Sia Case Study Essay
Singapore Airlines by Lau Geok Theng with the assistance of Leong Wai Yee In September 2010, senior executives of Singapore Airlines (SIA) were wondering what strategic thrusts they should adopt over the next ten years in order to remain competitive and profitable. The company had just announced increases in fares averaging S$200 (US$148) more for economy seats and S$1,000 (US$743) more for premium seats, given the improved economic climate and increased air passenger counts in recent months.
The company had also announced that Mr Goh Choon Phong would take over as Chief Executive Officer in January 2011 when the current CEO, Mr Chew Choon Seng retires in December 2010. Mr Goh had been with the company since 1990 and had held various senior positions including Director of Singapore Airlines Cargo and Senior VP of Finance. The airline industry was not an easy one to survive in, as the performance of companies was highly reliant on factors often beyond their control.
Other than regulations imposed by governments, airlines were buffeted by external influences such as economic climates, disease outbreaks, natural disasters, and changes in oil prices. Relative to competitors in the industry, Singapore Airlines (SIA) had outstanding performance so far, evidenced by the numerous awards and titles that it had achieved. SIA faced strategic dilemmas regarding which path to take – a path of continuity or a path of change? Company History The history of the SIA group dated back to 1937 when Malayan Airways Limited was registered, although flight operations really began ten years later.
On 1 May 1947, a twin-engine Airspeed Consul took off from Singapore Kallang Airport on the inaugural flight for the services that were to be operated between Singapore, Kuala Lumpur, Ipoh and Penang (the latter three are cities in Malaysia). In 1963, with the emergence of the new Federation of Malaysia, the airline was renamed Malaysian Airways Limited. In 1965, following Singapore’s separation from Malaysia, the airline’s equity was divided equally between the Malaysian and Singapore governments and the airline became known as Malaysia-Singapore Airlines (MSA) Limited.
In 1968, the sarong kebaya uniform designed by Pierre Balmain was first introduced and the Singapore Girl emerged to later become an internationally recognized icon. The expansion of routes created more differences in national priorities: Singapore pushed for greater 1 international connections while Malaysia wanted to focus on domestic networks within its territories. In January 1971, the two governments agreed to establish separate national airlines, leading to the discontinuation of MSA operations in October 1972. Two new airlines then emerged – Singapore Airlines (SIA) and Malaysian Airline System.
The newly formed SIA had a modest fleet of ten aircrafts, staff of 6000 and a route network spanning 22 cities in 18 countries. It could not rely on government bailouts as the government shareholder made it clear from the outset that the airline had to provide service and generate economic benefits and profits on its own. The government might help in creating an efficient infrastructure, negotiating traffic rights and maintaining labor peace but there was no interference in SIA’s operation and no subsidies. Growth at SIA was rapid.
The network increased to 57 cities in 37 countries in 1989 and 119 cities in 41 countries in 2001. Revenues increased from S$340 million in 1972/73 to S$2. 7 billion in 1983/84. Profits increased from S$96 million in 1983/84 to almost S$1 billion in 1989. In 1985, the Singapore government reduced its holdings in SIA to 63% by floating shares in the Singapore stock market and sold the shares to employees and made private placements overseas. In 1986, the government further reduced its holding to 56% and increased the foreign ownership proportion to 27. 5%.
Management Structure SIA was headed by Chairman Stephen Lee Ching Yen and Chief Executive Officer Chew Choon Seng. The Board of Directors consisted of seven other members – Dr William Fung Kwok Lun, Euleen Goh Yiu Kiang, David Michael Gonski, James Koh Cher Siang, Christina Ong, Dr Helmut Gunter Wilhelm Panke, and Lucien Wong Yuen Kuai. These nine people were involved in the various committees: Board Executive Committee, Board Audit Committee, Board Compensation and Industrial Relations Committee, Board Nominating Committee and Board Safety and Risk Committee.
The Executive Management team consisted of Chew Choon Seng, CEO; Bey Soo Khiang, Senior EVP (Executive Vice President) Marketing and Corporate Services; Ng Chin Hwee, EVP, Human Resource and Planning; Mak Swee Wah, EVP, Operation and Services; Tan Pee Teck, Senior VP, Cabin Crew; Tan Chik Quee, Senior VP, Commercial Technology; Mervyn Sirisena, Senior VP, Engineering; Chan Hon Chew, Senior VP, Finance; Gerard Yip Beng Hock, Senior VP, Flight Operations; Christopher Cheng Kian Hai, Senior VP, Human Resources; Yap Kim Wah, Senior VP, Product and Services; and Ng Kian Wah, Senior VP, Sales Regions. 2
Overseas regions were headed by Lee Lik Hsin, Regional VP, North Asia; Lim Wee Kok, Regional VP, Americas; Paul Tan Wah Liang, Regional VP, Europe; Subhas Menon, Regional VP, South West Pacific; and Philip Goh Ser Miang, Regional VP, West Asia and Africa. Senior Management officers for its other subsidiaries were: William Tan Seng Koon, President and CEO, SIA Engineering; Chin Yau Seng, CEO, SilkAir; and Tan Kai Ping, President, SIA Cargo. Performance & Strategy SIA achieved a net profit attributable to equity holders of S$216 million for the financial year ended 31 March 2010 (see Financial Statistics in Appendix 1).
Passengers carried, revenue passenger-km and passenger yield dropped during the financial year (see Operating Statistics in Appendix 2). Table 1 shows the breakdown of profits in the SIA Group. Table 1 SIA Group: Contribution of Profits by Subsidiaries 2009/10 (S$ million) Singapore Airlines SIA Engineering SilkAir SIA Cargo (38. 6) 110. 4 49. 2 (145. 1) 2008/09 (S$ million) 822. 9 112. 6 33. 6 (245. 0) Change (S$ million) – 861. 5 -2. 2 + 15. 6 +99. 9 Source: SIA Group Analyst/Media Briefing FY2009/10 Results
The global nature of SIA’s operations was one of the airline’s strengths as it allowed for geographic diversification of revenue and thus decreased economic risk. Despite the rapid growth of the Asian sector from the late 1980s to the Asian financial crisis in 1997, SIA did not concentrate its efforts solely on Asia and neglected other regions. In 2007/08, the percentage passenger revenues by regions were East Asia (28. 9%), Europe (21. 8%), the Americas (18. 7%), South West Pacific (18. 3%), and West Asia and Africa (12. 3%). This reflected a well-balanced revenue composition based on different regions.
SIA had always prided itself on providing service excellence and this was reflected in its investment in its staff. SIA was committed to attracting and recruiting people of high 3 caliber and equipping them with the skills to provide the best service. When SIA began operation in 1972, it was difficult for an airline to differentiate itself as both rates and services were heavily regulated by the International Air Transport Association (IATA) which had rigid rules controlling every aspect of in-flight services from the size of sandwiches to the type of free drinks allowed in the economy class.
SIA chose to withdraw from IATA at that time but rejoined the organization in the 1990s when the reorganized group no longer regulated competitive practices. SIA had benefited from bold and prudent leadership, with its management making decisions with foresight, such as maintaining a modern aircraft fleet and setting up of modern airport facilities. They also made financial investments into hotel and property projects that generated income for SIA.
SIA leaders, however, had put down ideas for direct diversification into hotel chains and travel agencies; the rationale for this was that focusing on its core business would enable it to provide the best for its customers in terms of product and service standards. The hardest task for the management, as mentioned by the Chairman in 1992, had always been to keep to the „straight and narrow? – to define the aims and objectives clearly and to stick to them. SIA was devoted to its values of free enterprise and free competition as well as excellence in work performance.
SIA had previously pursued a strategy of growth through global diversification by pursuing equity stakes in airlines younger than itself and had the capacity of faster growth. SIA had an interest in obtaining a stake in an Australian airline to extend its reach and garner a larger share of traffic along the Kangaroo route from Australia and New Zealand through Singapore and onto Europe. It tried to secure a stake in Ansett in 1991 and Qantas in 1994 without success.
In 1999, SIA’s US$250 million bid for a 50% stake of Ansett, which at that time was owned by News Corp, was unsuccessful because Air New Zealand (ANZ), which was the other 50% owner of Ansett, exercised a pre-emptive right to buy the News Corp stake. Later in April 2000, SIA turned its attention to ANZ and bought a 25% stake in ANZ, the maximum percentage that a single foreign airline could own under New Zealand government’s regulations. In September 2001, with Ansett seriously failing, ANZ put the carrier in administration.
In October 2001, SIA’s stake in ANZ was reduced to 6. 47% following a recapitalization package in which the New Zealand government invested NZ$885 million in ANZ. This stake was later sold in the open market at a substantial loss. SIA also took a 49% stake in Virgin Atlantic Airways in March 2000 costing 600 million pounds but later sold the shares in the open market after declaring that the stake had underperformed. In 2004, SIA entered the low-cost carrier market by investing in a 49% stake in Tiger Airways. 4
Its partners were Indigo Partners LLC, Irelandia Investments Limited and Temasek Holdings. That stake was reduced to 34. 4% in 2010 when Tiger Airways became listed on the Singapore Stock Exchange. Human Resource Management Human resource management (HRM) was an area that was crucial to the success of SIA, particularly due to their emphasis on delivering sustained service excellence over the years. During recruitment, cabin crew applicants had to undergo a strict selection process. Initial criteria included age (26 being the maximum), academic performance and physical attributes.
Upon meeting the requirements, applicants then went through a group interview, a psychometric test, a uniform test (where applicants were requested to put on the sarong kebaya to be assessed on their posture, gait and general looks), a water confidence test (where they wore life jackets and were required to jump from a three-metre height into a swimming pool), a two-to-one interview (conducted by the Senior Vice President of Cabin Crew and one member of the senior staff) and a tea party (where shortlisted applicants mingled with management staff so that any doubts could be clarified and final judgments could be made).
Recruitment for SIA pilots was equally stringent with two rounds of structured interviews and a computerized pilot selection test. The entire recruitment process would take about 2 to 4 months in each case. SIA placed strong emphasis on training. Newly recruited cabin crew members were required to complete an intensive course spanning four months, twice the industry average duration. Topics covered in the training program included safety and functional training, grooming and deportment, gourmet food and fine wines, and the art of conversation.
After the four months of training, cabin crew were placed on probation for six months and had to undergo further training at later stages. Such training enabled cabin crew to provide gracious service that reflected warmth and friendliness and yet assert confidence and authority. Shortlisted SIA pilots would spend 15 to 17 months on training to acquire an Airline Transport Pilot’s License (ATPL) with Instrument Rating (IR) and undergo further training for 1 to 2 years to become a First Officer.
All staff members, even senior vice presidents, were sent for training regularly to help them maintain an open mindset, accept change and development, and deliver new services introduced by SIA. The SIA’s Training Centre, set up in January 1993, consisted of the Management Development Centre (MDC) and four departments: Cabin Crew Training, Flight Crew Training, Commercial Training and IT Training. The relationship between management and operational staff was essential to the success of the training 5 programs.
Management staff members were often regarded as mentors, rather than superiors, who guided the newer staff members along. Managers were rotated amongst departments every few years so as to allow them to have a deeper understanding of the organization as a whole, promote a corporate outlook, reduce disputes between departments, and allow for change and innovation. Service Delivery Teams SIA staff members worked in teams which allowed for effective communication and facilitated service delivery. The 6,600 crew members were divided into units of about 13 people with a team leader in charge.
Team members would be allocated to fly together as often as possible to build up ties and cultivate team spirit. The team leader acted as a mentor and counsellor who would provide guidance and help to the team members. ‘Check trainers’ supervised about 12 to 13 teams and flew with them for the purposes of inspection and aiding in the development of the teams. Interest groups, such as Performing Arts Circle, Gourmet Circle, Language Circle and Sports Circle were also formed to develop the interests of employees and to encourage them to get to know other staff members.
Frontline Staff It was not just the actual act of delivering the service that was important. The mindset of the frontline staff was equally important. As staff members got more experienced, they developed soft skills and learnt to take the initiative to anticipate the needs of the customers by noticing certain details such as body language. SIA frontline staff members were trained to have a customer-oriented mindset which often led them to go the extra mile. SIA believed in empowering staff members to enable them to take the initiative to improve their services.
For instance, frontline staff members were allowed to increase baggage allowance from 20kg to 25kg, 30kg or 50kg if the circumstances called for it. However, such action must be justified and recorded. Cabin crew also contributed to cross-functional task forces to address specific issues and participate in areas such as ‘innovation lab’ where employees generated ideas and tested them. Rewards and Recognition SIA recognised that staff would need constant motivation to deliver service excellence and as such had in place a reward and recognition system.
Motivating staff through these means also allowed SIA to retain staff and reduce turnover rate. SIA introduced variable components of pay linked to the individual staff’s performance as well as the company’s overall financial performance. Equity-linked incentives were also provided for 6 staff. Acknowledgements of the work of specific staff members who went the extra mile were made during meetings and briefings and in the corporate newsletters. The Deputy Chairman’s Award was given out every year to show the appreciation of the top management for exceptional staff achievements.
Product and Services SIA currently operated passenger services to 93 destinations in 38 countries all over the world, in regions such as West, North and Southeast Asia, Africa, Europe, Australia, New Zealand, and North America (see Figure 1). Other than SIA itself, the SIA Group consisted of SIA Engineering, SIA Cargo, SilkAir (SIA’s subsidiary airline focusing on regional locations), and Tradewinds Tours and Travels (tour operating arm of SIA and SilkAir); and had shares in several other enterprises.
In 2009, SIA divested its 81% stake in Singapore Airport Terminal Services (SATS) to SIA shareholders by distributing 730 SATS shares for every 1000 SIA shares held. The move would allow SIA to focus on its core business and allow SATS to pursue its own opportunities. Figure 1 Singapore Airlines Destination Network Source: SIA Website 7 Fleet SIA placed much emphasis on regular investments in new aircrafts which allowed SIA to provide a better experience of flying due to the incorporation of the latest developments in passenger comfort, safety, and facilities.
New aircrafts tended to be superior in technology, thus, they were more fuel-efficient and had improved on-time performance. SIA became a pioneer in the industry to own the A300 Superbus, the B747-300 Big Top, the B757 and the A310-200. It was the first to operate an international commercial flight across the Pacific Ocean using the 747-400 Megatop. In 2004, SIA set a record by operating the world’s longest flight between Singapore and Los Angeles, and broke its own record later in the same year with its non-stop flight between Singapore and New York.
SIA acquired the A380, the world’s largest commercial plane, in October 2007. As of 1 July 2010, SIA’s passenger fleet comprised 106 aircrafts, with an average age of 6 years and 3 months (see Appendix 3). As of 31 March 2010, the freighter fleet of SIA Cargo consisted of eleven B747-400s with average age of eight years and two months while the SilkAir’s fleet comprised 11 Airbus A320s and 6 Airbus A319s with an average age of five years and nine months.
Service Classes SIA offered twelve suites in its A380 aircrafts which was priced at S$10,500 for the Singapore-Sydney flight, about a third more than the first class fare. It also offered first class, business class and economy class seats like other airlines. Some flights such as the ones between Singapore and New York and between Singapore and Los Angeles had been converted into business class only (so economy class seats were not available in these flights). Seats and Space The twelve Suites available in the A380 aircrafts each had its own private cabin.
Each cabin had a 35-inch wide armchair seat hand-stitched by master Italian craftsmen Poltrona Fraun and a separate stand-alone bed together with turn-down service, fine linen and full size pillow. The first-class seats had a width of 35 inches and upholstery of fine-grain leather with mahogany wood trimming. The seat could be adjusted to a sundeck lounge position or fully-flat bed position. The table could be adjusted to suit individual height preferences. Around the seat there were specially designed spaces for personal belongings, and a vanity corner complete with a mirror and drawer is built into every seat. Each business class seat measured 30 inches (76 cm) in width, almost 50% wider than most other products in this class. The seats were arranged in a 4-abreast, 1-2-1, layout, with every seat having direct access to the aisle. When it was time to sleep, the new Business Class seat could be converted into a fully-flat bed. The innovative design of the economy class seats minimized the intrusion into space when passengers in front recline, but maximized knee- and leg-room.
Features of the seat included an easily accessible seatback-mounted handset, personal and nonintrusive reading light and in-seat power supply. Meals The exquisite menus for the Suite and the first and business class were created by the Singapore Airlines International Culinary Panel comprising the world’s most awarded chefs and presented on elegant tableware specially designed by Givenchy. To complement the meal, a selection of the finest wines hand-picked by a panel of wine experts or an unrivalled selection of champagnes and second growth Bordeaux were served in crystal ware.
The menu available for economy class passengers was also created by SIA’s renowned International Culinary Panel and was accompanied by a selection of wines and beverages. Ice cream was provided for passengers as well. Entertainment All passengers could enjoy KrisWorld, which included 120 movies and 170 TV shows. Music lovers could choose from a range of 740 CDs and over 20 radio channels. KrisWorld also had on-demand games, language-learning tools and travel guides.
In the Suite and first class, passengers were provided with a personal 23-inch LCD screen with 1280 x 768 pixels, the highest resolution available in the industry, complete with surround sound and the latest in noise-cancelling headphone technology. In the business class and economy class, passengers were provided with personal 15. 4 inch and 10. 6 inch LCD screens, respectively. Accessories and Toiletries Passengers in the Suite, first and business class were provided with sleepwear and beddings exclusively designed by Givenchy, a range of sensuous Ferragamo toiletries, and soft terry-cloth socks and eyeshades. Economy class passengers were given fleece blankets and provided with an amenity kit comprising a toothbrush set and knitted socks if the flight was an overnight flight exceeding four and a half hours or a day flight exceeding eight hours. Brand Reputation SIA had a consistently strong and positive brand reputation, being one out of the six airlines (the others were: Cathay Pacific Airways, Malaysian Airline System, Qatar Airways, Asiana Airlines and Kingfisher Airlines) to achieve a five-star rating with regard to customer service and product quality under the Star Ranking system by Skytrax Research.
SIA also gained recognition in other areas, such as being ranked 17th in Fortune magazine’s list of most admired companies in 2007; voted the world’s best international airline by Travel + Leisure magazine for the last 11 years, the world’s best international route airline by Conde Nast magazine for the 18th time in the last 19 years, and the world’s best airline by Business Traveller Asia Pacific for the last 15 years; and also received the Readers’ Digest Trusted Brands Platinum Award (Airline Category) for the 7th years running. SIA’s brand has an estimated value of S$354. million, based on a recent study. The “Singapore Girl” icon played an important part in SIA’s achievements, being conceptualized as a personification of oriental charm and friendliness, which the airline made real through careful recruitment and painstaking training, according to Dr Cheong Choong Kong, former CEO of SIA. While the service industry was moving towards a trend of playful informality in terms of service, an example being Virgin Airlines, SIA focused on training service staff down to every detail possible in its effort to achieve precision and consistency in its service.
This, together with positive word-of-mouth reviews from satisfied customers, created an impression of superior service and style. SIA was constant in its advertising efforts as it used the same advertising themes for its global campaign: the Singapore Girl icon, the tagline „a great way to fly? and the emphasis on having a young fleet. SIA invested heavily in advertising even during downturns. SIA had invested approximately S$750 million in advertising in its first 21 years, and its current advertising account was estimated to be worth S$50 million annually.
The company had also partnered with brands like Givenchy, Salvatore Ferragamo and L’Occitane, manifested in on-board facilities and items provided to passengers. Recently, in January 2007, SIA invited bids for its advertising account, which was previously held by Batey Ads. Batey Ads was the advertising agency which created the Singapore Girl icon in 1972. The Singapore Girl attire and advertising slogan had changed little since then. The move by SIA to seek new advertising proposals raised 10 debate over whether the Singapore Girl image should be retained or changed.
SIA management was concerned that SIA should not lose touch with consumers in the everevolving world of information and communications technology. Should SIA adopt a new image for the new IT era? Proponents of retaining the Singapore Girl image pointed out the possible negative effects that changing a painstakingly built image which had worked well for decades would have on the brand name of SIA. On the other hand, critics had stated that the image of the Singapore Girl was sexist and depicted the notion of a subservient Asian female that was not so relevant in this time and age.
Distribution Channels The internet had been integrated by the airlines into their distribution channels. Travelers could gather information and book flights through travel agents who were connected to a customer reservation system (CRS), through travel websites such as Expedia which would connect customers to a CRS, or through airline websites. ABACUS In 1988, SIA and Cathay Pacific created Asian Customer Reservation System (ABACUS), an Asian CRS headquartered in Singapore and were soon joined by nine other airlines to form ABACUS International Holdings.
The Asian airlines collectively held 65% of this CRS with SABRE, the American Airlines CRS taking the other 35% stake. In 1999, ABACUS launched the Alliance Manager product which was designed to meet the specific requirements of the STAR and OneWorld Alliances and to give travel agents fast and simple access to information about routes operated by members of the alliances. ABACUS allowed seamless connections to 720 destinations in more than 112 countries under the STAR Alliance and provided travel services from 316 airlines, 52,000 hotel properties and 50 car rental companies. Kriscom, Krismax, SQ-eTravel and SIA
Mobile Bookings made by travel agents went through a CRS, which in turn, would link up with Kriscom, SIA’s in-house system which also handled yield management for SIA. Krismax was a yield management and forecasting system which helped SIA match seat capacity with waitlisting customers. SIA developed its own Internet booking site, SQ-eTravel, where passengers could book flights, order special meals, view seating plans, and book preferred seats. In 2009, SIA introduced SIA Mobile which allowed customer to book flights and access KrisFlyer services through selected mobile phones, Blackberry or iPhones.
They could also select seats and check-in through the mobile devices. 11 Alliances and Partnerships In 1989, SIA pioneered one of the first alliances in the airline industry, the Global Excellence Alliance (GEC) with Delta Airlines and Swissair. The main reason for alliance was to circumvent regulatory barriers. An European or Asian airline did not have pick-up rights to fly passengers internally within US (for example, from New York to Los Angeles) as such rights were reserved for US carriers.
An alliance benefited both partners as the US carrier could now have access to European or Asian network and the non-US partner could have access to US network through code sharing. The alliance bound the three airlines together through small cross-equity stakes (in the case of SIA 5% of Delta and 2. 5% of Swissair). The alliance led to other benefits such as increased sales through coordinated schedules, savings and flexibility from sharing groundhandling facilities and exchanging cabin crew, and savings from sharing sales and checking office costs.
In November 1997, the GEC alliance was dissolved because of differences among the three partners. In 1999, SIA joined the STAR Alliance, formed in 1997 by Lufthansa, United Airlines, Thai Airways, Air Canada and Scandinavian Airlines. Today, the STAR Alliance had 28 members representing a total of 4,027 aircrafts, 405,000 employees, 627. 52 million passengers per year, sales revenue of US$156. 8 billion, daily departures of 21,200 in 1172 airports, 990 lounges and operations in 181 countries. Market & Industry Overview The aviation industry started out in 1912 when the first scheduled airline flight took off.
Over the next 30 years, the aviation technology was still relatively undeveloped and only in the 1950s, turbo-prop engine powered aircraft were introduced and improved the productivity, reach and capacity of the industry. In the 1960s, with the advent of jet engines, the development of the industry was further facilitated. Currently, the aviation industry was crucial for the global economy, especially in terms of exports and tourism. It was estimated to contribute to 7. 5% of the world’s gross domestic product and generate 32 million jobs.
Despite this, the industry had been experiencing over-capacity from 1985 to 2005, leading to decreased yields and profitability in comparison to other industries. Even after 2005, capacity had been increasing but demand has not increased enough to meet the supply (see Figure 2). The balance between profit and loss had been precarious and subjected to much fluctuation, as evidenced in the unstable performance of the industry in terms of profitability from 1995 to 2009 (see Figure 3). 12 Figure 2 International Passenger and Freight Capacity (Seasonally Adjusted)
AFTK = available freight tonne kilometers; ASK =available seat kilometers Source: IATA Financial Forecast Presentation 2010 Figure 3 Global Commercial Airline Profitability Source: IATA Financial Forecast Presentation 2010 13 Characteristics of the Aviation Industry Government Intervention The aviation industry was characterized by a high level of government intervention due to several reasons including patriotism, strategic importance of the sector (in terms of economy and national security) and safety of passengers. International flight routes and frequencies usually eeded to be approved by host and home governments, unless countries had signed „open skies? agreements with each other. Local governments also restricted the purchase of equity stakes in airline companies by foreign investors. Governments also intervened by giving subsidies to airlines that were performing poorly. However, in more recent times, the trend of deregulation had emerged with the US being the first to implement deregulation of its internal airline market in 1978. Factors Beyond the Control of Airlines There were various factors that could not be controlled by the companies within the aviation industry.
One was oil prices which were determined by demand and supply influenced by geological as well as socio-economic factors. Conventionally, oil price was denominated in US dollars despite the fact that many international airlines earned much of their revenue in different currencies. Fuel made up 30% of the operating costs of airlines in 2007, which explained why the rapid increase in prices from 2003 onwards had significantly affected the performance of airlines. Other than oil prices, airlines incurred expenses from landing and aircraft parking fees imposed by the governments.
Local infrastructure and events, such as those of terrorism or socio-political unrest, also influenced the profitability of airlines. Complexities of Operations Factors such as the perishable nature of flight seats, the seasonal and cyclical nature of the demand for seats and the long time horizons involved in decision-making contributed to the complex nature of airline business. Although airlines employed price discrimination methods for yield management, there were tendencies toward destructive price competition which decreased profitability.
There was much difficulty in juggling the capacity of airlines due to the difference in demand at different time periods. Airline executives faced the problem of having to plan for long time horizons such as decisions on acquisition of new aircrafts. This involved large investments and significant lead times. Executives had to make long-term commitments in anticipation of future trends. Cost Structure The operating costs of airlines included (1) variable direct operating costs, (2) fixed direct operating costs, and (3) indirect operating costs.
The first category included fuel 14 expenses, flight crew allowances, direct engineering costs, airport and en-route charges and passenger service costs. The second category comprised aircraft depreciation and rental, flight and cabin crew salaries and engineering overheads. The last category consisted of route- and product-related costs such as passenger service staff salaries, station and ground expenses, ticketing staff costs, promotion costs and general administrative costs. Competition Below are brief descriptions of some of SIA’s major competitors.
Air France-KLM started operations in 1933 and currently served about 245 destinations in more than 100 countries with a fleet of around 640 aircrafts. Air France had three core businesses – passenger operations, cargo and aircraft repair and maintenance. It had eight subsidiaries, specializing in air transport (regional airlines) and complementary activities such as airline catering services (Servair), aeronautical maintenance (CRMA) and cargo forwarding (SoDExi). As of 2009, 42% of its revenue was attributed to the primary market of Europe and 17% was derived from the Asian market.
Air France introduced „premium economy? seats in April 2010 for its Incheon-Paris route which had expanded space of around 40% compared to regular economy seats. British Airways, which was set up in 1919, served about 150 destinations in 75 countries via a fleet of more than 240 aircrafts. Its main activities were international and domestic air services for the carriage of passengers, freight and mail. British Airways’ main market was Europe, which accounted for 72% of its sales. British Airways competed with SIA in the European market and in transatlantic flights.
In 2000, British Airways introduced innovative seatbeds in its business class and managed to get some migration from SIA customers. Emirates started out in 1895 as a wholly-owned entity by the government of Dubai and its businesses included an international cargo division, a destination management and leisure division, an international ground-handler, and an airline IT developer. The airline had a fleet of 137 aircrafts and flew to over 100 destinations in 60 countries. The main markets of Emirates were East Asia and Australasia (27. % of revenue), as well as Europe (27. 3% of revenue). At the 2007 Dubai Airshow, Emirates announced a historic civil aviation aircraft order valued at US$34. 9 billion in list prices for 120 Airbus A350s, 11 A380s, and 12 Boeing 777-300ERs. Emirates currently had 48 Boeing 777s pending delivery and was set to become the world’s largest 777 operator. On 15 July 2010, Emirates became the first international carrier to touch down a commercial A380 flight at the newly inaugurated Terminal 3 of the Indira Gandhi International (IGI) Airport, New Delhi.
Its A380s were known for its First Class Private Suites, Shower Spas and 15 Onboard Lounge for First Class and Business Class passengers. In-flight entertainment included more than 1,000 channels of on-demand entertainment, with 200 movies from around the world, 100 TV channels, more than 500 audio channels, 100 video games and news, sports and business headlines. Qantas, originally registered as the Queensland and Northern Territory Aerial Services Limited (QANTAS), was founded in 1920.
Other than the core business of passenger transportation and air freight, Qantas had several subsidiaries to its name. These included QantasLink and Jetstar, and associated businesses like in-flight catering and holiday and travel operations. The revenue of Qantas was largely derived from the markets of Australia ($9,760 million) and the United Kingdom and Europe ($1,102 million). As of 1 July 2010, Qantas Group’s passenger fleet comprised 23 aircraft from Airbus, 126 from Boeing as well as 42 Bombardier Dash 8 aircrafts. Jetstar had 59 aircraft from Airbus.
Recent developments from Qantas included the announcement stating that it would receive the first of 50 Boeing 787 Dreamliners in mid-2012 rather than 2014, and the launch of a new in-flight entertainment system on all Qantas domestic and international flights from August 2010. China Eastern Airlines (CEA) was established in June 1988. CEA had 9 domestic branches and was the controlling shareholder of China Cargo Airlines, China Eastern Jiangsu Airlines Co. , Ltd and China Eastern Wuhan Airlines Co. , Ltd. The sub companies of China Eastern were located in 11 provinces of China.
It operated over 80 international and regional routes and over 330 domestic routes, which connected 110 cities in China and aboard. CEA had 200 large-to-medium sized modern jets, comprising of A340-600, A340-300, A330, and A320 series and B767 and B737 series. CEA competed with SIA in the Asian market in the areas of passenger services and cargo. Its sales mainly came from Hong Kong, Japan and China, which accounted for 72% of total sales in 2008. Cathay Pacific was founded in 1946 and currently had a fleet of over 120 wide-bodied aircrafts including Boeing 777-300s, Boeing 777-300ERs, Boeing 777-200, Boeing 747400, Airbus A340-300,
Airbus Industrie A330-300 and other freighters. Its subsidiaries and associates included Cathay Pacific Catering Services (HK) Limited, Cathay Holidays Limited, Hong Kong Airport Services Limited, Hong Kong Dragon Airlines Limited, Vogue Laundry Service Limited, AHK Air Hong Kong Limited, Hong Kong Aircraft Engineering Company Limited, Air China Limited and Hong Kong Air Cargo Terminals Limited. North Asia, especially Hong Kong and mainland China, was the main market for Cathay Pacific. 16 In recent times, low-cost carriers also posed as competitors to SIA.
As SIA cut down on capacity and routes due to the economic downturn, budget carriers like Jetstar Asia increased frequencies and added new destinations. In 2009, low-cost carriers accounted for 20% of passengers and 25% of flights at Singapore’s Changi Airport. To compete with these carriers, SIA took a 49% stake in Tiger Airways, a budget carrier that served destinations in the Asia-Pacific region. SIA also introduced fares that rival those of budget carriers such as the promotions it offered in 2009 for flights to Hong Kong and Bangkok.
Return economy fares for Hong Kong were priced at S$298 (just S$15 more than Jetstar’s fares) during the sales period from 16 to 18 June. In another promotion, fares for flights to Bangkok were priced at S$228, compared to prices like Jetstar’s S$143, AirAsia’s S$175, and Tiger Airway’s S$178. Major Events and Developments Asian Financial Crisis The Asian financial crisis started in 1997 in Thailand and spread to Japan and Southeast Asia resulting in depreciation of Asian currencies and stock markets.
While the Asian financial crisis adversely affected airlines like Cathay Pacific, Korean Air and Garuda, SIA maintained profitability via specific measures: capacity reduction, salary freezes and sales promotions which included some tie-ins with hotels. In 1998, SIA announced its biggest product launch in the midst of the Asian financial crisis, with new products and services estimated to be worth S$500 million across all three classes on its Boeing 747, Boeing 777 and Airbus 340.
These products and services included mini-suites for First Class passengers, privacy dividers and larger seating areas for Business Class passengers, improved seats for Economy Class passengers and better in-flight meals for all classes. At the same time, SIA cut its losses through measures such as a 2. 5% reduction in capacity for flights within Southeast Asia and increased capacity for flights to the U. S, Europe and Australia. A promotion was later launched with the offering of a Hello Kitty collectible dressed in the SIA air stewardess uniform.
In an effort to cut costs, SIA’s twenty highest ranking officers and 316 group managers volunteered to forgo annual increments in salary for the financial year of 1998-1999. In September 1998, SIA deferred the delivery of eleven aircraft over the next two years. The after-tax profit of SIA breached the billion dollar mark despite the poor economic climate during this period. 17 SQ006 Crash SIA’s first major accident occurred in October 2000 when a plane took off down a closed runway, causing it to crash into some construction equipment at Taiwan’s Chiang Kai Shek Airport resulting in the deaths of 83 of the 179 passengers on board. 6 passengers were seriously injured and 40 either sustained minor injuries or were unscathed. SIA swiftly dealt with the situation by offering compensation amounting to US$400,000 to the next-of-kin of those deceased, which exceeded the figure of US$75,000 stated in the Warsaw convention, and US$20,000 to the survivors. The services of the two pilots involved were terminated by SIA. A number of survivors and relatives of the victims filed a total of 21 lawsuits against SIA.
In 2002, a report was issued by the Taiwanese government citing pilot error as the main cause of the accident, which contradicted the Singapore government’s report stating that problems at the airport played an essential role in the incident. The Taiwan government also sent a notice for the claim of NT$3 million from SIA for costs incurred due to the damage. SIA handled public relations by attempting to provide accurate information and to maintain open and honest communication with the survivors and the next-of-kin of the victims. SIA openly took up responsibility for the accident and for the deaths and injuries caused.
The CEO of SIA flew to Taipei from New Zealand and announced the Buddy system which would assign grief counselors to those affected. He followed up by paying visits to victims and next-of-kin at hospitals in Taipei. SIA provided daily updates about the accident through press releases and also a hotline that the media and interested parties could call to ask for information. September 11 Terrorist Attacks In September 11, 2001, 19 al-Qaeda members hijacked four passenger planes in the US and two of the aircrafts were deliberately crashed into the twin towers of the World Trade Center in New York City.
The third plane was crashed into the Pentagon in Arlington, Virginia, and the remaining plane crashed into a field in Pennsylvania after passengers and crew tried to regain control of the aircraft. There were no survivors for any of the flights and the death toll was 2,995 including the hijackers. These attacks greatly affected the aviation industry, and the flights to and from the US almost grounded to a halt due to the shut-down of the US airspace. Flights to the US were cut back by 15 to 20% by the end of the third week of October. Pay cuts of 7 to 15% were implemented for SIA’s management and 16 aircrafts were deferred for delivery. 8 SIA was on the way to recovery from the crisis within a year of its occurrence. In July 2002, it launched an improved Business Class service which included SpaceBeds, seats designed for improved comfort and space. Features of the in-flight entertainment system were also enhanced and passengers could send text messages to email addresses or mobile phones in the comfort of their own seats. Pay cuts were restored for SIA staff. SARS Outbreak In March 2003, the outbreak of Severe Acute Respiratory Syndrome (SARS) took place. Several East Asian nations including Singapore, Hong Kong, Vietnam and China were affected.
By 10 April, the number of patients diagnosed with SARS was 2,781 and there had been a total of 111 deaths from 17 countries. Many countries implemented restrictions on air travel to and from the affected countries. SIA responded by waiving most fees involved in re-routing or change in travel plans for passengers travelling to and through the Middle East or SARS-affected countries. It would also suspend around 65 flights in light of the soft demand conditions. By 12 April, SIA had reduced its capacity by 19. 6% and stated that it would stop flying to Guangzhou, the origin of the SARS outbreak.
The airline terminated the services of 206 trainee crew members expected to complete training between May and August 2003 but provided them with severance packages. Global Financial Crisis The global financial crisis in 2007 led to a severe economic downturn and major cut in air travel by businesses and consumers. In the 2007/08 annual report, SIA Chairman Stephen Lee expressed concern over the high fuel prices and weak global economy, but assured shareholders that the Board and management would maintain vigilance, pursue prudent cost management and focus on matching capacity with demand.
To cope with the recession, SIA declared in February 2009 that it would cut capacity by 11% in the fiscal year ending March 31, 2010. SIA also stated that it would decommission 17 aircrafts over the year rather than four it initially planned. Salaries of the staff as well as the working hours were cut. Volcanic Ash Cloud in Europe On 14 April 2010, a volcanic eruption in Iceland’s Eyjafjallajokull caused a large volcanic ash cloud in Europe. The volcanic ash cloud caused the shutdown of airspace in many European airports including London, Paris, and Amsterdam.
From 15 to 18 April, 120 flights between Singapore and Europe had been cancelled. 19 The priority of SIA was to manage the situation by attending to affected customers. The airline provided a SMS notification service (for those who had registered their mobile phone numbers) to inform passengers of alternative flight arrangements. Regular updates were provided on the SIA website and through hotlines that customers could call. SIA also waived cancellation/change fees for tickets to and from Europe, valid for tickets issued up to 15 April and for travel up to April.
Once the flights started to be reinstated, customers who had had their flights cancelled were re-booked on departing flights subject to availability, and priority was given to special needs or elderly customers and those with young children. Safety of its passengers was a major priority, thus SIA stated that it would not fly unless it was safe. By April 21, SIA estimated that it had lost S$40 million due to flight disruptions and another S$10 million from expenses due to the hotel accommodation, meals and other facilities provided to the customers affected, both local and overseas.
Recent Industry Performance Aviation revenues increased from US$322 billion in 2003 to US$564 billion in 2008 but declined to US$479 billion in 2009 due to the global financial crisis. Recovery was expected and this revenue was forecasted to reach US$522 billion for the whole of 2010 (see Appendix 4). Low industry profitability was largely caused by decreasing passenger yields. Passenger yield fell at an annualized rate of 3% from 1990 to 1999 and freight yield fell at 2. 8% from 1990 to 1999.
However, in the period of 1993 to 2000, the airline industry did well due to the booming world economy, low oil prices and interest rates, and political stability. From 2001, the poor performance of the industry could be attributed to the September 11 terrorist attacks and the political events that followed, which in the short run had negative effects on air traffic and in the long run caused increased costs of security. Several major carriers in the US had to seek bankruptcy protection due to the decline in demand and excess capacity which led to huge losses.
In spite of the slight recovery that the industry experienced in 2007, rising oil prices affected revenues and profits of airline companies and caused continued losses and bankruptcies. The global airline industry suffered a net loss of $15. 9 billion (-2. 8% margin) in 2008 compared to a net profit of $12. 9 billion (2. 5% margin) in 2007. Net loss of US$9. 4 billion was expected for the whole of 2000. Travel markets by region have been experiencing uneven growth, with the Middle-East and Asian market doing relatively better than the others (see Appendix 5 & Table 2).
IATA’s traffic forecasts for the next three years are shown in Table 3. 20 Table 2 Profitability by Regional Markets Source: IATA Table 3 Source: IATA 21 Despite the difficulty in achieving profitability, the aviation industry had come far in other areas. This included a high safety record compared to other modes of transportation, improved accessibility due to high frequency of flights and extensive networks, high reliability of flights in terms of punctuality and completed flights, provision of affordable travel options and improved range of facilities attributed to constant technological innovation.
Strategic Dilemmas The senior executives of Singapore Airlines were wondering what major initiatives and strategic thrusts should be undertaken to maintain and improve the company’s competitive advantages and profitability. On the one hand, customer behavior and expectations had changed in the new landscape of internet and mobile connectivity. On the other hand, the competitive landscape had also changed and competitors were equally capable of developing innovative products and delivering service excellence. What innovative products should SIA develop and offer which would represent sustainable competitive advantages over the next ten years?
What else could the company do to further improve its service excellence, given service levels of competitors had improved significantly? What brand identity should the company adopt and emphasize in the future? Should there be a major change in the Singapore girl identity? How focused should the company be on its core business? Was the divestment from SATS necessary and wise? Isn’t ground handling and catering, especially in its home base of Changi Airport, critical to the success of an international airline like SIA? Should SIA further divest from SIA Engineering and Tradewinds to focus on its core airline business?
The recent addition of the Suite to the existing three service classes of first, business and economy had further increased complexity of capacity management. Should the long term directions be fewer or more service classes? Should more flights be converted to Business Class only? Should SIA take equity stake or form alliance with any party or parties in order to overcome regulatory barriers and pave the way to growth? 22 Appendix 1 Source: Annual Report, Singapore Airlines 23 Appendix 2 Source: Annual Report, Singapore Airlines 24 Appendix 3
Singapore Airlines’ Passenger Fleet As At 1 July 2010 Aircraft Type A380 – 800 A340 – 500 A330 – 300 B747 – 400 B777 – 300ER B777 – 300 B777 – 200ER B777 – 200 A350 XWB – 900 B787 – 9 Total Engine Rolls-Royce Trent 900 Rolls-Royce Trent 553 Rolls-Royce Trent 700 PW4056 GE90-115B Rolls-Royce Trent 892 Rolls-Royce Trent 892 Rolls-Royce Trent 884 In Fleet 10 5 15 7 19 12 11 27 0 0 106 20 20 53 20 20 46 4 On Firm Order/Lease 9 On Option/Purchase Right 6 Source: Singapore Airlines website 25 Appendix 4 Source: IATA 26 Appendix 5 Demand Recovery by Region June 2010 vs.
June 2009 Africa Asia/Pacific Europe Latin America Middle East North America Industry YTD 2010 vs. YTD 2009 Africa Asia/Pacific Europe Latin America Middle East North America Industry RPK Growth 21. 3% 15. 5% 7. 8% 14. 7% 18. 0% 10. 8% 11. 9% RPK Growth 13. 2% 10. 5% 3. 3% 10. 2% 20. 1% 5. 9% 7. 9% ASK Growth 12. 1% 4. 4% 4. 3% 9. 5% 13. 1% 5. 6% 5. 9% ASK Growth 8. 6% 1. 0% -0. 4% 3. 8% 13. 2% 0. 1% 2. 0% PLF 69. 0 77. 9 81. 0 73. 8 76. 6 86. 6 79. 8 PLF 67. 9 77. 2 77. 3 74. 8 75. 0 81. 0 77. 1 FTK Growth 54. 0% 29. 8% 15. 3% 44. 9% 39. 6% 24. 2% 26. 5% FTK Growth 46. % 35. 1% 12. 6% 48. 2% 34. 1% 29. 4% 28. 3% AFTK Growth 23. 3% 20. 5% 2. 1% 25. 3% 17. 9% 5. 9% 12. 2% AFTK Growth 14. 8% 14. 8% -4. 6% 24. 9% 15. 8% 0. 6% 6. 8% RPK = revenue per kilometer; ASK = available seat kilometer; PLF = passenger load factor; FTK = freight tonne kilometer; AFTK = available freight tonne kilometer Source: http://www. iata. org/pressroom/facts_figures/traffic_results/Pages/2010-07-28-01. aspx 27 References Air France KLM 2010, viewed 25 July, 2010, . Allen, R. , 1990. SIA: Take-off to Success. Singapore: Tien Wah Press. British Airways, 2010.
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