within Thailand. In some cases, the fares are also subject to approval by the country of origin of flight (either Singapore or Thailand in the above example). Increasingly, however, the regulatory barriers are falling. Open skies agreements between the U.S. and the European countries are leading to the dismantling of the restrictions on flight frequencies. Recently, an Open Skies agreement has also been signed between the U.S. and Singapore which will allow SIA to fly to new destinations in the

Research on Singapore Airlines by Goldman Sachs. This is only a hypothetical example and does not reflect the reality in any way.


633

U.S. These could be served by direct flights Over time, flying equipment has also from the home base in Singapore as well become more sophisticated. Newer planes as by continuing its flights from a U.S. port are bigger and can fly farther. These planes of entry (e.g., New York) to other destina- also offer better fuel efficiency over the tions in the U.S. (e.g., Atlanta). Under the older designs. Flying larger planes is parOpen Skies agreement, SIA could also de- ticularly essential for busy routes such as termine its own flight frequencies. New York to Tokyo or London to Singapore. Some other policies that were not spe- Inside the plane, technological advances cific to the airlines industry have also af- have enabled customers to enjoy new feafected it. For instance, a country's laws re- tures and services. They can make telgarding unions could have a tremendous ephone calls, send faxes and enjoy personimpact on the wages-and-salary component alised entertainment. of an airline's cost structure.

Strategic Dimensions Industry Trends Alliances

Airline alliances have proliferated over the past 15 years. As of May 1996, there were a total of 389 alliances worldwide. Equity was involved in 62, or 16 per cent of these alliances. Alliances was a catch-all term and the scope of an alliance could be as narrow as a particular route (e.g., Singa pore to New York) or quite broad to include cooperation at the corporation-level (covering all the routes served by the cooperating airlines). Alliances also serve a variety of purposes, the most important of which is to extend an airline's reach. Technology

Airlines make extensive use of technology in their operations. One example is the proprietary reservation system which involves writing extremely complex software programs and is typically the domain of large airlines such American Airlines and United Airlines. Many smaller airlines have formed consortia to develop rival com puterised reservation systems. In addition to ticketing, check-in facilities are extensively computerised. Of late, functions like baggage handling are also becoming increasingly automated.

Airline strategies were extremely complex and cover several interrelated factors. Different airlines also emphasise different within the airlines industry include: the route structure of the airline, the type and the age of the flying equipment (planes), the quality of in-flight and ground services offered and the prices charged to economy class passengers.

Appendix 2: Subsidiaries and Related Operations The SIA Group has 21 subsidiaries including the following major ones: Singapore Airlines Company, Singapore Terminal Services (SATS) group, Service Quality Centre, SIA Properties, SilkAir, Singapore Engineering Company Pte Ltd and Singa pore Flying College. SATS Group

The SATS Group comprises four companies - SATS Airport Services, SATS Catering, SATS Security Services and Aero Laundry and Linen Services. The SATS group is in charge of Changi Airport, regularly voted as one of the world's best air-

634

Case 8

• The Singapore Airlines Group

ports. During the year ending March 31, SIA Engineering Company 2000, SATS serviced 47 airlines at the SIA Engineering Company has developed Changi Airport and handled 21.7 million extensive capabilities in repairing aircraft passengers. It also handled 1.4 million including overhauling engines and refur tonnes of cargo. As of March 2000, it had bishing aircraft components. The SIA entered into ten joint ventures in nine hangar, the world's largest column-free countries including India and China. Joint , hangar, has made SIA fully self-sufficient ventures accounted for 8.9 per cent of in airframe and engine maintenance and SATS' profits during the year. SATS had recently (mid-2000) com - capable of selling engineering services at all levels to other airlines. It operates joint pleted the construction of a S$215 million venture companies with Pratt and Inflight Catering Centre with a production capacity of 45,000 meals daily. Construc - Whitney, a major aircraft engine manufac turer, in Singapore and in Taiwan. The Sin tion of (S$270 million) Airfreight Terminal gapore joint ventures serve as Pratt and 6 was expected to be complete in mid-2001. Whitney's exclusive Center of Excellence When completed, the new terminal would Facility in the Asia Pacific and Indian sub boost SATS' total cargo handling capacity 47 continent. In March 2000, SIAEC took a 2.05 million tonnes a yo.ir 10 per cent equity stake in Kong Kong Aero Airlines Annual Report, 1999-2000 and Engine Service Pte Ltd which overhauled www.singaporeair.com}. Rolls Royce and Trent engines. SIAEC does Changi Airport is widely considered maintenance work for 56 airlines includ the premier express freight hub in the Asia Pacific region, primarily due to SATS in - ing Air India, Polar Air, Federal Express and China United. As much as 18.6 per vestments and foresight. cent of its revenues are drawn from third party work. 48 SilkAir SIA's regional arm is known as SilkAir. It primarily operates flights to regional holi day destinations. As of March 2000, SilkAir operated 88 scheduled revenue flights each week to 19 destinations and maintains a fleet of six aircraft. On December 19, 1997, Singapore-bound SilkAir flight MI 185 from Jakarta crashed in a swampy terrain in Sumatra (Indonesia). The Boeing 737 was less than a year old and there were no distress signals from the aircraft before the actual crash. The crash, the first in either SLA or its subsidiary's history, killed all 104 people aboard the aircraft. 46

46

-

Other Subsidiaries

The Service Quality Centre is a joint ven ture with the National Productivity Board of Singapore. Formed in 1991, it trains sev eral thousand employees from more than 100 companies in both the service and the manufacturing sector. As of March 2000, the SIA group owned 20 commercial and 25 residential properties. It also leases 430 properties located in 122 cities in 45 coun tries. SIA Properties oversees the develop ment of these properties both within and outside Singapore. 49 The airline's other

-

-

Yahoo News 1997. No Indication of Survivors in SilkAir Crash, December 20. http:/1 www.yahoo.com I 47 P r a t t a n d W h i t n e y a n d S I A E C F o r m E n g i n e O v e r h a u l V e n ht ut trpe :, 1 1 w w w . s i n g a p o r e a i r . c o m I 48 SIA Annual Report, 1999-2000. 49 Ibid.


subsidiaries included SALE, a leasing com pany; Auspice, a Channel Islands-based portfolio investment company; and Sing Bi Funds, a Singapore based subsidiary responsible for the group's regional portfolio investment activities. 50

Study Questions 1. What generic strategy is SIA following?

50

SIA Annual Report, 1999-2000.

What factors can explain SIA's success? Optional question: Does Singapore have a national competitive advantage in terms of having an international airline? (For discussing the optional question, the students will need a fairly good knowledge regarding the Singapore economy.)

635

Singapore Airlines Case Study

Recommend Documents