American Airline Group Inc External Assessment

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Singapore Airlines Ltd

External Assessment

TIM 350- Introduction to Tourism Transportation

Spring 2018

March 2, 2018

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A. Introduction

An external assessment of Singapore Airlines is to identify threats and opportunities that

would have impact on their company and is the process of evaluating the company’s external

environment. The purpose of this external assessment is to clarify where the company has been

situated within the airline industry and to collect significant data that could affect the company’s

performances. This external assessment will be helpful for understanding of Singapore Airline’s

performances based on analyzing its external environment. This external assessment is also

completed with important information of recent local, national, and international trends in each

of five most crucial elements for the external assessment that include economic, social, political,

technological, and competitive forces.

Company History

Singapore Airlines (SIA) is the national airline of Singapore and one of the most

recognized airlines in the world due to its distinctive advantages. The company’s history is

connected to the historical relationship between Great Britain and Malaya. Singapore Airline’s

origin was Malayan Airways Limited (MAL) back in the day when Great Britain colonized

Malaya.

In 1936, the British government and Imperial Airways localized air transport in

Singapore and Malaya by forming Malayan Airways Limited (MAL). That was the time when

Singapore was still in a part of Malaya called as Malaysia now. In 1957, Malaya was liberated

from Great Britain, and it resulted many changes on MAL. The Malayan government operated

MAL by themselves, and they began to offer service to many countries in Asia.

In 1965, Singapore achieved its independence from Malaysia. During that time, Malayan

government wanted to focus on domestic routes while Singaporean government to expand its air

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transportation all around the world. For this reason, Singapore Airlines separated from Malaysian

– Singapore Airlines and was incorporated as an independent carrier in 1972. The governments

of Singapore and Malaysia acquired the individual control on their airlines in which they could

operate their own flight services domestically and internationally. Singapore Airlines went

through tough time because they did not have stable infrastructure itself to compete with many

big airline companies in the world. In the early 1980s, Singapore Airlines continued to expand

their services to many other destinations by partnership with British and the United States. In

1990s, SIA still climbed with affiliating with Delta, Air Canada and Swiss Air through

promoting the brand itself as Singapore Airlines over the globe. (Press, 1999)

With its technological advantages that Singapore Airlines has, the company has grown up

and has expanded its business influence on markets in many continents. Now, Singapore Airlines

is a well-known global carrier that operates its services to 93 destinations in the world.

Business Summary

Singapore Airlines (SIA) is the flag carrier of the country of Singapore with routes to

Asian, Europe and North America and is based on Changi Airport, which is awarded as the

number one international airport in the world in 2015. SIA’s subsidiaries have four main

operating segments to include airline operations, engineering services that provide airframe

maintenance and other technical ground handling services, cargo operations, and other services

that include training of pilots, air charters, and tour wholesaling. Singapore Airlines provides

outstanding customer services by putting much efforts to upgrade their aircraft and technology.

SIA is 54% owned by Singapore government with minor shareholdings by Delta Airlines and

Swissair. SIA operates its services over 90 cities in 40 countries and is known as one of the

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world’s most profitable airline companies through overcoming many recessions that affected in

the airline industry.

B. External Assessment

Economic Forces

Singapore’s GDP recently grew by 3.6 percent from the fourth quarter of 2017 to 2018.

Improvement in manufacturing sector has largely contributed on GDP growth. Since airline

industry is significantly related to economic growth, Singapore Airlines could have taken

advantages from this economic growth. This opportunity will affect SIA’s business positively in

the year of 2018 as it has been up lately. (Zacks, 2018)

For the foreign exchange risks, Singapore Airlines is affected by the fluctuations in

foreign exchange rates because they are in many parts of businesses in the world. It is one of the

threats that SIA faces, and the volatility of Singapore Dollars against other currencies, such as

the US dollar, Euro, Japanese Yen, and Australian dollar, is affecting SIA’s finance. When it

comes to the business transactions in foreign currencies, the company’s investment in

international subsidiaries and affiliates and assets and liability is being exposed to exchange

risks. In 2015, the company experienced a loss of Singapore Dollars 17.7 million from the

business transactions in foreign currencies. (Park, 2017)

Higher oil prices have been expected to be an issue in the airline industry in the world in

2018 as well. In 2017, the last two months were the most expensive months throughout the year

of 2017. Jet fuel prices for the fourth quarter of 2018 are 15% higher than the first quarter of

2017 in which many airlines could not forecast accurately. In 2017, Organization of the

Petroleum Exporting Countries (OPEC) and Russia contracted to control global crude oil output,

and it has squeezed the supplies of global oil. (Brockwell, 2018) For these reasons, jet fuel prices

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are expected to be expensive in the global oil market that can threaten Singapore Airline’s profit

margins.

Social, Cultural, Demographic, and Environmental Forces

In terms of world-wide air travel demand, the International Air Transport Association

(IATA) saw that industry-wide revenue passenger kilometers (RPKs) increased by 7.6 % in

2017. Alongside great global economic conditions in the world, 2017 was the year of increased

demand for both air passenger and freight volumes. Total industry-wide available seat kilometers

(ASKs) increased by 6.3 % in 2017 compared to 2016. These facts apparently prove that the

demand of airline industry has been grown recently. (IATA Economics, 2018)

In September 2017, Singapore Airline’s passenger load factor rose by 1.2 % compared to

2016. The main reason of increasing load factor was strong traveling demand in India, Maldives,

China, and Southeast Asia. . (“Singapore Airlines passenger numbers..”, 2017) When it comes to

the demand for flights between India and Singapore, Singapore Airlines has been dealing with

meeting the huge demand for India market since they have seen the increase in load factor from

India market. India market is one of the fastest growing aviation markets in the world with large

population, and India’s air travel demand worldwide in 2016 reached 23.3 percent, which is the

highest growth percentage. It will consistently help SIA increase their profit.

Also, the Singapore-China market has grown rapidly with a consistent increase in

Chinese visitor number to Singapore since 2014. The passenger traffic between Singapore and

China increased by 12% in 2017. The number of domestic and international air travel made in

2016 was 486 million, which is substantially beneficial for increasing carrying capacity between

China and Singapore. Singapore Airlines can use these opportunities to attract more passenger

from the main market as they have done so far.

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Changes in social habits like an increase in customer’s fear of traveling could bring on

negative impacts on Singapore Airlines. The fear of traveling from safety issues and epidemic

caused a significant negative impact on Singapore Airlines as other global airlines faced.

Continued terrorist attacks in Europe seem to be a threat to Singapore Airlines. Europe is one of

the main markets of SIA, and SIA operates their services with 14 destinations in Europe and

about 30 % of SIA’s seat capacity. In November 2015, Paris attacks in France and the rise of

terrorist group, such as ISIS caused security concerns in the world. After terrorist attacks on

certain city with Europe, SIA has seen more empty seats in Europe-bound flights. In 2017, the

loads to Europe was significantly lower than 2016, which has dropped down 2.9% (from 74.8%

to 71.9%). (“Singapore Airlines’ earnings to take a massive hit…”, 2016)

Political and Governmental Forces

Singapore Airlines is a government-owned company by the Singapore government

investment with 54% of voting stock. This means that the Singapore government activities or

policies regarding protection of domestic industry, privatization, and other political factors can

affect Singapore Airlines directly. Since it is considered as a national carrier in Singapore,

Singapore Airlines is under contract to Federal Aviation Administration (FAA) and Department

of Transportation regulations. The FAA is in charge of managing licensing requirement for both

aircraft and components under Federal Aviation Act of 1958. This stringent regulation made the

company to operate the inspection by the FAA with a possibility of penalties and fines. In

addition, SIA may need to recruit more pilots due to the timing and amount rest periods for pilots

at work, which increases costs.

In addition, Singapore Airlines is required to get an approval from Singapore government

regarding expansions of their international businesses. The process of minimizing the

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government regulation is a threat for them because SIA has been through pressure from the

government with expanding their business overseas. Due to a political barrier in India, Singapore

Airlines had to withdraw their bid for a stake in Air India. In 2005, Singapore Airlines

experienced difficulties from receiving approval by Australia government to invest into the

Australia market as well.

Labor costs in Singapore increased to 117.10 Index Points in the fourth quarter of 2017,

which is higher than the average 99.01 Index Points from 1980 until 2017. In general, the labor

cost is comprised of 35% of the total of airline’s operating expenses approximately. Many

airlines try to reduce their expenses on lesser expenses, such as marketing, handling luggage,

maintenance, etc. An increasing in labor costs puts financial pressure on Singapore Airlines since

Singapore’s labor costs has increased continually. Although, there are some ways to cut costs to

be more profitable, Singapore Airlines might be very difficult to control cutting labor costs to

enhance the productivity of their employees. The reason why the increasing labor cost is a

significant threat for Singapore Airlines is that the company is owned by Singapore government.

This means that the company must follow the government’s policies, which include designating

shift time for pilots. This makes the company suffer to control the labor costs. (“Singapore

Labour Cost”, 2018)

Technological Forces

Advances on technology enables to break down barriers in the global airline market.

Online shopping and e-commerce have been growing, and global e-retail sales hit the amount of

1.9 trillion U.S. dollars in 2016. (“Online-shopping and E-Commerce…”, 2018) It is also

expected to grow more than ever. Singapore Airlines could have taken benefits from this fact.

Online shopping and mobile shopping have been recently rising with an increased number of

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customers using their mobile devices. Singapore Airlines took steps forward to initiate new

online shopping mall in June 2014. Through utilizing Singapore Airlines’ membership program,

which is KrisFlyer, the online shopping mall is enabling KirsFlyer members to purchase

clothing, food, electronics, and other various items while also earning KrisFlyer miles. As the

online shopping trend seems to be important to consider in the airline industry, this will be a

great opportunity for Singapore Airlines to maintain their business.

Blockchain technology enables to go beyond financial transactions, and it has been in the

spotlight recently. It is a disruptive force to be estimated with in aviation and other industries in

particular by intermediaries. Singapore Airlines plans to adapt this new technology in six

months, and it will enable its frequent flyers to use their miles for point-of-sale transactions. This

new technology has great benefits for SIA. It would cost Singapore Airlines and extra seat

whenever a customer decides to redeem his miles for a free flight unlike their previous rewards

programs made a burden for SIA. This is a big cost for Singapore Airlines, which costs over

$700 million of deferred revenue due to the huge amount of miles seating to be redeemed.

However, a blockchain based loyalty program will be saving this cost due to the usage of miles

done by its customers. It will reduce the company’s financial burden that causes from redeeming

miles because the company can immediately sell the miles in the market for cash even though a

customer redeems a huge number of miles. For this reason, this new technology will be a

opportunity for SIA to reduce their costs in rewards programs. (Delahunty, 2018)

Competitive Forces

Intense competition between airlines is one of the main threats that Singapore Airlines

has faced from both direct competitors and indirect competitors.(H, 2017) Examples of

Singapore Airline’s competitors include Emirates, Cathay Pacific Airways, All Nippon Airways,

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and plenty of new budget airlines such as JetStar, Qantas Airways, and Tiger Airways. Some of

these airlines fly on the same routes with Singapore These competitors have threatened SIA in a

way that some offer cheaper fares, improved customer service, flexible flight schedules,

alternative routes served, safety record and reputation, and frequent flyer programs.

For one of the SIA’s competitors, Qantas Airways’ changed their capacity on some of the

key cities that are essential materials for Singapore Airlines 2017, which includes Sydney-

Singapore-London route as well as the Melbourne-Singapore route. As SIA has to compete with

Qantas, SIA has concerned that consistent pressure on the yields and experienced a 3.1% drop in

passenger yields during the first quarter of 2017. (Chan, 2017) For the recent impacts on the

company’s finance, the intense competition with strong Middle Eastern carriers, such as

Emirates and Qantas, now seems more serious to Singapore Airlines. In 2017, the stock of SIA

slumped 7.3 % and erasing $663 in market value, which is the biggest since August 2010.

Singapore Air group, which includes Singapore Air, also experienced a net loss of $105.4

million due to the competition. (Vishnoi, 2017)

C. External Factor Evaluation Matrix

Opportunities Weight Rating Weighted

Score

1. Growth in Singapore’s GDP by 3.6 % from 2017 to 2018

will help SIA take advantages in their business. (Zacks, 2018)

0.09 2 0.18

2. Positive outlook towards Singapore travel from India and

China is looking forward a continuous increase in profits as

SIA experienced the outcome in a 1.2% increase of passenger

load factor in 2017 due to the increased traveling demand

from those countries. (“Singapore Airlines passenger

numbers..”, 2017)

0.12 4 0.48

3. A continuous increase in world-wide air travel demand

with a 7.6% of increased Revenue Passenger Kilometers in

2017 would be beneficial for SIA. (IATA Economics, 2018)

0.10 2 0.20

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4. As the global e-retail sales hit 1.9 trillion U.S. dollars in

2016, online shopping is expected to grow more than ever,

and SIA has operated their own online shopping mall since

2014. (“Online-shopping and E-Commerce…”, 2018)

0.08 2 0.16

5. SIA will launch a blockchain based rewards programs,

which enables SIA to save over $700 million of deferred

revenue due to the huge number of miles waiting to be

redeemed. (Delahunty, 2018)

0.09 2 0.18

Threats

1. The fluctuations in foreign exchange rates have affected

SIA adversely, such as a loss of Singapore Dollars 17.7

million in 2015 from international business transactions.

(Park, 2017)

0.09 2 0.18

2. Increasing jet fuel prices now, which is 15% higher than

2017 might threaten SIA’s profit margin. (Brockwell, 2018)

0.13 3 0.39

3. Labor costs in Singapore increased to 117.10 Index Points,

which is higher than the average throughout decades, and this

would make SIA suffer from controlling their expenses.

(“Singapore Labour Cost”, 2018)

0.08 1 0.08

4. A fear of traveling after terrorist attacks, such as Paris

attack in 2015 and other security problems has threatened

SIA’s business as they have seen a 2.9 % drop in the loads to

Europe in 2017. (“Singapore Airlines’ earnings to take a

massive hit…”, 2016)

0.10 3 0.30

5. Intense competition with Middle Eastern and low-cost

carriers might be a challenge for SIA to maintain their market

value and stock as they have seen 7.3% slumped stock in

2017. (Vishnoi, 2017)

0.12 4 0.48

Total 1.00

2.63

After conducting the external assessment of Singapore Airlines Ltd, the company got a score

of 2.63, which is a little bit above the average score of 2.5. There are many opportunities that

SIA can take advantages of and also threats that could affect their business adversely. Overall,

the strongest opportunity for Singapore Airlines would be the positive outlook to increasing

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demand from their main markets, such as China and India for maintaining their business. The

most significant threat would be considered as intense competition with Middle Eastern and low-

cost carriers. Even though the competition in the airline industry is getting intense and there are

many things to concern in terms of their finance, it would be possible to improve their business

better with concentrating on squeezing costs and building up a stable internal system that could

minimize their external threats.

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D. References

Brockwell, B. (2018, January 2). OPIS Blog. Retrieved February 27, 2018, from

http://blog.opisnet.com/stronger-2018-jet-fuel-prices-expected

Chan, SJ. (2017, September 05). Singapore Airlines to face increased pressure as competition

heats up down under. Retrieved February 27, 2018, from

https://www.theedgesingapore.com/singapore-airlines-face-increased-pressure-

competition-heats-down-under

Delahunty, T (2018, February 5). Singapore Airlines To Use Blockchain Technology For

Frequent Flyer Program. Retrieved February 27, 2018, from

https://www.newsbtc.com/2018/02/05/singapore-airlines-to-use-blockchain-technology-

for-frequent-flyer-program/

H. (2017, May 25). SIA has lost market share and needs new strategy. Retrieved February 27,

2018, from http://www.straitstimes.com/singapore/sia-has-lost-market-share-and-needs-

new-strategy

IATA Economics. (2018, February 13). Retrieved February 27, 2018, from

http://www.iata.org/publications/economics/Reports/afm/Airlines-Financial-Monitor-Jan-

18.pdf

Is Singapore Airlines blockchain-based loyalty program a good move for consumers and the

company? (n.d.). Retrieved February 27, 2018, from

http://www.thedrum.com/opinion/2018/02/15/singapore-airlines-blockchain-based-

loyalty-program-good-move-consumers-and-the

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Market analysis of airline company SINGAPORE AIRLINES. (2015, March 23). Retrieved

February 27, 2018, from https://www.ukessays.com/essays/marketing/market-analysis-

of-airline-company-singapore-airlines-marketing-essay.php

McCaffrey, C. (2014, June 10). Airline Spotlight: Singapore Airlines - Travel Blog by

FlightNetwork. Retrieved February 27, 2018, from

https://www.flightnetwork.com/blog/spotlight-singapore-airlines/

Online-Shopping and E-Commerce worldwide: Statistics & Facts (n.d.). Retrieved February 27,

2018, from https://www.statista.com/topics/871/online-shopping/

Park, K. (2017, July 27). Singapore Airlines Returns to Profit. Retrieved February 28, 2018,

from https://www.bloomberg.com/news/articles/2017-07-27/singapore-air-returns-to-

profit-says-outlook-is-challenging

Press, J. (1999). International Directory of Company Histories, Vol. 27.Retrieved February 27,

2018, from http://www.fundinguniverse.com/company-histories/singapore-airlines-ltd-

history/

Singapore Airlines passenger numbers, load factor rose in August. (2017, September 15).

Retrieved February 27, 2018, from

https://www.channelnewsasia.com/news/business/singapore-airlines-passenger-numbers-

load-factor-rose-in-august-9221116

Singapore Airlines’ earnings to take a massive hit amid spate of Europe attacks. (2016, July 16).

Retrieved February 27, 2018, from http://sbr.com.sg/aviation/news/singapore-

airlines%E2%80%99-earnings-take-massive-hit-amid-spate-europe-attacks

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Singapore Labour Costs 1980-2018 | Data | Chart | Calendar | Forecast. (n.d.). Retrieved

February 27, 2018, from https://tradingeconomics.com/singapore/labour-costs

U. (2015, March 14). SWOT Analysis of Singapore Airlines. Retrieved February 27, 2018, from

https://hubpages.com/business/SWOT-Analysis-of-Singapore-Airlines

Vishnoi, A. (2017, May 22). Singapore Airlines Tumbles Most in Six Years After Surprise Loss.

Retrieved February 27, 2018, from

https://www.bloombergquint.com/business/2017/05/18/singapore-airlines-reports-

surprise-loss-on-cargo-provisioning

Zacks Equity. (2018, February 15). ETFs in Focus as Singapore GDP Exceeds Expectations.

Retrieved February 27, 2018, from https://www.nasdaq.com/article/etfs-in-focus-as-

singapore-gdp-exceeds-expectations-cm922544