_________ ___________OKOTHE SINGAPORE AIRLINES GROUP'

* Nitin Pangarkar2 *

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 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-rang-ing alliance comprising 11 airlines. The outside environment, especially within East Asia had improved, with many coun-tries 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 re-gional competitors such as Thai Airlines and Malaysian Airlines were recovering from the impact of the Asian economic cri-sis 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

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 under-taking acquisitions. Even the Star Alliance represented a significant departure from SIA's time-tested strategy of internal growth and partnerships on a limited ba-sis so as to protect its brand reputation. Finally the recent crash of flight SQ006 might tarnish SIA's excellent reputation for safety.

HistoryMalayan Airways, the predecessor of Sin-gapore 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 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

1 © 1998 by National University of Singapore. Updated and reproduced with permission fromAsian Case Research Journal (September 1998): 211-237. Also published in Business Strategyin 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, Faculty of Business Administration, National University of Singapore, 17 Law Link, Singapore117591, Tel: +65-8745299, Fax: +65-7795059, E-mail: fbapn@nus.edu.sg. Not to be reproducedor used without written permission.

Case 8 • The Singapore Airlines Group 619

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-ders at the time.3 Soon afterwards, the Los Angeles Times acknowledged SIA as "one of the world's best managed and fastest-growing 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.

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 resources5.

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-come competition from them all".6 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$800-S$1000,8 the same prices as a round-trip

3 The SIA Story. http:l I www.singaporeair.com I1 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 WesleyPublishing.

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.

620 Case 8 • The Singapore Airlines Group

Exhibit 1 Geographical Analysis of SIA's Revenues and Load Factors

Geographic area Revenues (S$ millions) Overall load factor (%)

Passenger Seat Factor (%)

North and

99-00 98-99 97-98 99-00 98-99 97-98 99-00 98-99 97-98

2453 2060 2207 65.2 59.2 57.9 71.2 66.1 63.0 South East Asia

Americas 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 1090 909 796 70.6 71.1 71.2 75.6 77.0 75.1 Pacific

West Asia 822 710 663 67.8 65.4 63.8 - 72.4 10.0 66.6 and Africa

Rvstprnwide 7942 6858 6750 71.23 68.8 69.1 74.9 72.5 70.5

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

ticket from Singapore to Los Angeles. Simi-larly a round-trip ticket from Singapore to Kuala Lumpur costs S$290, though the fly-ing time each way was less than one hour.

Though it did not provide any direct assistance to SIA, the Singapore Govern-ment helped it gain fair access to other markets. The then Prime Minister of Sin-gapore, Mr Lee Kuan Yew, had intervened on SIA's behalf so that it could receive fair treatment for serving routes in Australia, Malaysia and Indonesia (e.g., Bali).9

The Government had also not hesi-tated to build the necessary infrastructural facilities. It spent almost S$1.5 billion (at 1981 prices) for completing the first phase of the ultra-modern Changi Airport. SIA also had substantial investments in Changi Airport, to the tune of S$500 million. These investments, however, were mostly related to its facilities such as hangar, mainte-

nance centre and catering centre, among others.10

StrategyDeployment of TechnologySIA maintained the youngest fleet of air-craft of all the major international carri-ers. The average age of SIA planes was about five years and two months as of March 31, 2000, compared to the industry average of 13 plus years. Being younger, SIA's planes were more reliable, quieter and roomier. SIA was also the first airline to recognise the demand for more non-stop services that offered travellers, especially businessmen, uninterrupted travel to long-haul destinations.

On October 14, 1995, SIA took deliv-ery of its 34th 747-400 and became the larg-

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

Case 8 • The Singapore Airlines Group 621

Exhibit 2 SIA's Financial Results*

1999-2000 1998-99 1997-98 1996-97 1995-96

Total revenue 8,899 7,796 7,724 7,222 6,890Total expenses 7,759 6,942 6,725 6,326 5,845Operating profit 1140 854 999 896 1045Surplus 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 171

Surplus on liquidation of Abacus Distribution System ________ 14 ___ ________ ________Profit before tax 1,464 1,117 1,172 1,076 1,082Profit after tax and minority interests 1,164 1,033 1,039 1,032 1,025Profit attributable to shareholders 1,164 1,033 1,035 1,032 1,025CU.,,.n ,~nni*il . . . . . j L I tip 1 i U 1 1,351 1,283 1,283 1,283 1,283Distributable reserves 7,421 8,652 7,844 7,312 6,566Non-distributable reserves 2,286 2,286 2,254 1,947 1,947Shareholder's funds 10,958 12,188 11,380 10,542 9,796Fixed assets 11,882 11,667 11,398 11,054 9,792Associated companies 306 223 103 95 73

JV companies 188 153 126 73 43

Long term investments 547 943 937 840 812

Current assets 3,528 4,181 3,145 2,459 2,476Total assets 16,451 17,168 15,707 14,521 13,195Long term liabilities 567 566 523 464 442

Current liabilities 3,741 3,370 3,171 3,073 2,521Total liabilities 4,307 3,954 3,695 3,537 2,962Net liquid assets 1,647 2,493 1,512 844 1,101Cash flow through operations 2,429 1,773 2,070 1,975 1,976Internally generated cash flow 3,239 2,798 3,144 2,345 2,006Capital expenditures 1,912 2,053 2,121 2,450 1,573Per share data Earnings before tax (cents) 115 87 91 84 84Earnings after tax (cents) 91 81 81 80 80Cash 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 Case 8 • The Singapore Airlines Group

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

Destination cities (No.) 118 110 77 77 77

Passengers carried (OOOs) 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 l?.9fi«

Value added per employee 290,160 226,304 235,451 220,440 1

209,332 a 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 effi-ciency than the 747-200 or the 747-300. SIA was one of Boeing's leading customers for large commercial aircraft. In 1994, the air-line purchased 22 per cent of the total pro-duction of the B747-400. In 1996, SIA be-came the launch customer for the A340-300E which was said to have the quietest cabin in the sky.11 In March 2000, SIA's op-erating fleet comprised 92 aircrafts.

SIA was also at the forefront in the area of in-flight entertainment. For in-stance, its entertainment system, Krisworld, offered a six-inch video screen and a combination remote control unit-cum-telephone, fitted at every seat

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 com-mercial 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-

11A Corporate Profile of SIA 1997. Public Relations Department, Singapore Airlines.12 SIA Annual Report, 1999-2000.13 Chang, Yeong and Loh, The Quest for Global Quality, op. cit.

Case 8 » The Singapore Airlines Group 623

mated systems at Singapore's Changi Air-port that dramatically expanded passen-ger 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 FacilitiesSIA has always maintained the philosophy of putting the customer first. In the words of Mr Michael Tan Deputy Managing Di-rector (Commercial) of SIA:

We believe that to succeed, an airline must be a service innovator rather than a price-leader. Being customer-oriented 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 conven-tional 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. Sev-eral 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,

two business centres, four full-serv-ice 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 trav-elling to selected destinations in the U.S. The travellers' particulars were transmitted to the U.S. Immigra-tion 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 des-tination 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 Shokado Bentoserviceware.

In November 1996, SIA introduced Internet check-in for First Class, Raffles Class and Priority Passen-gers flying out of Singapore.

It also operated a centralised infor-mation system known, as Central-ised Baggage Tracing unit, which enabled more effective manage-ment of mishandled baggage.18

By the end of 1999, all SIA aircraft were equipped with automatic ex-ternal defibrillators — life saving equipment that could revive pas-sengers experiencing sudden car-diac arrest.19

14 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.

17

624 Case 8 • The Singapore Airlines Group

By March 2000, SIA had launched local websites in 16 countries and SIA's e-ticketing facility was avail-able 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.

MarketingSIA had been running the highly recog-nised Singapore Girl campaign for several yoprp. Independent studies had consist-ently rated the SIA advertising as having an extremely high recall rate among cus-tomers.20 SIA's advertisements also rou-tinely stressed the fact that its fleet was the youngest in the world.

Cargo and Related OperationsCargo revenues constituted almost 20 per-cent of SIA's revenues. With revenues of S$l,909 million for the year ended March 2000, SIA was the third largest cargo air-line in the world in terms of international freight tonne kilometres.

During the 1999-2000 fiscal year, SIA's other activities, besides transport of pas-sengers and cargo, accounted for about 15.8 per cent of its total revenue. These activi-ties included airport operations, kitchen operations and maintenance operations (see Appendix 2). Related operations also contributed 26 per cent of SIA's total prof-its.21

Alliances and AcquisitionsOver the years, SIA has signed several al-liances. The following discussion, however identifies only a few major cooperative ven-tures. In 1989, SIA entered into a trilat-eral alliance with Delta Airlines and SwissAir to form a global network span-ning 300 cities in more than 80 countries. From SIA's point of view, the alliance of-fered 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, shar-ing 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 impor-tant European hubs such as Paris, Frank-furt 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 comprehen-sive alliance. The alliance would cover a wide area of commercial cooperation, in-cluding code-sharing, network and sched-ule development, frequent flyer pro-grammes, product development, ground-handling, customer service, information technology and cargo operations. Lufthansa would use Singapore as a pri-mary hub in Southeast Asia and Australa-

20 Singapore Airlines (A), Harvard Business School Case no. 9-687-022.21 SIA Annual Report , 1999-2000.

Case 8 • The Singapore Airlines Group 625

sia, while SIA would use Frankfurt as its hub in continental Europe. "This alliance brings two of the world's top airlines to-gether with one objective: to give our pas-sengers 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 In-ternational, United Airlines and VARIG Brazilian Airlines.

In December 1999, SIA announced that it would acquire a 49 per cent stake in Vir-gin Atlantic, the holding company for Vir-gin Atlantic Airways, Virgin Holidays and Virgin's cargo operation, Virgin Aviation Services, for £551 million. SIA had the fol-lowing 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 air-lines to grow faster than either can man-age 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

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 ul-timate objective is to become a global group of airline and airline-related companies. This stake in Air New Zealand and, indi-rectly, Ansett is another important step towards that goal."23 In July 1997. Singa-pore Airlines, Air New Zealand, Ansett Aus-tralia and Ansett International announced plans for the creation of the largest inter-national alliance of airlines based in the Asia Pacific region. With its recent acqui-sitions, SIA had extended its combined reach (with its partners) to more than 200 cities around the world.

Previous SIA alliances included a code-sharing 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 al-lowed joint marketing of an all-cargo serv-ice between Copenhagen and Singapore. It had also formed an alliance with Aerolineas Argentinas to offer one of the cheapest round-the-world economy fares for a trip via the South Pacific.26

22 Singapore Airlines and Lufthansa Sign Alliance Agreement, http://www.singaporeair.com/23 Singapore Airlines' stake in Virgin Atlantic, http://www.sinagporeair.com24 Singapore Airlines and American Airlines begin code sharing flights, http: I / www.

singaporeair.com I25 Singapore Airlines and Lufthansa Cargo Expand Cooperation.. http: 11 www.singaporeair.com I26 Information regarding alliances from SIA website, http://www.singaporeair.com/

626 Case 8 • The Singapore Airlines Group

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 PoliciesLabour RelationsAlmost 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 man-agement had been neither very cordial nor very adversarial. There were occasional strains in the relationship. Some major points of contention included flying allow-ances, staying and other arrangements in overseas locations and the workload espe-cially 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

never faced a strike and the union man-agement relations were considerably bet-ter than in many U.S.-based carriers.28

However, in July 1997, NTUC (Na-tional 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 un-ions see the big picture—mainly issues re-lating to the airline's competitiveness. Soon afterwards, there was improvement in un-ion management relations. The manage-ment was able to implement several changes. They included a cut in cabin crew pi7.p for first class and requiring supervi-sors to serve meals, which they were not required to do before, for a S$300 allow-ance. 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 Ex-hibit 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

27 SIA employed about 14,000 people in its airline operations. The remaining were employed bythe group's subsidiaries.

28 In 1997, American Airlines' pilots rejected, by a 2 to 1 margin, a contract characterised by thecompany and Wall Street as the most generous in the industry. American at Bay, Air TransportWorld, March 1997, pp. 28-40.Also see, Air Transport World 1997. Will the real United please stand up? August, pp. 26-34.

29 NTUC was, by far, the largest union in Singapore. I t had a good relat ionship with the government and the NTUC chief served as a Minis ter wi thout Por t fol io in the Singapore Cabinet .

30 The Straits Times 1998. The New Face of Labour Management Relations at SIA. May 3, pp. 42-43.

31 For the four major U.S. carriers, labour costs varied from 35.5 per cent of total (United) to 37.4per cent (Delta). Air Transport World, 1997. American at Bay, op. cit.

Case 8 * The Singapore Airlines Group 627

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

Fuel costs

Depreciation charges

Rentals on lease of aircraft

Sales costs Handling

charges

Aircraft maintenance and overhaul costs

Inflight meals and other passenger costs

Landing, parking and other overflying charges

Other costs3

16.5

16.4

15.1 3.1

11.7

11.4

7.1 7.0

6.6

5.1

17.

4

14.

6

16.

6

2.6

11.

8

12.

0

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 age for male stewards was 55 years.32

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

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 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

32 Lim Gaik Eng and Ng Seok Hui. Singapore Airlines. Faculty of Business Administration, National University of Singapore.

33 Chang, Yeong and Loh, The Quest for Global Quality, op. cit., p. 185.

'

628 Case 8 • The Singapore Airlines Group

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

There were several rules regarding personal grooming, uniform care, poise and personal conduct. For instance, cabin crew were instructed not to eat onions or drink alcoholic beverages for ten hours before flight time. There were specific rules re-garding laundering uniforms, makeup and hair styling. Crew members had to report to the SIA clinic to have their teeth checked and cleaned every six months.35

SIA had also launched the "Outstand-ing Service on the Ground" programme to motivate the airline's frontline staff on the ground to provide genuine innovative serv-ice.36 Most of SIA's ground service opera-tions were handled by SATS, a sister com-pany. Every* SATS Airport Services frontline staff member was required to take the following pledge:

We, the staff of Terminal Two Pledge by these qualities towards service excellence:

To greet each passenger at the begin-ning and at the end of their journey.

To address them by name, rank or title.

To give personalised service with a friendly smile.

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 train-ing or around $5,000 per employee which was 12 times Singapore's national average. In 1993, SIA opened a $80 million train-ing centre, thus bringing all SIA's training needs under one roof.38 It conducted regu-lar reviews to ensure that its salaries were market-competitive.

Customer FeedbackTo supplement the informal channels of communication, vSTA conducted rpgiilpr passenger opinion surveys to monitor the quality of its services. Passengers were asked to rate the quality of SIA's in-flight service, food and beverages, in-flight enter-tainment, aircraft interior, airport opera-tions, reservations and ticket office opera-tions. The survey forms were designed to take only five minutes of a passenger's time and were printed in five different lan-guages to cover the widest spectrum of passengers. The survey results were ana-lysed and past and present performance regarding the Service and Performance Index was circulated to key personnel in the organisation. SIA's decision to invest S$52 million in a cabin management and interactive video system was prompted by the relatively lower ratings scored by the in-flight entertainment compared to other areas of in-flight service.39

34 Perspectives, 1998. A Symbol of SIA's Training Philosophy, April, pp. 58-59.35 Singapore Airlines (A), Harvard Business School Case no. 9-687-022.36 Lim Gaik Eng and Ng Seok Hui. Singapore Airlines case.37 Chang, Yeong and Loh, The Quest for Global Qual i ty , op. c i t .38 Perspectives 1998. Forging a Competitive Edge: The SIA Experience, April, pp. 89-91.39 Ibid.

Case 8 • The Singapore Airlines Group 629

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.

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.

Total InvolvementTo 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.

Performance Accolades and AwardsSIA was routinely recognised as one of the world's premier airlines. During the 1999-2000 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

magazine. In a survey, readers of the Conde Nast Traveler magazine declared SIA as the best airline in the world, for the elev-enth time in 12 years.

Financial PositionThe 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.

IncentivesSIA 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-

Load Factors and YieldsSIA maintained load factors of about 73-74 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 Case 8 » The Singapore Airlines Group

west (69 per cent).40 In terms of cargo op-erations, SIA maintained load factors of 68 per cent. SIA's overall break-even load fac-tor varied between 65.9 per cent (1996-97) and 62.6 per cent (1995-96). In 1999-2000 and 1998-99, SIA's passenger yield stood at 95.3 and 90.4 per cents respectively, whereas the cargo yields were 33.7 and 32.6 per cents. The slight improvement in the Financial Year 2000 was attributable to the recovery of many of the crisis-af-fected Asian economies. In general, SIA's passenger yields were lower than most other close rivals, possibly because SIA had neither a domestic market that it could dominate nor highly regulated routes (e.g., within Europe).

Future IssuesSIA faces several challenges in the near future. First, several other airlines in the region are trying to imitate SIA's success. These include Malaysian Airlines and Thai Airlines. Cathay Pacific was already com-parable to SIA in terms of service reputa-tion. Malaysia and Hong Kong have new airports that rival Changi Airport in so-phistication and amenities. New hubs in Manila, Taipei and Seoul are competing with Changi for air cargo volume and threatening Changi's position as a pre-eminent transshipment centre.41 Another challenge comes from within Singapore it-self. With increasing affluence, the salary levels within Singapore are rising rapidly. It is also harder to recruit good employees in Singapore due to a tight labour market, forcing the airline to turn to foreign coun-tries.

In addition, several internal issues have come up recently. The acquisition of

stakes in Virgin Atlantic and Air New Zea-land represents the first of such moves by SIA. In the past, it had always grown in-ternally or through alliances. The acquisi-tions pose a significant challenge to SIA since it means managing people in coun-tries that are culturally distant to Singa-pore. There are also significant differences between SIA and Virgin, in terms of their corporate culture. SIA has always been innovative but cautious, especially when its reputation is at stake. Virgin is more open to trying risky ideas. Hence the inte-gration of the new acquisitions is likely to pose a significant "challenge.

There are also concerns about the Star Alliance. While the alliance enhances the possibility of offering seamless travel to passengers, the number of partners could be an issue. With so many involved, the probabilities for divergence and disagree-ment multiply. In addition, there are con-cerns that if even one of the alliance part-ners does not provide adequate levels of customer service, the reputation of the other members will be tarnished.

On October 31, 2000, Singapore Air-lines flight SQ006, carrying 159 passen-gers, tried to take off in bad weather (heavy rains and gusty wind) from the Chiang Kai Shek Airport in Taipei. Seventy-nine pas-sengers and four crew members died after the Boeing 747 crashed into construction equipment and broke in two. The runway had been closed for construction for sev-eral months (Fate of SQ006; http: 11 cna.mediacorpnews.com/sq006'). The plane, bought in January 1997, was less than four years old and had no apparent defects. An investigation by The Austral-ian found that even though some flight at-tendants risked their lives to save people,

40 SIA statist ics from website, http: 11 www.singaporeair.com / Industry average from Air Transport World, 1/1995.

41 Changi Looks to the Future, http:11web3.asial.com.sgI

Case 8 • The Singapore Airlines Group 631

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.pore-window.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 ptuspects. 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

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 EconomicsAirline profits are a function of the follow-in̂ 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 .

42 Air Transport World, 2/97.43 Yahoo Business News 1997. World Air Travel Growing Slowly, October 9. http: I / www.yahoo.rorn I

632 Case 8 • The Singapore Airlines Group

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 busi-ness and first classes, on the other hand, is very high. Since 1980, this differential has widened considerably, due to both fall-ing 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 traf-fic (number of passengers in a particular fliyU). Since the remaining costs ^b^ «<t per cent of the total) are fixed, airlines have a strong incentive to carry additional pas-sengers (improve their load factors), even at rock-bottom prices. In their zeal to in-crease load factors, airlines compete fiercely with each other, lowering the qual-ity and predictability of any airline's oper-ating earnings. Airlines also undertake high levels of debt to finance purchases of new planes, which increase their financial risk.44

There are four major components of an airline's cost structure. These are labour, fuel, maintenance and aircraft purchase. Labour is the most significant expense for most of the airlines from the developed countries. Many airlines from developing countries are able to offer comparatively lower pay to their staff and thus could re-duce this expense considerably. Fuel ex-penses are also a significant percentage of costs. Since oil is a commodity, its price fluc-tuates significantly. Oil prices are also de-nominated in U.S. dollars, thus adding an element of exchange rate risk. Airlines

have very little control over their fuel costs. Maintenance and ground services also con-stitute a substantial percentage of an air-line's expenses. Airlines often perform rou-tine maintenance at the home base but contract with local airlines for local main-tenance capacity. As a rule, in-house main-tenance is scale-sensitive but, if the utili-sation 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 fea-sibility of maintaining in-house repair op-erations in that location.

Regulation and Government InterventionThough the extent of government interven-tion in the airline industry was declining, it is still higher than most other industries. In the international arena, the route struc-ture as well as the frequency of flights is governed by agreements between the two concerned countries (origin and destina-tion). For instance, an agreement between Thailand and Singapore might stipulate the number of weekly flights between Sin-gapore and Bangkok.45 Such agreements might also not allow a SIA flight to Bang-kok 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 Thai-land in the above example). Increasingly, however, the regulatory barriers are fall-ing. Open skies agreements between the U.S. and the European countries are lead-ing to the dismantling of the restrictions on flight frequencies. Recently, an Open Skies agreement has also been signed be-tween the U.S. and Singapore which will allow SIA to fly to new destinations in the

i4 Research on Singapore Airlines by Goldman Sachs.45 This is only a hypothetical example and does not reflect the reality in any way.

Case 8 • The Singapore Airlines Group 633

U.S. These could be served by direct flights from the home base in Singapore as well as by continuing its flights from a U.S. port of entry (e.g., New York) to other destina-tions in the U.S. (e.g., Atlanta). Under the Open Skies agreement, SIA could also de-termine its own flight frequencies.

Some other policies that were not spe-cific to the airlines industry have also af-fected it. For instance, a country's laws re-garding unions could have a tremendous impact on the wages-and-salary component of an airline's cost structure.

Industry TrendsAlliances

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 (cov-ering all the routes served by the cooper-ating airlines). Alliances also serve a vari-ety 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 in-volves 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 exten-sively computerised. Of late, functions like baggage handling are also becoming in-creasingly automated.

Over time, flying equipment has also become more sophisticated. Newer planes are bigger and can fly farther. These planes also offer better fuel efficiency over the older designs. Flying larger planes is par-ticularly essential for busy routes such as New York to Tokyo or London to Singapore. Inside the plane, technological advances have enabled customers to enjoy new fea-tures and services. They can make tel-ephone calls, send faxes and enjoy person-alised entertainment.

Strategic DimensionsAirline strategies were extremely complex and cover several interrelated factors. Dif-ferent 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 includ-ing 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 GroupThe SATS Group comprises four compa-nies - SATS Airport Services, SATS Cater-ing, SATS Security Services and Aero Laundry and Linen Services. The SATS group is in charge of Changi Airport, regu-larly voted as one of the world's best air-

634 Case 8 • The Singapore Airlines Group

ports. During the year ending March 31, 2000, SATS serviced 47 airlines at the Changi Airport and handled 21.7 million passengers. It also handled 1.4 million tonnes of cargo. As of March 2000, it had entered into ten joint ventures in nine countries including India and China. Joint , ventures accounted for 8.9 per cent of SATS' profits during the year.

SATS had recently (mid-2000) com-pleted the construction of a S$215 million Inflight Catering Centre with a production capacity of 45,000 meals daily. Construc-tion of (S$270 million) Airfreight Terminal 6 was expected to be complete in mid-2001. When completed, the new terminal would boost SATS' total cargo handling capacity

2.05 million tonnes a yo.irAirlines Annual Report, 1999-2000 and www.singaporeair.com}.

Changi Airport is widely considered the premier express freight hub in the Asia Pacific region, primarily due to SATS in-vestments and foresight.

SilkAirSIA'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

SIA Engineering CompanySIA Engineering Company has developed extensive capabilities in repairing aircraft including overhauling engines and refur-bishing aircraft components. The SIA hangar, the world's largest column-free hangar, has made SIA fully self-sufficient in airframe and engine maintenance and capable of selling engineering services at all levels to other airlines. It operates joint venture companies with Pratt and Whitney, a major aircraft engine manufac-turer, in Singapore and in Taiwan. The Sin-gapore joint ventures serve as Pratt and Whitney's exclusive Center of Excellence Facility in the Asia Pacific and Indian sub-continent.47 In March 2000, SIAEC took a 10 per cent equity stake in Kong Kong Aero Engine Service Pte Ltd which overhauled Rolls Royce and Trent engines. SIAEC does maintenance work for 56 airlines includ-ing Air India, Polar Air, Federal Express and China United. As much as 18.6 per cent of its revenues are drawn from third party work.48

Other SubsidiariesThe 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

46Yahoo News 1997. No Indication of Survivors in SilkAir Crash, December 20. http:/1 www.yahoo.com I

47 Pratt and Whitney and SIAEC Form Engine Overhaul Venture, http: 11 www.singaporeair.com I48 SIA Annual Repor t , 1999-2000.49 Ibid.

Case 8 » The Singapore Airlines Group 635

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

Study Questions1. What generic strategy is SIA following?

What factors can explain SIA'ssuccess?Optional question:Does Singapore have a nationalcompetitive advantage in terms ofhaving an international airline? (Fordiscussing the optional question, thestudents will need a fairly goodknowledge regarding the Singaporeeconomy.)

50 SIA Annual Report, 1999-2000.