Issues in Global Marketing.
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singapore_airlines.pdf
38 • CASES IN THE ENVIRONMENT OF BUSINESS
It was July in 2003. Mr. Chew Choon Seng, the CEO of Singapore International Airlines (SIA), put away the analyst reports that he had been poring over. Mr. Chew had just taken over the job of CEO from Mr. Cheong, who had retired after a long and spectacularly successful tenure at the helm of one the world’s most admired airlines. Mr. Chew’s initial tenure was, however, fraught with challenges. Reeling from the fallout of the SARS (Severe
Acute Respiratory Syndrome) outbreak in Singapore, Hong Kong, China, and neighboring regions which decimated passenger traffic, SLA had laid off over 400 employees in June to bring down its operating costs. An additional 156 cabin crew staff were laid off in late July. Senior man agement salary cuts averaging 22% had been announced, and negotiations were on with cabin and ground staff for further wage cuts. SARS, unfortunately, accompanied the outbreak of hostilities in Iraq, which itself dampened traffic through the prime Middle East markets. Faced with rising breakeven load factors,’ the company appeared to have no choice but to trim its operat ing costs. However, these moves were viewed with widespread skepticism since SIA had the full backing of its majority shareholder, the Government of Singapore, a stance that the unions deemed unfriendly. Some believed that the company was using SARS and the Iraq war
as convenient excuses to downsize. Analysts feared that these moves could have a negative impact on employee morale and, consequently, on passenger service, the hallmark of SIA’s business strategy. SIA had built its enviable track record around
its superior strategy of differentiation. While this approach had worked for a long time, there were some chinks in the armor that were becoming evident. Competitors had been quick to copy many of the remarkable service innovations pioneered by SIA. The avenues for tangible dif ferentiation that SIA had used in the past had become the norm. Every major air carrier now offered a choice of meals in economy class, innovative entertainment options in the cabins, and all the trappings of luxury that used to be the sole domain of SIA. Of particular concern was the increasing competition from international carriers headquartered in neighboring countries, such as Thai Airways, Cathay Pacific, Malaysian, and Qantas. These earners had learned to dupli cate some ofthe key features of SIA’s competitive strategy, from recruitment to in-flight service and fleet management. This placed growing pressure on the firm to refine its differentiation strategy. Low-cost carriers were beginning to make
their presence felt in Asia for the first time. Some local fimis such as Air Asia and Virgin Bluewe ramping up to offer regional low-cost services .
THUNDERBIRD THE GARVIN SCHOOL OF INTERNATIONAL MANAGEMENT
SINGAPORE INTERNATIONAL AIRLINES: PREPARING FOR TURBULENCE AHEAD
Prepared by Professor Kannan Ramaswamy Copyright 0 2004 Thunderbird, The Garvin School of International Management. Al) rights reserved.
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along sectors that SIA had dominated for a long time, The Government of Singapore had recently authorized a new low-cost start-up to be based in Changi, the heart of SIA’s empire. The govern ment had also suggested that it might sell its 57% stake in SIA. This, some believed, would force SIA to compete on an even keel with other air lines. All along, they had felt that the unfair part nership between the government and SIA gave the company access to deep pockets—a charge that SIA had consistently denied. The company had begun to spread its wings
into major international markets a few years earlier with the acquisition of ownership inter ests in Air New Zealand and Virgin Atlantic. The Air New Zealand deal turned sour and SIA lost $157 million. Market watchers believed that the 49% ownership stake in Virgin that had cost SIA $1.6 billion in 1999 had already lost over 60% of its value. It was rumored that there were fonnidable obstacles in architecting a smooth partnership between the disparate, albeit service- oriented, cultures ofVirgin and SIA. Mr. Chew, it appeared, had his work cut out
for him. He faced the challenging task of redefin ing the competitive strategy of SIA in turbulent times.
TIm INTERNATIONAL AIRUr.m INDUSTRY
The airline industry, traditionally, has been frag mented, primarily due to the limiting effects of national and international regulations. Constrained by landing rights and local ownership require ments, even large airline companies have only been able to develop dominance over their own regional markets at best. With the exception of the United States, dominant national flag carriers, typically owned by the national governments, have remained the only locally owned international carriers in their countries. However, the coinpeti tive dynamics in this industry started to change dramatically during the late l990s. Deregulation, privatization, and the advent of new technologies started to reshape the industry on a global level. The United States deregulated its airlines
in 1978 and has since witnessed heightened
The Dependence ofProfitability on Industry Structure • 39
competition and aggressive jockeying for market position. Europe entered the throes of a similar escalation of competition following the creation of the European Union and the disbanding of country-specific barriers to free-market competi tion among air carriers. In Asia, deregulation occurred in fits and starts, with some major regions allowing greater access to foreign cam ers. For example, Japan made major strides in deregulation after selling off its shares in the then state-owned Japan Airlines, and permitted All Nippon Airways to serve international markets. In Latin America, many of the smaller national flag carriers were privatized. Countries such as Mexico and Argentina infused significant levels of market competition in their airline industries by removing anticompetitive barriers and priva tizing their national airlines. The trend seemed certain to gain further
momentum. The major European nations were already in discussions with the United States to implement an open transatlantic market area where landing rights would be determined by free-market forces rather than regulatory policy. Open-skies agreements are bilateral agreements between countries that agree to provide landing and take-off facilities for air carriers originating in any of the partner countries. Such an agree ment does not have the typical restrictions related to landing rights that are determined on a city-pair basis. For example, Singapore and the U.S. had signed an open-skies agreement under which a Singapore carrier could travel to any destination city in the U.S. and vice versa. The twin trends ofprivatization and deregula
tion resulted in an increasingly global approach to strategic positioning in this industry. Although most large carriers still retained their regional dominance, many forged alliances with other leading carriers to offer seamless services across wider geographic areas. These alliances made most of the larger airline companies into de facto global organizations. With increasing geographic reach and decreasing regulatory barriers, many of the regions were witnessing acute competi tion, often in the form of fare wars. Consumers, in general, became much more price-sensitive than ever before. In attempting to keep up with
r
I
40 • CASES IN THE ENVIRONMENT OF BUSINESS
the competition, many carriers upgraded their service offerings, contributing to declining yields in a price-conscious market. Chronic excess capac ity worldwide only exacerbated this situation. Not surprisingly, there was a decline in passen ger revenue yield in all geographic regions, and the airlines were fighting an uphill battle to extract higher levels of efficiencies from their operating structures.
The Rise ofAlliances
By the late l990s, alliances between air cam ers in different parts of the world had become the norm rather than the exception. By 2004, most of the leading carriers around the world were part of mega-alliances which had evolved to include several carriers under a single alliance brand. The Star Alliance, for example, included ten carriers representing Asia-Pacific, North America, Latin America, and Europe. Oneworld, a similar net work of partnerships, encompassed eight carriers spanning a similar geographical territory to Star. Alliances such as these were expected to redirect traffic, increase profitability, help leverage scale economies in operations, and differentiate ser vices in the minds of consumers who wanted to buy travel services through a single carrier. While they did seem like a wonderful strate
gic option even to established carriers, alliances brought their own set of thorny issues. There were invariably questions relating to level of service across carriers, safety records of the partners, and willingness to cede control to an alliance. The key issue seemed to be the diffi culty in developing a consensus about how the partners would establish common safety, service, and performance standards. Further, in the European markets there was a potential for cross shareholdings between carriers as privatization accelerated. It was feared that this could create a parallel network that might undercut alliances. Since individual airlines were typically allowed to negotiate side deals with other carriers on their own irrespective of their alliance member ship, the likelihood of inter-network rivafry was also high.
History and Culture of Singapore Singapore witnessed bountiful growth and
had become the envy of many neighboring coun tries by the late 1990s. Its per capita GNP increased by a phenomenal 32% in the 1990s, and currently stood at $37,401. Much of the growth in modern Singapore could be traced back to the policies and priorities established by Mr. Lee Kuan Yew, the most powerful Prime Minister in the country’s history. He was able to tap the patriotic spirit of his people when he announced his intent to develop Singapore to rival Switzerland in terms of standard of living. His emphasis on superior education standards, a controlled labor environment, and significant outlays for training and development all helped to enhance the quality of human capital. At the end of 2002, Singapore boasted a literacy rate of 93.7%, among the highest in the region. Singapore’s Confucian work ethic dovetailed very well with Kuan’s ambitions. It emphasized responsibilities over rights and placed enormous value on attributes such as hospitality, caring, and service. As a result of these efforts, Singapore in 2004 ranked among the best countries in terms of human capital and was often rated among the world’s friendliest places to do busi ness. Rising standards of living meant higher wages. Coupled with the small size of the local population and a very low unemployment rate, the availability of labor was seen as a potential stumbling block in the drive toward further growth. Many of the larger companies already depended on a sizable number of expatriates from neighboring countries, as well as the West, to staff positions. A staunch believer in free trade and internally
driven growth, Mr. Lee made it clear from the start that the “world does not owe Singapore a living.” For example, in the air transportation sector, Mr. Yew’s government declared that SIA, although the national carrier, would not receive any subsidies or protection from the government. It would have to sink or swim based on its own
SINGAPORE INTERNATIONAL AIRLINES
I I
L_ -
I
- — - .
_ _ _
_ _ _
C at ha y Pa ci fi c
M as ay s.i a A ir bn es
Q A N TA S
S4 ng ap or e
— —
m a:
20 00
20 07
20 02
20 03 E
20 00
20 01
20 02
2t 20 3E
20 00
20 01
20 02
20 03 E
20 00
20 01
20 02
20 03 E
20 00
20 01
20 02
20 03 E
C ap ac It y
Fl ee t S tre ng th (N a. )
64 75
79 80
93 97
10 0
10 0
14 7
17 8
19 3
19 6
92 93
92 96
79 81
81 81
A va ila bl e AT K
11 63 0
11 82 7
12 82 0
13 57 6
75 31
80 55
76 24
79 78
11 11 7 12 18 7 12 31 7 12 50 6
16 91 7
18 03 4
18 30 5
19 77 4
77 52
84 90
87 52
90 22
Pa ss en ge r A SK
61 90 9
62 79 0 63 05 0
57 24 9
48 90 6
51 23 8
52 59 5 54 26 6 85 03 3 92 94 3 95 9. 44 99 50 9 67 72 8
92 64 8
94 55 9
99 56 6 55 51 7
60 45 9 6 3 1 9 8 6 6 0 6 1
O ve ra ll RT K
86 50
82 01
95 22
82 84 .1 4
48 53
53 79
51 50
54 97
17 18
18 59
15 98
15 30
12 03 8
12 98 5
12 73 5
14 06 0
54 69
58 18
60 27
62 44
Pa ss en ge r R PK
47 15 3
44 79 2
49 04 1 35 30 95 2 34 93 0
38 31 3
34 70 9 37 65 3 64 14 9 70 54 0 75 13 4 77 22 5 65 71 8
71 11 8
69 99 5
74 18 3 41 34 7
45 18 7
46 57 1
50 87 4
L oa d Fa ct o4 s
O ve ra ll (O LF )
75 %
70 %
76 %
64 %
65 %
67 %
66 %
69 %
71 %
72 %
70 %
71 %
71 %
69 %
69 %
70 %
Pa ss en ge r (P LF )
76 %
71 %
78 %
64 %
71 %
75 %
66 %
69 %
75 %
76 %
78 %
78 %
75 %
77 %
74 %
75 %
75 %
75 %
74 %
75 %
B re ak -E ve n L oa d
63 %
70 %
65 %
71 %
66 %
67 %
71 %
71 %
65 %
66 %
67 %
66 %
Y ie ld
O ve ra ll (f /R TK )
44 .8
42 .5
42 .2
39 .8
66 .0
68 .0
64 .9
64 .5
19 .4
21 .0
20 .4
20 .3
P as se ng er (c /R P K )
6. 1
5. 8
5. 7
5. 4
10 .9
11 .3
11 .3
11 .2
9. 1
9. 4
9. 0
9. 1
2. 1
2. 2
2. 2
2. 2
C ar go (1 R TK )
24 .8
22 .2
21 .6
20 .3
33 .7
34 .2
32 .2
34 .2
11 .6
12 .1
11 .3
11 .7
O pe ra ti ng C os ts
St af f (J A T K )
7. 6
7. 7
9. 5
9. 9
4. 7
5. 2
6. 0
6. 4
12 .9
14 .3
10 .0
11 2
4. 6
5. 2
5. 5
6. 5
6. 0
6. 0
6. 0
6. 5
Fu el ($ /A TK )
6. 5
6. 0
5. 5
6. 0
3. 5
5. 2
6. 0
6. 1
4. 9
7. 5
7. 0
6. 9
4. 6
6. 7
5. 5
6. 6
5. 5
5. 5
5. 5
6. 0
M ai nt en an ce (4 /A T K )
2. 8
3. 1
3. 2
2. 6
11 .6
11 .6
13 .0
13 .6
17 .9
20 .9
22 .0
23 .1
3. 1
2. 4
4. 1
4. 6
2. 7
2 2. 3
2. 3
T ot .O pe r.C os ts lA T l(
28 .7
29 .2
28 .2
26 .6
43 .7
45 .4
44 .9
45 .5
45 .2
32 .1
32 6
36 .6
F in an ci al .
S al es (l oc al cu rr.
- m )
34 52 3
30 ,4 36
33 09 0
28 21 9
82 88 .3
92 61
96 95
88 94
91 07
10 18 8 10 66 8 11 37 5
88 99
99 51
94 48
10 51 5 12 33 52
12 91 73
12 90 15
12 71 80
O pe r. In co m e
52 89
83 2
47 50
— 28 50 .1 19 -2 5 5 7
— 13 30
-8 36
33 9. 1
87 4
69 6
68 0
56 7
11 40
13 47
48 2. 3
71 7
14 93 2
12 22 7
18 68 8
15 28 2
O pe r. M ar gi n %
15 .3 2%
2. 73 %
14 .3 5%
— 10 .1 0%
— 3. 09 % — 14 .3 6%
— 9. 61 % 3. 61 % 9. 60 % 6. 83 %
6. 26 % 4. 98 %
12 .8 1%
13 .5 4%
5. 10 %
6. 82 %
12 .1 1%
9. 47 %
14 .4 9%
12 .0 2%
Br iti sh A w ay s
L uf th an sa
K LM
A IR FR A N C E
SW IS S
20 00
20 01
20 02
20 03 E
20 00
20 01
20 32
29 03 E 2
29 01
20 02
20 03 E
20 00
20 01
20 02
20 03 E
20 00
20 01
20 32
In di ca to r
A va ila bI eA T K (b n)
25 .8 4
25 .5 8
22 .8 5
21 .3 3
23 .5 6
23 .9 4
22 .7 6
22 .5 7 13 .1 2 13 .1 8
12 .6 9 12 .9 5
0. 91
0. 85
5. 15
Pa ss en ge rA SK
(b n)
16 8. 36
16 6. 66
15 1. 05
13 9. 17
12 2
12 8
12 0
12 0
76 .0 5 75 .2 2
72 .2 9 74 .8 2
10 2. 30
11 0. 28
11 6. 46
11 9. 60
6. 5
6. 25
31 .5 2
Pa ss en ge r Lo ad
69 .8 %
71 .2 %
70 .4 %
71 .9 %
71 .3 %
71 .0 %
74 .0 %
72 .0 % 77 .0 % 80 .0 %
79 .0 % 79 .4 %
76 .0 %
78 .0 %
76 .0 %
76 .0 %
71 .8 %
52 .8 %
71 .0 %
Fa ct or
lY ie ld (C JR TK )
47 .0 1
49 21
51 .2 8
49 .3 3
1. 39
1. 31
1. 40
1. 26
47 .1
51 .7
51 .4
51 .5
0. 22
0. 16
0. 22
O pe ra tin g C oa t.
St af f
24 81
24 91
24 09
21 07
36 25
44 81
46 60
45 68
36 93
16 75
17 47
19 07
20 29 5
34 36
37 38
38 56
11 07
31 3
98 3
Fr ie l
80 4
98 4
10 28
84 2
24 37
16 21
13 00
13 16
14 31
10 38
98 3
88 6
66 68
16 25
14 43
13 69
35 5
17 4
55 1
M ai nt en an ce
66 1
64 0
67 3
59 2
15 33
75 7
68 6
69 7
29 25
59 8
65 2
47 7
54 1
17 11 7
To t O pe ra tin g C os ts
86 56
92 27
84 50
73 93
15 40 4
18 50 5
17 50 0 17 80 0 62 01
66 83
66 26
66 18
38 64 2
10 90 0
11 20 4
10 68 7
59 05
16 84
53 04
E xh ib it
1 K ey Fi na nc ia la nd O pe ra tin g St at is tic s fo r G lo ba lA ir Pa ss en ge r C ar rie rs
(C on tin ue d)
a— • _ .
E xh ib it 1
K ey Fi na nc ia la nd O pe ra tin g St at is tic s fo r G lo ba lA ir Pa ss en ge rC ar rie rs
So us re : A nn ua l R ep on s. S. G . Se cu nt ie s R es ea rc h. A BN
A m ro .
N ow : D ef in iti on of te nn s in A pp en di x.
8 ? . - S • ; i i
; . .
;c 7c c
- . _ . : ° :1
B rit is h A in sa ys
L uf th an sa
K LM
A IR FR A N C E
SW IS S
20 00
20 01
20 02
20 03 E
20 00
20 01
20 02
20 03 E V X ) 20 01
20 02
20 03 E
20 00
20 01
20 02
20 03 E
20 00
20 01
20 02
Fl ns nc la ls
S al es (lo ca l cu rt . -m
) 80 92
85 58
83 40
76 88
18 88 8
16 69 0
16 97 1
15 14 4 13 87 5 69 60
65 32
64 85
67 72 9
12 28 0
12 52 8
12 68 7
64 14
12 82
42 78
O pr . in co m e (m )
92 2
10 67
-1 10
29 5
14 82
-3 16
15 92
-2 38
20 9
27 7
-9 4
-1 33
23 55
44 3
23 5
19 2
10 8
-9 09
-2 99
O pr .M
ar gi n %
11 .4 %
12 .7 %
— 1. 3%
3. 8%
8. 8%
— 1. 9%
9. 4%
— 1. 6%
1. 5%
4. 0%
— 1. 4%
— 2. 1%
3. 5%
3. 6%
1. 9%
1. 5%
1. 7%
— 70 .9 %
— 7. 0%
U SA
U ni te d
A m er K .a n
D el ta
N or th w es t
U S A irw ay s
2 20 01
20 02
20 00
20 01
20 02 2
20 01
20 02 2 0 0 0 2 0 0 1 2 0 0 2
20 00
20 01
20 02
C e
P as se ng .r A S M (b n)
17 5. 49
16 4. 85 14 8. 83
16 1. 03
17 4. 69
17 2. 2
15 4. 97
14 7. 84 14 1. 72 10 3. 36
98 .3 6 93 .4 2
66 .5 7
68 .7 4
56 .3 6
A du af f ll e
P as ae ng eR A S M (b n)
12 6. 93
11 6. 64 10 9. 46
11 6. 59
12 0. 61
12 1. 75
11 3
10 1. 72 10 2. 03
79 .1 3
73 .1 3 72 .0 3
46 .8 9
45 .9 8
40 .0 4
Pa ss en ge r Lo ad
72 .3 0%
70 .8 0%
73 .5 0%
72 .4 0%
69 .4 0%
70 .7 0%
72 .9 0%
66 .8 0%
72 .0 0%
76 .6 0% 74 .3 0% 77 .1 0%
70 .4 0% 68 .9 0% 71 .0 %
Fa ct or
P as se ng er Y le ld
13 .2 5
11 .7
10 .8
14 .0 6
13 .0 8
11 .8 6
13 .8 6
12 .7 4 12 .0 8 12 .0 4
11 .2 4 10 .7 6
16 .1 3
14 .3 2
13 .0 5
(it /R PM
)
O p. ra tt ng C os t. (m )
St af f
67 30
70 80
70 29
67 83
80 32
83 92
59 71
61 24
61 65
36 10
39 63
38 78
36 37
37 26
32 55
Fu el
25 11
24 76
19 21
24 95
28 88
25 62
19 69
18 17
16 83
18 72
17 27
14 39
12 84
11 03
78 2
M ai nt en an ce
69 8
70 1
56 0
10 96
11 65
11 08
72 3
80 1
71 1
64 0
66 9
57 6
50 4
53 2
40 5
To t. O pe ra tin g C os ts
18 69 8
19 90 9 17 12 3
18 32 2
21 43 3
20 62 9
15 10 4 14 99 6 14 61 4 10 84 6 10 77 3 10 33 5
93 22
99 71
82 94
F in an cl al s
S al es (I oc al cu rr .- m )
19 35 2
16 13 8 14 28 6
19 70 3
18 96 3
17 29 9
16 74 1
13 87 9 13 30 5 11 41 5 99 06
94 89
92 69
82 88
69 77
O pr . In co m e (m )
65 4
-3 77 1 -2 83 7
13 81
-2 47 0
-3 33 0
16 37
-1 60 2 -1 30 9
56 9
.8 68
-8 46
-5 3
-1 68 3
-1 31 7
O pr .M ar gi n%
3. 4%
-2 3. 4% -1 9. 9%
7. 0%
-1 3. 0%
-1 9. 2%
9. 8%
-1 1. 5% -- 9. 8%
5. 0%
8 .8 %
-8 .9 %
-0 .6 %
-2 0. 3%
-1 8. 9%
r resources and ingenuity. Singapore literally adopted a free-skies approach whereby foreign flag carriers from other countries were welcome to serve the city-state without any restrictions. This meant heightened competition for SIA right from the start. However, the free-market philoso phy also resulted in sharper rates of market giowth. For example, roughly 35% of the equity base of Singapore was foreign in origin, and foreign investors owned 17% of all companies in the country, both testaments to the successful piograms that attracted foreign capital and corn inerce to the island nation. Tourism played a very significant role in the
overall development of the country. Handicapped by small size and the lack of natural resources, Singapore had to rely on service industries such as tourism and finance to generate growth. It had always enjoyed an enviable status as an important geographic hub dating back to the pre-British colonization era. During its history as a British colony, Singapore provided an important stop-off point for travelers from Europe and Britain to the outlying colonies ofAustralia and New Zealand. Building on this historical reputation, Singapore evolved into an important Asian tourist hub.
Singapore International Airlines: The Company
STA traced its roots to an organization called Malayan Airways that offered its first commer cial passenger service in May 1947. The modern incarnation of SIA was born in 1972 when the Malaysia Singapore Airlines was officially split into two new airline companies, SIA and Malaysian Airlines System (later called Malaysia Airways). The long association with the Malaysian counterpart had proved to be quite beneficial to the fledgling company. The crews gained signif icant flight experience operating over rough geo graphical terrain in Southeast Asia. Their safety records were impeccable. This association also provided SIA personnel with crucial operating experience ranging from flight operations to matters of administrative importance. As part of
The Dependence ofProfitability on Industry Structure • 43
the split, SIA got half the combined assets, most of the overseas offices, its headquarters building in Singapore, and a fairly new computer reserva tion system. By early 2003, SIA reached over 90 destinations in more than 40 countries in Asia, Europe, North America, the Middle East, the Southwest Pacific, and Africa. Its subsidiary, Silk Air, served feeder routes and reached 24 destinations in the South/Southeast Asian region. It was promoted as the choice for vacation trav elers looking to travel short distances between various points of tourist interest in the region, such as Penang, Siam Reap, and Yangon. SIA had established an enviable record both
in terms of its operational performance and its profitability history. It was one of the few Asian airlines that had continuously posted profits even during lean years such as the 1 990s economic downturn in Asia. Its short-term performance record had, however, begun to flag as a result of SARS, the war in Iraq, and the general economic malaise that had taken hold of most of its critical markets. It was against this backdrop that the company had to debate alternative courses of action.
On the Ground SIA’s legendary commitment to superior ser
vice began on the ground. It built a network of wholly owned subsidiaries and joint ventures to provide operational support in areas such as cater ing, terminal management, and aircraft mainte nance. These subsidiaries were largely managed as autonomous entities that had to bid for orders from the parent and were rated number one in many of their core areas. The Singapore Airlines Terminal Services (SATS) subsidiary was one of the largest in the group. It offered a variety of ter minal management services including catering, passenger and baggage handling, and ramp opera tions. SATS operated one of the largest flight kitchens in the world at Changi International Airport, producing an average of 45,000 meals a day. It had an impressive client list that included British Airways, Quantas, Lufthansa, and Japan Airlines and served more than 70% of all airlines
44 • CASES IN THE ENVIRONMENT OF BUSINESS
flying into Singapore. SATS had also gone global through joint ventures in Beijing, Hong Kong, Ho Chi Minh City, Macau, Chennai, Male, Manila. Osaka and Taipei. The Changi International Airport was indeed
a crown jewel for SIA. Given its status as a national flag carrier, SIA occupied a pride of place at Changi, an airport that it also managed. The airport itself was rated among the best in the world by several global organizations. It often got top honors for its people-handling efficiency and cleanliness. For example, SIA made a promise to deliver a passenger’s baggage within ten min utes after arrival in Changi and consistently delivered on that promise. Such a high standard would have been difficult but for the excellence of its subsidiary network, especially SATS. Changi was also the headquarters of SIA Engineering Company, a subsidiary that provided aircraft maintenance and engine overhaul services. As a testament to its engineering prowess, many global carriers engaged SIA Engineering to service their fleets. SIA Engineering also had a global presence through joint ventures with reputable companies such as Rolls-Royce and Pratt & Whitney. The obsessive attention to detail began the
moment the passenger decided to travel on SIA. The company was at the forefront of introducing electronic ticketing through its Web site. Online ticketing was being rolled out across all destina tions in its network. To make it easy on the pas sengers, the company introduced automated check-in systems on certain flights that tended to attract a large number of travelers. It embraced technology in a variety of forms, allowing check- in via e-mail, telephone, and fax. The Silver Kris Lounge that SIA offered its first-class and raffles-class (business-class) passengers could be best described as “an oasis of peace and quiet”3 amidst the hustle and bustle of the airport. It featured an environment with plush armchairs, deep-pile carpeting, aquariums, tropical gardens, and a decor that included original paintings by Singapore artists. Top-of-the-line business equipment such as computers, fax services, and a stock ticker were standard amenities. It was one
of the largest and most luxurious airport lounges in the world.
Fleet Acquisition and Management
Singapore Airlines came a very long way from its origins as a company that had a fleet of just ten aircraft serving a network of 22 cities. By 2003, it operated a fleet of 97 aircraft, almost all of them capable of long-haul, large-capacity flights. It had 28 more on order and was in line to be among the first companies to buy the 500-plus passenger, double-decker megaliner that Airbus would unveil shortly. It had planned its fleet acquisitions judiciously such that its fleet average was a little over five years old.4 It was the world’s largest operator of the Boeing 747-400 Megatops, a roomy aircraft capable of long-distance flights. Among the largest air car riers in the world, Delta Airlines came closest to SIA in terms of fleet age, with an average of roughly eight years. Most of the other carriers had large segments of their fleets in the 14+ years range.5 Maintaining youth in its flight operations was no small achievement. ft was a facet ofcompetition that SIA took very seriously. It maintained an office in Seattle, Washington just to interface with Boeing designers and over see the development of new additions to the SIA fleet. Newer aircraft were typically more fuel efficient and less maintenance intensive than older generations. SIA used a mix of leasing and outright purchase, primarily during economic lulls, to feed its appetite for new fleets, thus extracting maximum value for its investment. SIA emphasized fleet selection because of
strong signaling value. Newness implicitly sig naled the potential customer that s/he could expect top-of-the-line technology, comfortable seating, and a safe trip, all of which were critical aspects around which differentiation could be built. SIA designed aircraft interiors that encom passed the latest amenities. For example, it was among the first to offer a personal video screen in every seat, even in its economy class. Its in-flight entertainment system, KrisWorld,
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The Dependence ofProfitability on Industry Structure • 45
channels, and ten Nintendo game channels at ‘ivery seat, with a Dolby surround-sound system that was specially designed for SIA. Its first- class cabins became the gold standard in the industry. They were outfitted with armchair-type seats that converted into comfortable beds at the push of a button. Clad in Connolly leather (the company that supplies leather products to Rolls Royce, Ferrari, and Jaguar) and trimmed in burl wood, the seats included built-in communication devices and an inflatable air mattress. The cabin row provided a turn-down service where the bed linen was replaced on long trips. The famous French fashion house, Givenchy, designed all the serviceware. SIA tried to convey this air of exclusIvity in its other cabins as well. Even in coach class, the seats were wider than average, with spacious leg room, leg rests, video screens, and ergonomic headrests. As part of its drive to be a top-notch air earner, SIA gathered several firsts along the way. In 1991, it was the first transcontinental carrier to introduce in-flight telephones using advanced communications technology. It was the first with the Dolby surround-sound and personal video screens in coach. It was the first to offer fax services in the air. The list goes on. Plans were under way to upgrade the communications package to allow Internet access while in the air. It premiered an on-demand entertainment system called WISE- MEN in its first-class and raffles-class cabins as early as 1990. This system was designed to func tion just like a personal home theater, featuring a range of movies and entertainment options that each passenger could individually choose and control.
The Softer Side of SIA The company firmly believed that its employ
ees were the primary drivers of the success that it enjoyed in the marketplace. Through a deft mixture oforganizational culture, indoctrination, and ritual, SIA was able to meld the human assets into a formidable source of competitive advantage. A large number of its employees came from Singapore and Malaysia. As of 2003,
it employed 14,000 people worldwide, and was the largest private sector employer in the country. The company established an extensive SIA Training Center in Singapore that served as the focal point for training programs targeted at cabin crew, commercial staff, flight crew, and flight operations personnel. SIA executed a finely tuned recruitment
and training strategy to keep its ranks stocked with exceptional talent. Most of the employees arrived at the company either through a cadetship (similar to an internship) program that attracted generalists, or a specialist program geared to functional experts in areas such as computer ser vices and finance. The cadetship was an inten sive on-the-job training program that cycled employees through a variety of functions as they moved up the hierarchy. SIA’s commitment to employee training and development was reflected in the fact that it spent roughly 14 times as much per employee as the average Singaporean com pany. The company instituted a system of proven controls and mentoring guidelines that heLped the employees develop their potential to con tribute to the success of the organization. Over time, this built an enormous sense of cama raderie among the team, a very strong sense of identity and belonging, where the employees truly took pride in their organization. Although the employees had been quite accommodating in negotiating wage cuts during periods of economic crises, the cuts in 2002—2003 left a bad taste. The normally friendly unions had publicly expressed concern over the layoffs and salary reductions that followed in the wake of SARS and the Iraq war. Many among the rank and file viewed these actions as self-serving and suspect since the company had achieved close to normal passenger loads after the specter of SARS had faded. This distrust was indeed disturbing and seemed to spread across all ranks of employees from pilots to ground crew. It was the first time in recent memory that the company had to lay off employees in significant numbers. The pool of talent with respect to pilots was
indeed global. SIA had pilots from over fifty countries flying its fleet. Many of these pilots
I
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1
46 • CASES IN THE ENVIRONMENT OF BUSINESS
were expatriates drawn by the allure of flying the latest equipment under professional working conditions at very generous levels of compensa tion. The company operated its own flying col lege with facilities in Jandakot, Australia, that focused on improving training efficiency and producing qualified pilots. The college served as an incubator for developing Singaporean pilots to meet SIA’s growing demands. The company had a state-of-the-art flight training facility in Singapore which housed eight flight simulators where pilots were trained. All flight personnel were required to go through mandatory biennial proficiency checks. It was generally believed that the training programs, in this regard, were quite well administered, as reflected in the very high levels of safety that the company was able to achieve. It was the long-term intent to induct more Singapore nationals into the cockpit, a daunting proposition, especially since the number of local pilots available was quite low. This was augmented by graduates of the Singapore Armed Forces (SAF) which trained pilots for defense purposes. After completion of the mandatory employment with SAF, some of the trained personnel took jobs with SIA. Roughly half of SIA’s pilots were expatriates. Normally, the expatriates were more expensive since the company had to bear a variety ofexpenses such as housing, schooling for children, travel, etc., in addition to base pay. The complement of cabin crew was chosen
through a very rigorous selection process. SIA considered them to be the brand ambassadors who should reflect the high standards of service excellence that its passengers expected. Although they were drawn from many ethnicities within the South/Southeast Asian region (mainly Malaysia, India, Japan, Korea, Taiwan, and Indonesia), they were mostly Singaporean. This recruitment strategy posed a stumbling block since the pool ofavailable talent within Singapore was insufficient to draw from for long. Given the fact that SIA had some of the lowest labor costs among leading carriers, this home-based cost advantage had proven to be a critical ingredient in the success of the company. Any fall-off in the
availability of local talent could adversely impact operating costs, especially if it necessitated the increased recruitment of expatriate personnel. Such a move would also raise questions about how globalizing its workforce would fit in with its historic branding approach, “The Singapore Girl.” When SIA was formed, it had to compete against other airlines that had much more sophis ticated fleets and passenger options. In combat ing this handicap and to distinguish itself in the marketplace, SIA launched the Singapore Girl as the embodiment ofcaring, comfortable, hospitable service. It also played well to the Oriental mys tique that was then prevalent in the Western world where the company sought to establish a footing. The image of the Singapore Girl was carefully
nurtured. It began with a rigorous selection process and extensive training soon thereafter. The training program emphasized aspects such as passenger handling, social etiquette, and grooming. While no different on the surface from other competitors, the SIA program was far more intense and demanding. For starters, it lasted much longer than competitors’ training programs and embraced some nontraditional aspects. For example, many of its cabin crew spent extensive periods of their training program in homes for the aged to gain a better appreciation ofthe special needs of this fast-growing passenger segment. The company’s approach to molding attitudes and service-oriented behaviors transcended mere internalization of a set of physical practices and dos and don’ts by the cabin crew. The arduous training process was to be repeated periodically through preplanned refresher courses so that the crew could get acquainted with new cabin man agement technologies and service standards. Once in the fold of the organization, there was a marked effort on the part of management and staff to help each employee perform at his/her best potential. Various practices, such as detailed performance reviews and feedback at all levels, careercounseling, and performance-based reward systems, were designed toward this end. SIA was able to take advantage of local labor
laws and practices in staffing cabin positions.
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The Dependence ofProfitability on Industry Structure • 47
About 60% of the cabin staff was female, and it was expected that most of them would only fly for five to ten years. While male cabin crew members were employed as regular employees, female crew had to work through a system of five-year renewable contracts. Only five such contract renewals were permitted.6 SIA’s in-cabin service became legendary;
the standard that other airlines aspired to reach. In a recent survey by Condé Nast Traveler, a well-respected travel magazine, SIA was ranked overall as the “Best International Airline.” This was the tenth time that SIA was chosen for the prestigious honor in the eleven years that the award had been given. The respondents rated SIA’s cabin service as the best in the world, a tes tament to the company’s emphasis on excellence in this arena. Such awards were nothing new for SIA, which had garnered over a hundred from august organizations such as Zagat, Condé Nast, OAG Worldwide, ASEAN (Association of South East Asian Nations) Tourism Association, and magazines such as Asia Money and Business Traveller.
COMPETING IN THE NEW MILLENNIUM
By the late 1990s, competition in the airline busi ness had become decidedly global, although very few carriers could legitimately claim to be global earners. Carriers in the Asia-Pacific region had taken a page from the SIA playbook in offer ing premium services at consistently low fares. Those in Europe and North America had strength ened their positions through alliances. SIA had already taken some important steps to fortify its position globally. It had joined the Star Alliance, a powerful network of carriers that included Lufthansa, United, Ansett, Air New Zealand, All Nippon Airways, South Africa Airways, Air Canada, Thai, Varig, and SAS. It was believed that this would allow the members to offer code- sharing services, fine-tune traffic flows to increase revenues and efficiency, and combine their buying power to negotiate favorable terms for securing
inputs such as food and allied services. Translated from an SIA perspective, this opened several destinations that SEA did not yet serve. It could take advantage of code sharing to carry a greater number of passengers to destinations within Europe and the United States. For example, it served only four major cities in the U.S., Los Angeles, San Francisco, Las Vegas, and New York. Hence, the relationship with United could extend that limited set of destinations to encompass a considerably larger number of primary and sec ondary cities. A similar argument could be made with respect to leveraging the new relationship with Varig to fly to more destinations in South America, a region that was not well represented in SIA’s route structure. However, despite the obvious advantages, the alliance network did bring with it some concerns. It remained to be seen whether the other net
work carriers would be able to rise to the levels of SIA’s hallmark service standards. Should there be shortfalls, it was quite likely that the brand image that SIA had so carefully nourished could be tarnished, especially among its loyal first-class and business-class passengers. Joining a network amounted to delegating some aspects of brand management to the collective group of companies such that the identity of the network would transcend the individual identities of the members. The loss of control over some key decisions, such as scheduling and flight fre quency, could also pose challenges in the future. It also raised critical questions about the imitability of core competences. Would the part ner firms be able to learn more about the critical aspects of SIA’s recipe for sustainable competi tive advantage?
Equity Partnerships In balancing growth potential against the abil
ity to control the alliance, SIA acquired an 8.3% equity stake in Air New Zealand to cement a long partnership with the New Zealand carrier. Since Air New Zealand already owned 50% of Ansett Airways, SIA would have the benefit of the additional alliance with Ansett as well. It was
48 • CASES IN THE ENVIRONMENT OF BUSINESS
expected that these moves would strengthen SIA’s position in the Australasian market that was growing significantly. However, this grand design crumbled when Air New Zealand’s for tunes started turning sour. The govmment of New Zealand injected capital to shore up the company, but this had the negative effect ofdilut ing SIA’s ownership position. In very short order, SIA was left with a sizable loss and had to beat a hasty retreat from this initial foray to establish control of the key Australia-Asia routes. In late 1999, the company had made a bold
move to acquire 49% of the equity ofU.K.-based Virgin Atlantic Airways for $1.6 billion. This was considered a fairly steep price to pay for a deal that offered little operating control in the near term for SIA. However, the company felt that the partnership would cement SIA’s ability to leverage Virgin’s transatlantic routes, among the most lucrative worldwide. Virgin was also well-known for its exacting service standards, and consistently turned up in the number two spot behind SIA in most surveys ofcustomer sat isfaction. The partnership, however, did come with its own baggage. Virgin had clearly stated that it would not consider joining the Star Alliance, thus placing SIA in a delicate position. This meant that SIA would invoke the ire of other alliance partners should it favor Virgin over United and others for channeling some of its transatlantic passengers. Sir Richard Branson, the founder and CEO of
Virgin, had imbued his company with an aggres sive style of management. The company was a trendsetter and known for breaking traditional barriers in its march toward recognition. Mr. Branson himself was a bit of a publicity seeker and seemed to revel in periodically taking con troversial public positions. For example, when British Airways decided to retire its fleet of the supersonic Concorde jetliners, Mr. Branson offered to pay £1 in exchange for the fleet, believ ing it was a fair price for BA, which had been virtually given the fleet for free by the British government. Some believed that the swashbuck ling management style of Virgin contrasted sharply with the button-down conservative style of SIA. Soon after the partial purchase of Virgin
was completed. Branson announced plans to move into the Australasia market with low-cost services through a new company named Virgin Blue. He offered SIA the opportunity to partici pate in the venture, but SIA passed on the deal since it felt that it had already established signif icant market presence with its partial ownership of Air New Zealand. This proved to be a costly decision. When the Air New Zealand deal failed to bear fruit for SIA, the company was left with no viable alternative to capitalize on growth in the region. It was rather ironic to see that Virgin Blue was posting very good returns in that region. As the company was itself reeling from the
misfortunes of the post-9/l 1 era, its alliance part ner, Virgin, was going through a similar trough that required fresh injection of capital. The part ners had to plough in more funds at a particularly difficult time. It remained to be seen how well the partnership would be able to weather the sequential shocks that plagued global aviation.
Low-Cost Camers in Asia
Unlike the U.S. and Europe, Asia had been slow in responding to the phenomenon of low cost carriers. Propelled by the success ofcompa nies such as easyJet and Ryanair in Europe and Southwest and Jet Blue in the U.S., many new competitors were setting their sights on the Asian market. Historically, the Asian market seemed immune to the low-cost approach, given the tra ditional barriers to entry such as the longer flight distances, fewer alternative airport options, and lower passenger densities. However, in recent times many of these barriers had begun to fall, and some legitimate low-cost carriers were jock eying for position. There were at least six main contenders in the market as ofearly 2003, and an additional player was gearing up for entry using Singapore as a base. Based on the experience of large network carriers in Europe after the advent of easyJet and Ryanair, the large players in Asia, such as SLA, were bound to face incredible pricing pressures. Many of the new players were focusing on South Pacific and East Asian routes, prime SIA territory.
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The Dependence ofProfitability on Industry Structure • 49
Air Asia and Virgin Blue were credible threats. Air Asia was based in Malaysia and offered services at highly discounted rates to domestic destinations within the country. Its operations model used Kuala Lumpur as its cen tral hub, but plans were on the anvil for expand ing into Johor, a location that was within driving distance from Singapore. Although it had a very small tleet ofonly seven Boeing 737s, it planned to carry close to two million passengers by 2004. Its attractive fares would certainly drive traffic its way. For example, it was offering a round-trip ticket from Kuala Lumpur to the resort island of Penang for US$10, while its closest competitor, Malaysia Air, charged US$101 for the same trip. Network carriers were suddenly at a disadvantage. Air Asia also boasted that it had the lowest cost base of any passenger airline in the world at US2.5 per available seat kilometer compared to US5. I for SIA. Air Asia was set to bring the competition to SIA in the near future. It had recently scouted Changi International and Seletar Airport in Singapore to explore the possibility of setting up operations there. The company suggested that it would offer a one-way fare of US$28 from Changi to Kuala Lumpur, a sector where SIA was currently charging US$109. A group of investors in Singapore had mar
shaled a substantial amount ofmoney to mount a low-cost carrier to be named ValuAir that would operate from Singapore. The company, the brain child of former SIA Deputy Chairman Mr. Lim Chin Beng, promised to be a formidable competi tor in the near future. Virgin Blue, an offshoot of Virgin Airways,
had captured 30% of the domestic Australian market within three years. In its aggressive rise to market dominance, Virgin Blue acquired con trol over blocks of gates and terminal space in key airports such as Sydney. This all but elimi nated the possibility of another carrier besides Virgin Blue and Qantas, the national flag carrier, from building rival air service networks in that country. Virgin Blue was also contemplating service offerings from Australia to New Zealand and Fiji. In the very short period of time thatVirgin Blue was active in Australia, it had demonstrated
how vulnerable network competitors were to low-cost competition. Qantas was at the receiv ing end of this onslaught in Australia and wound up losing a significant chunk of its market share. It was clear that SIA could not wish away the impending threat.
THE FUTURE OF SIA
Mr. Chew Choon Seng had a host of challenging competitive issues ahead of him. How should SIA continue to differentiate itself from the copycats who seemed to be doing a very cred itable job at imitating SIA in terms of cabin ser vice and amenities? What new signaling devices could SIA harness to set itself apart from the competition? The very people who had been instrumental in helping the company become the best in its class were now disgruntled after the staff cuts and salary givebacks. They would somehow have to be motivated once again to help SIA ride the successive waves of crisis. It was of paramount importance to stem the threat of low-cost competition before it became a larger phenomenon. How should the emergence of low-cost carriers be addressed? SIA was at a crossroads in its history. The next few strategic moves would determine whether it would rise from its status as the best Asian airline to become a global player commanding the respect of the world’s largest carriers.
Noms
I. Breakeven load factor is an industry measure of capacity that must be earned for the flight to break even.
2. Government of Singapore, Department of Statistics, www.singstat.go’.
3. BBC program. 4. Fleet data and age obtained from www
.singaporeair.com. 5. Asian Airline Analyzer, UBS Investment
Research, June 2003. 6. J. Clark. “They Enjoy Being a ‘Girl,” USA
Today, November 19, 2002.
50 • CASES IN THE ENVIRONMENT OF BUSINESS
APPENDIX
Available Seat Kilometers (ASK) A measure of seat capacity available defined by the number of seats multiplied by kilometers flown
Available Seat Mile (ASM)
Available Ton Kilometer (ATK) A measure of capacity expressed in terms of aircraft payload multi plied by kilometers flown
Break-Even Load Factor Unit cost per ATK divided by overall yield—provides an indication of the load factor needed for the airline to break even at the oper ating profit level
Cargo Load Factor (CLF) Cargo load in RTKs expressed as a percentage of ATKs which indicates utilization of total capacity
Overall Load Factor (OLF) Total passenger and cal-go load expressed as a percentage of total passen ger and cargo capacity (ATKs) which indicates utilization of total capacity
In early June 1999, the management of the Swatch Group could be satisfied with the com pany’s accomplishments over the last 15 years. Thanks to its 14 brands and unusual approach to marketing, and with 116 million finished watches and movements produced in 1997, the Swatch Group had helped resuscitate the Swiss watch industry and become, in value terms, the world’s largest watch manufacturer. Despite an enviable track record, there was a growing sense of anxiety over the future of the company in an
Passenger Load Factor (PLF) Passenger Load Factor in RPKs is expressed as a percentage of ASKs which indicates utilization of seat capacity (RPKIASK)
Revenue Passenger Kilometers (RPK) A passenger traffic measure expressed as the total number of pas sengers carried multiplied by kilometers flown
Revenue per Available Seat Mile (RASM) Also referred to as unit revenue. Represents how much a carrier made spread across all seats that were available
Revenue Ton Kilometers (RTK) The total traffic carriage measured by the revenue-generating weight (in tons) of load carried multiplied by kilometers flown
Unit Cost Expenditure required to produce a unit of capacity expressed in cents per ATK for cargo or cents per ASK for passengers
Yield Amount of revenue generated by each unit of load expressed in cents per RTK for cargo or cents per RPK for passengers
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SWATCH AND THE GLOBAL WATCH INDUSTRY’
Prepared by Cyril Bouquet under the supervision ofAssociate Professor Allen Morrison
Copyright 0 1999, Ivey Management Services Version: (A) 1 999-09-23
industry that seemed to be in a perpetual state of change.
EARLY HISTORY
Until 1957, all watches were mechanical. The aesthetics of the exterior visible elements (dials, hands and case) as well as the reliability and accuracy of a traditional timepiece depended on the meticulous care and precision that had been
