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_________ ___________O K O

THE SING APOREAIRLINESGROUP'


* Nitin Pangarkar2 *

In November 2000, the Singapore Airlines as aircraft procurement and fuel. Many
group was at a critical juncture in its history. observers were also wondering if SIA had
taken on too much uncertainty. One cause
for concern was its inexperience in under-
Over the past two years, the company had taking acquisitions. Even the Star Alliance
undertaken a series of strategic initiatives. represented a significant departure from
It had made the most expensive product SIA's time-tested strategy of internal
launch in its history, acquiring a 49 per cent growth and partnerships on a limited ba-
stake in Virgin Atlantic Airways and a 25 sis so as to protect its brand reputation.
per cent stake in Air New Zealand. It had Finally the recent crash of flight SQ006
also joined the Star Alliance, a broad-rang- might tarnish SIA's excellent reputation for
ing alliance comprising 11 airlines. The safety.
outside environment, especially within
East Asia had improved, with many coun-
tries such as South Korea, Thailand and History
Malaysia, rebounding off economic lows.
This favourable external environment cou- Malayan Airways, the predecessor of Sin-
pled with the new initiatives was expected gapore Airlines, was started in 1947. The
to open up many new opportunities. There airline operated flights between Singapore,
were, other challenges, however. SIA's re- Kuala Lumpur, Ipoh and Penang, all within
gional competitors such as Thai Airlines the-then Malaya. With the formation of the
and Malaysian Airlines were recovering Federation of Malaysia in 1963, the Airline
from the impact of the Asian economic cri- was renamed Malaysian Airways and then
sis and competing vigorously for a share of Malaysia-Singapore Airlines (MSA) in
the market. The Singapore dollar remained 1966 when the governments of Singapore
weak against the U.S. dollar thus raising and Malaysia acquired joint control. By
the costs denominated in U.S. dollars such then MSA had successfully developed a

1
© 1998 by National University of Singapore. Updated and reproduced with permission from
Asian Case Research Journal (September 1998): 211-237. Also published in Business Strategy
in Asia: A Casebook (2001), Singh, Pangarkar and Lim, Thomson Learning: pp. 67-84.
This case was prepared as the basis for class discussion rather than to illustrate effective
or ineffective handling of an administrative situation.
2
Nitin Pangarkar is Associate Professor of Business Policy with the NUS Business School, Fac
ulty of Business Administration, National University of Singapore, 17 Law Link, Singapore
117591, Tel: +65-8745299, Fax: +65-7795059, E-mail: fbapn@nus.edu.sg. Not to be reproduced
or used without written permission.
Case 8 • The Singapore Airlines Group 619

route structure encompassing most of To generate earnings that provided


Southeast Asia and turned its attention to sufficient resources for investment
expanding its intercontinental network. On and satisfactory returns to share -
October 1, 1972, MSA ceased operations holders.
and Singapore Airlines became its succes -
To adopt human-resources manage -
sor. The new airline continued to serve the
ment practices company-wide that
international network of MSA and retained
attracted, developed, motivated and
all its B-737 and B-707 aircraft. The sub -
retained employees who contrib -
sequent growth of the airline paralleled the
uted to the company's objectives.
economic development of Singapore in par -
ticular and the Southeast Asian region in To maximise productivity and uti -
general. In 1978, SJA placed an order worth lisation of all resources 5.
US$900 million for 13 Boeing 747 and six
Boeing 727 planes, one of the largest or - Since the beginning, SIA had been a strong
ders at the time. 3 Soon afterwards, the Los proponent of deregulation and free compe -
Angeles Times acknowledged SIA as "one tition within the global airline industry
of the world's best managed and fastest- under which airlines could choose their
growing airlines". 4 The aircraft acquisition route structure and other aspects of serv -
ice without government intervention (See
of the most modern and youngest fleets Appendix 1). SIA's chairman, J.Y. Piliay,
worldwide. By March 31,2000, SIA was op - had once said: "We fear no airline and wel -
6
erating 613 passenger flights per week out come competition from them all". Singa -
of Singapore, up from 572 weekly passen - pore's top leaders had made it clear that
ger flights 12 months earlier. The airline's SIA could not expect any subsidies from
intercontinental route network, including the government and had to make profits if
freighter-only destinations, spanned 92 cit - it was to survive. 7 Many Asian countries,
ies in 42 countries (See Exhibit 1). In 2000, which formed important destinations for
the SIA group was Singapore's largest pri - SIA, however, heavily regulated the flights
vate sector employer. It was also routinely to and from their airports with a resulting
one of the most profitable airlines in the reduction in the "supply" of airline seats.
world. (See Exhibits 2 and 3) Consequently, the airlines operating on
SIA's broad goals and objectives had not these routes were able to charge higher
changed since its earliest days. Its goals were: prices and also enjoy higher load factors.
A discounted economy round-trip ticket for
To deliver customer service of the a 4.5 hour flight from Singapore to Bom -
highest quality that was safe, reli - bay costs, anywhere between S$800-
able and economical. S$1000, 8 the same prices as a round-trip

3
The SIA Story. http:l I www.singaporeair.com I
1
The Pursuit of Excellence: An Island and its Airline, 1978, Singapore Airlines.
5
Chang Zeph Yun, Yeong Wee Yong and Lawrence Loh 1996. The Quest for Global Quality: A
Manifestation of Total Quality Management by Singapore Airlines. Reading Mass: Addison Wesley
Publishing.
6
Mr J.Y. Piliay quoted in SIA, Take Off to Success, p. 118, Singapore Airlines, 1987.
7
Ibid.
8
In September 2000, the approximate exchange rate was S$1.75 = US$1.
620 Case 8 • The Singapore Airlines Group

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

Geographic Passenger Seat


area Revenues (S$ millions) Overall load factor (%) Factor (%)
99-00 98-99 97-98 99-00 98-99 97-98 99-00 98-99 97-98

North and 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- nance centre and catering centre, among
larly a round-trip ticket from Singapore to others.10
Kuala Lumpur costs S$290, though the fly-
ing time each way was less than one hour.
Though it did not provide any direct Strategy
assistance to SIA, the Singapore Govern-
Deployment of Technology
ment helped it gain fair access to other
markets. The then Prime Minister of Sin- SIA maintained the youngest fleet of air-
gapore, Mr Lee Kuan Yew, had intervened craft of all the major international carri-
on SIA's behalf so that it could receive fair ers. The average age of SIA planes was
treatment for serving routes in Australia, about five years and two months as of
Malaysia and Indonesia (e.g., Bali).9 March 31, 2000, compared to the industry
The Government had also not hesi- average of 13 plus years. Being younger,
tated to build the necessary infrastructural SIA's planes were more reliable, quieter
facilities. It spent almost S$1.5 billion (at and roomier. SIA was also the first airline
1981 prices) for completing the first phase to recognise the demand for more non-stop
of the ultra-modern Changi Airport. SIA services that offered travellers, especially
also had substantial investments in Changi businessmen, uninterrupted travel to long-
Airport, to the tune of S$500 million. These haul destinations.
investments, however, were mostly related On October 14, 1995, SIA took deliv-
to its facilities such as hangar, mainte- 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 6,890
Total expenses 7,759 6,942 6,725 6,326 5,845
Operating profit 1140 854 999 896 1045
Surplus on sale of aircraft 98 211 157 174 34
Share of profits of joint ventures 21 14 7 2 1
Share of profits of minority interests 33 23 9 4 2
Profit on sale of investments 171
Surplus on liquidation of Abacus
Distribution System ________ 14 ___ ________ ________
Profit before tax 1,464 1,117 1,172 1,076 1,082
Profit after tax and minority interests 1,164 1,033 1,039 1,032 1,025
Profit attributable to shareholders 1,164 1,033 1,035 1,032 1,025
.C
.U
. j.,,.
L I tip
n1,~
i Unn
1i*il . .
1,351 1,283 1,283 1,283 1,283
Distributable reserves 7,421 8,652 7,844 7,312 6,566
Non-distributable reserves 2,286 2,286 2,254 1,947 1,947
Shareholder's funds 10,958 12,188 11,380 10,542 9,796
Fixed assets 11,882 11,667 11,398 11,054 9,792
Associated companies 306 223 103 95 73
JV companies 188 153 126 73 43
Long term investments 547 943 937 840 812
Current assets 3,528 4,181 3,145 2,459 2,476
Total assets 16,451 17,168 15,707 14,521 13,195
Long term liabilities 567 566 523 464 442
Current liabilities 3,741 3,370 3,171 3,073 2,521
Total liabilities 4,307 3,954 3,695 3,537 2,962
Net liquid assets 1,647 2,493 1,512 844 1,101
Cash flow through operations 2,429 1,773 2,070 1,975 1,976
Internally generated cash flow 3,239 2,798 3,144 2,345 2,006
Capital expenditures 1,912 2,053 2,121 2,450 1,573
Per share data
Earnings before tax (cents) 115 87 91 84 84
Earnings after tax (cents) 91 81 81 80 80
Cash earnings ($) 1.86 1.72 1.64 1.57 1.52
Net tangible assets ($) 8.76 9.50 8.87 8.22 7.64

Unless noted otherwise, all figures in S$ millions.


Source: Singapore Airlines Annual Report, 1997-98.
622 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«
1

Value added per employee 290,160 226,304 235,451 220,440 209,332


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 throughout the aircraft. Key features of the
of the jumbo jet. This plane offered a system included 22 video channels, video
greater flying range and better fuel effi- games and Reuters Teletext news updates
ciency than the 747-200 or the 747-300. SIA hourly. In May 1999, SIA became the first
was one of Boeing's leading customers for airline in the world to offer Dolby
large commercial aircraft. In 1994, the air- Headphone "Surround Sound" as a new
line purchased 22 per cent of the total pro- feature of its in-flight entertainment.12
duction of the B747-400. In 1996, SIA be- The group also embraced the latest
came the launch customer for the A340- technology for its remaining operations. In
300E which was said to have the quietest 1988, it became the first airline in the world
cabin in the sky.11 In March 2000, SIA's op- to install a B747-400 flight simulator for
erating fleet comprised 92 aircrafts. training pilots. It was also the first com-
SIA was also at the forefront in the mercial airline to use Learjet 31s to train
area of in-flight entertainment. For in- its cadet pilots from the ab-initio stage to
stance, its entertainment system, the First Officer rank.13 Through these
Krisworld, offered a six-inch video screen measures, SIA ensured that its pilots were
and a combination remote control unit- extremely well-trained. Jointly with the
cum-telephone, fitted at every seat Government, it invested in highly auto-

11
A 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- two business centres, four full-serv-
port that dramatically expanded passen- ice banks, 20 restaurants, more
ger handling capacity and facilitated the than 100 shops and a host of other
provision of hassle-free customer services. services.
SATS Catering, a division of SIA, operated
the largest completely integrated ware SIA operated the Blue Lane APIS
washing system under one roof in the (Advanced Passenger Information
world. It also constructed a S$215 million System) facility for passengers trav-
kitchen complex with a capacity to produce elling to selected destinations in the
45,000 meals daily.14 U.S. The travellers' particulars were
transmitted to the U.S. Immigra-
tion offices well before the flight
Customer Conveniences and landed. The Immigration officials
Facilities could, thus, screen the passengers
SIA has always maintained the philosophy and the actual time taken to finish
immigration formalities at the des-
of putting the customer first. In the words
tination airport was shortened.16
of Mr Michael Tan Deputy Managing Di-
rector (Commercial) of SIA: Since October 1993, SIA had been
We believe that to succeed, an airline
offering Japanese cuisine to iirst
must be a service innovator rather class passengers flying to Japan.
than a price-leader. Being customer- The cuisine was served on a range
oriented means introducing innovative of Japanese
features and setting new standards. It Shokado 17 Bento
is difficult to imagine travel today serviceware.
without choice of meals, free drinks
and free headsets in economy class. All In November 1996, SIA introduced
were SIA's innovations in the 1970s.15 Internet check-in for First Class,
Raffles Class and Priority Passen-
In 1991, SIA introduced the world's first gers flying out of Singapore.
global satellite inflight telephone service,
Celestel and also the world's first conven- It also operated a centralised infor-
tional in-flight fax service. It also provided mation system known, as Central-
a complimentary bag of toiletries including ised Baggage Tracing unit, which
toothbrush, toothpaste, socks and a comb enabled more effective manage-
to all passengers on long-haul flights. Sev- ment of mishandled baggage.18
eral unique conveniences and facilities, such By the end of 1999, all SIA aircraft
as the following, awaited SIA customers: were equipped with automatic ex-
Singapore's Changi Airport, the ternal defibrillators — life saving
home of SIA, had a gymnasium, a equipment that could revive pas-
conference hall, an exhibition hall, 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.
624 Case 8 • The Singapore Airlines Group Alliances and Acquisitions
Over the years, SIA has signed several al-
By March 2000, SIA had launched liances. The following discussion, however
local websites in 16 countries and identifies only a few major cooperative ven-
SIA's e-ticketing facility was avail- tures. In 1989, SIA entered into a trilat-
able in 24 overseas stations. eral alliance with Delta Airlines and
SwissAir to form a global network span-
In June 1999, SIA introduced a new ning 300 cities in more than 80 countries.
generation of Wisemen audio- and From SIA's point of view, the alliance of-
video-on-demand service to its First fered opportunities to service a greater
and Raffles Class customers. The number of destinations in both the U.S. and
Wisemen system offered a choice of Europe. Though the alliance led to some
25 movies, 50 short features and 50 synergies through joint purchasing, shar-
audio-CDs. ing of airport facilities and exchange of
personnel, there were several problems.
Marketing Owing to its different geographical focus
(primarily the U.S. and Europe and Latin
SIA had been running the highly recog- America, to a leaser extent"), Dcltn T.va? not
nised Singapore Girl campaign for several too committed to the alliance. Though
yoprp. Independent studies had consist- Swissair was comparable to SIA in terms
ently rated the SIA advertising as having of service reputation and image, it did not
an extremely high recall rate among cus- have a major presence in any of the impor-
tomers.20 SIA's advertisements also rou- tant European hubs such as Paris, Frank-
tinely stressed the fact that its fleet was furt or London, With the formation of the
the youngest in the world. European Union, SIA believed that it
would be better-off forging a relationship
Cargo and Related Operations with an airline that belonged to one of the
EU member countries, SIA pulled out of
Cargo revenues constituted almost 20 per- the trilateral alliance in 1997.
cent of SIA's revenues. With revenues of In November 1997, SIA and Lufthansa
S$l,909 million for the year ended March announced the formation of a comprehen-
2000, SIA was the third largest cargo air- sive alliance. The alliance would cover a
line in the world in terms of international wide area of commercial cooperation, in-
freight tonne kilometres. cluding code-sharing, network and sched-
During the 1999-2000 fiscal year, SIA's ule development, frequent flyer pro-
other activities, besides transport of pas- grammes, product development, ground-
sengers and cargo, accounted for about 15.8 handling, customer service, information
per cent of its total revenue. These activi- technology and cargo operations.
ties included airport operations, kitchen Lufthansa would use Singapore as a pri-
operations and maintenance operations mary hub in Southeast Asia and Australa-
(see Appendix 2). Related operations also
contributed 26 per cent of SIA's total prof-
its.21

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 came on the heels of SIA's purchase of 8.3
hub in continental Europe. "This alliance per cent of the share capital of Air New
brings two of the world's top airlines to- Zealand in the form of "B" ordinary shares.
gether with one objective: to give our pas- With 25 per cent of Air New Zealand, SIA
sengers an even better travel experience," would have a strategic stake in both Air
remarked Lufthansa's Chairman Juergen New Zealand and Ansett Holdings Limited
Weber.22 (Ansett). The New Zealand carrier owned
In October 1999, SIA announced that 50 per cent of Ansett and would acquire
it would join the Star Alliance "as a part of the other 50 per cent soon.
its global strategy to provide improved SIA deputy chairman and CEO, Dr
services and benefits, including seamless Cheong Choong Kong, had the following
air travel worldwide". Other members of comment: "As evidenced by our recent 49
the Star Alliance included Air Canada, Air per cent stake in Virgin Atlantic, SIA's ul-
New Zealand, All Nippon Airways (ANA), timate objective is to become a global group
Ansett Australia, the Austrian Airlines of airline and airline-related companies.
Group (comprising Austrian Airlines, This stake in Air New Zealand and, indi-
Lauda Air and Tyrolean Airways), rectly, Ansett is another important step
Lufthansa German Airlines, Scandinavian towards that goal."23 In July 1997. Singa-
Animus System ^tiAtij, Thai Airways In- pore Airlines, Air New Zealand, Ansett Aus-
ternational, United Airlines and VARIG tralia and Ansett International announced
Brazilian Airlines. plans for the creation of the largest inter-
In December 1999, SIA announced that national alliance of airlines based in the
it would acquire a 49 per cent stake in Vir- Asia Pacific region. With its recent acqui-
gin Atlantic, the holding company for Vir- sitions, SIA had extended its combined
gin Atlantic Airways, Virgin Holidays and reach (with its partners) to more than 200
Virgin's cargo operation, Virgin Aviation cities around the world.
Services, for £551 million. SIA had the fol- Previous SIA alliances included a code-
lowing comment regarding the acquisition sharing agreement with American Airlines
of the stake: "The synergies derived from (Singapore-Chicago route),24 Delta Airlines
linking the complementary route networks (Singapore-New York route) and Austrian
of SIA and Virgin, in particular Virgin's Airlines (Singapore-Vienna route) and joint
transatlantic network, will allow both air- cargo services with British Airways, KLM
lines to grow faster than either can man- and Lufthansa, among others.25 SIA had
age on its own." entered a partnership with SAS which al-
On April 25,2000, SIA announced that lowed joint marketing of an all-cargo serv-
it had reached an agreement with Brierley ice between Copenhagen and Singapore. It
Investments Limited (BID to acquire 16.7 had also formed an alliance with
per cent of Air New Zealand Limited (Air Aerolineas Argentinas to offer one of the
New Zealand) in the form of "B" ordinary cheapest round-the-world economy fares
shares for NZ$285 million. The investment 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.com
24
Singapore Airlines and American Airlines begin code sharing flights, http: I / www.
singaporeair.com I
25
Singapore Airlines and Lufthansa Cargo Expand Cooperation.. http: 11 www.singaporeair.com I
26
Information regarding alliances from SIA website, http://www.singaporeair.com/
626 Case 8 • The Singapore Airlines Group

SIA was the pioneering member of the never faced a strike and the union man-
group that created Abacus, the Asian Com- agement relations were considerably bet-
puterised Reservation System. Realising ter than in many U.S.-based carriers.28
that, by itself, it did not have the critical However, in July 1997, NTUC (Na-
mass, it enlisted eight partners including tional Trades Union Congress) chief Lim
Cathay Pacific, China Airlines, DragonAir, Boon Heng, who was also the Minister
Malaysia Airlines, Philippine Airlines, without Portfolio in the Government, joined
Royal Brunei Airlines, Tradewinds and the SIA Board of Directors. He said that
WorldSpan Global Travel Information the management culture must change to
Services to form Abacus. rally every SIA worker to help meet global
competition.29 He promised to help the un-
ions see the big picture—mainly issues re-
Internal Organisation Policies lating to the airline's competitiveness. Soon
afterwards, there was improvement in un-
Labour Relations
ion management relations. The manage-
Almost 37 per cent (9,000 out of 24,000) of ment was able to implement several
SIA's employees were members of the SIA changes. They included a cut in cabin crew
C 2 7 ^ pi7.p for first class and requiring supervi-
sors to serve meals, which they were not
lationship between the union and the man- required to do before, for a S$300 allow-
agement had been neither very cordial nor ance. The three deputy managing directors
very adversarial. There were occasional and the union leaders sought to reach out
strains in the relationship. Some major to the company's 24,000-strong workforce,
points of contention included flying allow- meeting small groups of 20 managers each
ances, staying and other arrangements in time to show how serious they were about
overseas locations and the workload espe- working together.30
cially during packed flights. In May 1997, SIA's labour costs formed only 16-17
1,000 copies of an anonymous circular went per cent of its revenues, by far the lowest
out to the cabin crew. The circular listed figure among all major airlines (See Ex-
grievances such as a proposed cut in meal hibit 4). For other carriers such as
allowances and a drop in the number of Lufthansa, American Airlines, United and
crew on some flights. SIA's cabin crew meal Swissair, the corresponding percentage
allowances had come down from $2,500 per was in the region of 35-37 per cent.31 The
month before 1987 to $1,700 by March only major carrier that came close to
1996. Despite these conflicts, SIA had

27
SIA employed about 14,000 people in its airline operations. The remaining were employed by
the group's subsidiaries.
28
In 1997, American Airlines' pilots rejected, by a 2 to 1 margin, a contract characterised by the
company and Wall Street as the most generous in the industry. American at Bay, Air Transport
World, March 1997, pp. 28-40.
Also see, Air Transport World 1997. Will the real United please stand up? August, pp. 26-34.
29
N T U C w as, by far, th e largest un ion in S ingap ore. It h ad a goo d relatio nship w ith the go vern
m en t an d the N T U C chief served as a M inister w ith ou t Po rtfolio in th e Sin g apo re C ab inet.
30
T h e S t r a i ts T im e s1 9 9 8 . T h e N e w F a c e o f L a b o u r M a n a g e m e n t R e l at io n s a t S I A . M a y 3 , p p . 4 2 -
43.
31
For the four major U.S. carriers, labour costs varied from 35.5 per cent of total (United) to 37.4
per cent (Delta). Air Transport World, 1997. American at Bay, op. cit.
Case 8 * The Singapore Airlines Group 627

Exhibit 4 SIA's Cost Structure

Category of costs % of total costs for the % of total costs for the
year 1999-2000 year 1998-99

Staff costs 16.5 17.


Fuel costs 16.4 4
Depreciation charges 15.1 3.1 14.
Rentals on lease of aircraft 11.7 6
Sales costs Handling 11.4 16.
charges 6
7.1 7.0
Aircraft maintenance and 2.6
overhaul costs
11.
Inflight meals and other 6.6
8
passenger costs 5.1
12.
Landing, parking and other
overflying charges 0
3
Other costs
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 - self'. 33 Crew management also put forward a
ish Airways whose labour costs constituted theme for an annual service campaign. In
24 per cent of its revenues. SIA's steward - 1993, the theme was "Let's prove we are the
esses' starting salaries were comparable to best".
many U.S. carriers but did not increase as SIA's training programme for its crew
rapidly with seniority. SIA stewardesses members was extremely rigorous. A new
also tended to be young and were given a in-flight/ cabin crew member was put
maximum of four five-year contracts, after through three months of training before
which they could assume ground positions. the new crew member could start serving
If a stewardess became pregnant, she had as operational crew. Speaking about SIA's
to leave her job. The compulsory retirement training philosophy, Dr Cheong Choong
32
age for male stewards was 55 years. Kong, CEO of SIA said:
Training is a necessity, not an option.
Training It is not to be dispensed with when
times are bad. Training is for every -
SIA in-flight crew members were taught body. It embraces everyone from the
the motto "Unless you can make the oth - office assistant and baggage handler
ers happy, you can never be happy your- to the managing director. We do not

32
Lim Gaik Eng and Ng Seok Hui. Singapore Airlines. Faculty of Business Administration, Na
tional 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 To maintain eye contact during our
in software and hardware that money transaction.
can buy. Because we take a long term
view of training, our investments in Customer service is what we are out
staff development are not subject to the to give.37
vagaries of the economy. Training is for
ever. No one is too young to be trained, In 1992, SIA spent S$84 million on train-
nor too old. 34 ing or around $5,000 per employee which
was 12 times Singapore's national average.
There were several rules regarding In 1993, SIA opened a $80 million train-
personal grooming, uniform care, poise and ing centre, thus bringing all SIA's training
personal conduct. For instance, cabin crew needs under one roof.38 It conducted regu-
were instructed not to eat onions or drink lar reviews to ensure that its salaries were
alcoholic beverages for ten hours before market-competitive.
flight time. There were specific rules re-
garding laundering uniforms, makeup and
hair styling. Crew members had to report Customer Feedback
to the SIA clinic to have their teeth checked To supplement the informal channels of
and cleaned every six months.35 communication, vSTA conducted rpgiilpr
SIA had also launched the "Outstand- passenger opinion surveys to monitor the
ing Service on the Ground" programme to quality of its services. Passengers were
motivate the airline's frontline staff on the asked to rate the quality of SIA's in-flight
ground to provide genuine innovative serv- service, food and beverages, in-flight enter-
ice.36 Most of SIA's ground service opera- tainment, aircraft interior, airport opera-
tions were handled by SATS, a sister com- tions, reservations and ticket office opera-
pany. Every* SATS Airport Services tions. The survey forms were designed to
frontline staff member was required to take take only five minutes of a passenger's time
the following pledge: and were printed in five different lan-
We, the staff of Terminal Two Pledge by guages to cover the widest spectrum of
these qualities towards service excellence: passengers. The survey results were ana-
lysed and past and present performance
To greet each passenger at the begin- regarding the Service and Performance
ning and at the end of their journey. Index was circulated to key personnel in
To address them by name, rank or the organisation. SIA's decision to invest
title. S$52 million in a cabin management and
interactive video system was prompted by
To give personalised service with a the relatively lower ratings scored by the
friendly smile. in-flight entertainment compared to other
areas of in-flight service.39

34
Perspectives, 1998. A Symbol of SIA's Training Philosophy, April, pp. 58-59.
35
Singapore Airlines (A), Harvard Business School Case no. 9-687-022.
36
Lim Gaik Eng and Ng Seok Hui. Singapore Airlines case.
37
C h a n g , Y e o n g a n d L oThh, e Q u e s t f o r G l o b a l Q u a l iotpy ., 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 play at the SIA Control Centre. Under a
to each customer complaint or compliment profit-sharing scheme, employees received
it received. The market research depart - special bonuses based on the profitability
ment conducted regular focus group stud - of the company. The bonus could amount
ies to predict future customer require - to a significant percentage of the annual
ments. salary of an employee.

Total Involvement Performance Accolades


To promote greater autonomy in decision
making and a sharper focus on quality and
and Awards
customer services, SIA formed 21 subsidi - SIA was routinely recognised as one of the
aries and five associated companies. Its world's premier airlines. During the 1999-
management systems and training were 2000 year, SIA received over 60 awards
designed to ensure that staff at all levels worldwide in a range of categories. It was
were empowered and encouraged to make named Asia's Best Managed Company of
independent decisions. SIA practised job the Decade by the Asiamoney magazine
rotation by moving executives between and Asia's Most Admired Company (for the

resulted in several benefits. Staff acquired magazine. In a survey, readers of the Conde
an understanding regarding how the en - Nast Traveler magazine declared SIA as
tire organisation worked. It also promoted the best airline in the world, for the elev -
a corporate outlook among staff and mini - enth time in 12 years.
mised sectoral interests. This practice also
created an appetite for change and inno -
vation as people constantly brought new Financial Position
ideas with them to new jobs. The SIA group's financial position was ex -
Corporate-wide business meetings and tremely strong. In March 2000, the group's
briefings were held regularly to keep staff shareholders' funds stood at S$9,707 mil -
informed of the latest developments. Cor - lion, enough to pay for most of its purchases
porate newsletters and circulars helped of aircraft in the foreseeable future. In the
promote information sharing. Interaction recent past, the shareholders' funds had
between staff and management was en - grown at a rate exceeding S$500 million
couraged through regular staff meetings. every year. The group had no debt.

Incentives Load Factors and Yields


SIA had instituted the Winning Ways SIA maintained load factors of about 73-
Award to recognise and reward crew mem - 74 per cent, five to six points better than
bers who provided excellent service to pas - the industry average for international serv -
sengers. The award was based on customer ices and comparable to a few carriers such
compliments and was given quarterly. The as Air France, KLM and Cathay Pacific.
yearly winner received a distinctive Omega The load factors were, however, higher than
Constellation timepiece. The top WWA win - several other reputed carriers such as
ner's name was carved in gold on the Roll Lufthansa (68.6 per cent), American (67.8
of Honour, which was on permanent dis- 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 - stakes in Virgin Atlantic and Air New Zea -
erations, SIA maintained load factors of 68 land represents the first of such moves by
per cent. SIA's overall break-even load fac - SIA. In the past, it had always grown in -
tor varied between 65.9 per cent (1996-97) ternally or through alliances. The acquisi -
and 62.6 per cent (1995-96). In 1999-2000 tions pose a significant challenge to SIA
and 1998-99, SIA's passenger yield stood since it means managing people in coun -
at 95.3 and 90.4 per cents respectively, tries that are culturally distant to Singa -
whereas the cargo yields were 33.7 and pore. There are also significant differences
32.6 per cents. The slight improvement in between SIA and Virgin, in terms of their
the Financial Year 2000 was attributable corporate culture. SIA has always been
to the recovery of many of the crisis-af - innovative but cautious, especially when
fected Asian economies. In general, SIA's its reputation is at stake. Virgin is more
passenger yields were lower than most open to trying risky ideas. Hence the inte -
other close rivals, possibly because SIA had gration of the new acquisitions is likely to
neither a domestic market that it could pose a significant "challenge.
dominate nor highly regulated routes (e.g., There are also concerns about the Star
within Europe). Alliance. While the alliance enhances the
possibility of offering seamless travel to
passengers, the number of partners could
Future Issues
be an issue. With so many involved, the
SIA faces several challenges in the near probabilities for divergence and disagree -
future. First, several other airlines in the ment multiply. In addition, there are con -
region are trying to imitate SIA's success. cerns that if even one of the alliance part -
These include Malaysian Airlines and Thai ners does not provide adequate levels of
Airlines. Cathay Pacific was already com - customer service, the reputation of the
parable to SIA in terms of service reputa - other members will be tarnished.
tion. Malaysia and Hong Kong have new On October 31, 2000, Singapore Air -
airports that rival Changi Airport in so - lines flight SQ006, carrying 159 passen -
phistication and amenities. New hubs in gers, tried to take off in bad weather (heavy
Manila, Taipei and Seoul are competing rains and gusty wind) from the Chiang Kai
with Changi for air cargo volume and Shek Airport in Taipei. Seventy-nine pas -
threatening Changi's position as a pre - sengers and four crew members died after
eminent transshipment centre. 41 Another the Boeing 747 crashed into construction
challenge comes from within Singapore it - equipment and broke in two. The runway
self. With increasing affluence, the salary had been closed for construction for sev -
levels within Singapore are rising rapidly. eral months (Fate of SQ006; http: 11
It is also harder to recruit good employees cna.mediacorpnews.com/sq006'). The
in Singapore due to a tight labour market, plane, bought in January 1997, was less
forcing the airline to turn to foreign coun - than four years old and had no apparent
tries. defects. An investigation by The Austral -
In addition, several internal issues ian found that even though some flight at -
have come up recently. The acquisition of tendants risked their lives to save people,

40
S IA s t a t i s t i c s f ro m w e b s i teh ,ttp : 1 1 w w w . s i n g a p o r e a i r . c o mI n/d u s t r y a v e ra g e f r o m
A ir T r a n s
port 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 - association of more than 250 airlines, has
gency doors, fleeing the plane before all said that revenues per passenger for its
inside had been rescued. The incident was member carriers fell 2.5 per cent in 1996.
likely to tarnish SIA's reputation for safe Operating cost reductions, however,
travel. On the day of the crash, SIA's stock amounted to only 1 per cent thus narrow -
price dipped slightly but rebounded to its ing already thin margins. 43
pre-crash levels quickly (The Tragedy of The Asian economic crisis, which
Flight SQ006, http: I1 www.singa.pore- erupted in July 1997, added a new dimen -
window.org/swOO/001216au.htm). sion to the competitive dynamics. Before
the Asian economic crisis, travel to and
from Asia was the fastest growing segment
Appendix 1: The International of the travel industry. With the crisis, how -
ever, these growth rates are expected to
Airlines Industry moderate considerably.
Major competitors in the airline industry
include American Airlines, United Airlines,
Industry Economics
Delta Airlines and Northwest Airlines (all
from the U.S.), Air France, Lufthansa (Ger - Airline profits are a function of the follow-
many), British Airways (U.IO, Swissair in^ EuCbOrS. L.iC [Oau caCLOr, CriG ' iciu ..._n*
(Switzerland), Singapore Airlines, Cathay the costs. Airlines try to maximise both the
Pacific (Hong Kong), Japan Airlines and load factor and the yield but try to mini -
Qantas (Australia). mise costs. Load factor can be defined as
This industry is a major component of the percentage of seats that are occupied
the travel and tourism industry. With in - in a flight. Yield is the revenue derived by
creasing affluence, people around the world an airline for each kilometre travelled by
are spending a larger percentage of their each passenger. Unit costs are calculated
income on travel and tourism, thus enhanc - on the basis of available seat kilometres
ing the sector's p tuspects. Between 1987 (that is the number of seats on a plane
and 1996, the number of passengers car - times the number of kilometres) rather
ried by all the airlines increased by 31 per than the number of seats occupied. This is
cent whereas the number of passenger kilo - because most of the expenses of an airline
metres increased by almost 51 per cent. 42 vary by capacity offered (available seats)
The emergence of new technology, includ - rather than by the number of passengers
ing more fuel-efficient flying equipment served.
and inexpensive, yet powerful, information To maximise revenue, airlines try their
technology is leading to new opportunities best to identify the willingness and the
for cost reduction. ability of the passengers to pay varying
Airlines around the world face several fares. At a broad level, travellers can be
threats, however. Regulatory barriers are divided into business and leisure travel -
coming down allowing competitors to ply lers. Leisure travellers are, in general, more
new routes and exerting a downward pres - sensitive to prices and will switch to alter -
sure on prices in the process. IATA (Inter - native modes of transportation (e.g., cars
national Air Transport Association), an or not travel at all if the fares seem higl .

42
Air Transport World, 2/97.
43
Y a h o o B u s i n e s s N e w1 9s 9 7 . W o r l d A i r T r a v e l G r o w i n g S l o w ly , O c t ohbtetpr :9 I. / w w w . y a h o o . r o r n I
632 Case 8 • The Singapore Airlines Group

They also travel, most often, by economy have very little control over their fuel costs.
class. Business travellers, on the other Maintenance and ground services also con-
hand, often travel by either business or first stitute a substantial percentage of an air-
class. The price differential between line's expenses. Airlines often perform rou-
economy class, on the one hand, and busi- tine maintenance at the home base but
ness and first classes, on the other hand, contract with local airlines for local main-
is very high. Since 1980, this differential tenance capacity. As a rule, in-house main-
has widened considerably, due to both fall- tenance is scale-sensitive but, if the utili-
ing economy class fares and rising business sation is high, it could be considerably
and first class fares. cheaper than contract maintenance. In
Industry analysts estimate that 55 per general, the larger an airline's presence in
cent of an airline's costs, mostly interest a particular location, the higher is the fea-
and depreciation, are unrelated to the sibility of maintaining in-house repair op-
number of flights flown. According to the erations in that location.
Asia Pacific Airlines Association, only 16
per cent of an airline's costs are tied to traf- Regulation and Government
fic (number of passengers in a particular
fliyU). Since the remaining costs ^b^ «<t Intervention
per cent of the total) are fixed, airlines have Though the extent of government interven-
a strong incentive to carry additional pas- tion in the airline industry was declining,
sengers (improve their load factors), even it is still higher than most other industries.
at rock-bottom prices. In their zeal to in- In the international arena, the route struc-
crease load factors, airlines compete ture as well as the frequency of flights is
fiercely with each other, lowering the qual- governed by agreements between the two
ity and predictability of any airline's oper- concerned countries (origin and destina-
ating earnings. Airlines also undertake tion). For instance, an agreement between
high levels of debt to finance purchases of Thailand and Singapore might stipulate
new planes, which increase their financial the number of weekly flights between Sin-
risk.44 gapore and Bangkok.45 Such agreements
There are four major components of an might also not allow a SIA flight to Bang-
airline's cost structure. These are labour, kok to continue to some other destination
fuel, maintenance and aircraft purchase. within Thailand. In some cases, the fares
Labour is the most significant expense for are also subject to approval by the country
most of the airlines from the developed of origin of flight (either Singapore or Thai-
countries. Many airlines from developing land in the above example). Increasingly,
countries are able to offer comparatively however, the regulatory barriers are fall-
lower pay to their staff and thus could re- ing. Open skies agreements between the
duce this expense considerably. Fuel ex- U.S. and the European countries are lead-
penses are also a significant percentage of ing to the dismantling of the restrictions
costs. Since oil is a commodity, its price fluc- on flight frequencies. Recently, an Open
tuates significantly. Oil prices are also de- Skies agreement has also been signed be-
nominated in U.S. dollars, thus adding an tween the U.S. and Singapore which will
element of exchange rate risk. Airlines 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 Over time, flying equipment has also
from the home base in Singapore as well become more sophisticated. Newer planes
as by continuing its flights from a U.S. port are bigger and can fly farther. These planes
of entry (e.g., New York) to other destina- also offer better fuel efficiency over the
tions in the U.S. (e.g., Atlanta). Under the older designs. Flying larger planes is par-
Open Skies agreement, SIA could also de- ticularly essential for busy routes such as
termine its own flight frequencies. New York to Tokyo or London to Singapore.
Some other policies that were not spe- Inside the plane, technological advances
cific to the airlines industry have also af- have enabled customers to enjoy new fea-
fected it. For instance, a country's laws re- tures and services. They can make tel-
garding unions could have a tremendous ephone calls, send faxes and enjoy person-
impact on the wages-and-salary component alised entertainment.
of an airline's cost structure.
Strategic Dimensions
Industry Trends
Airline strategies were extremely complex
Alliances and cover several interrelated factors. Dif-
ferent airlines also emphasise different
Airline alliances have proliferated over the
past 15 years. As of May 1996, there were within the airlines industry include: the
a total of 389 alliances worldwide. Equity route structure of the airline, the type and
was involved in 62, or 16 per cent of these the age of the flying equipment (planes),
alliances. Alliances was a catch-all term the quality of in-flight and ground services
and the scope of an alliance could be as offered and the prices charged to economy
narrow as a particular route (e.g., Singa- class passengers.
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- Appendix 2: Subsidiaries and
ety of purposes, the most important of
which is to extend an airline's reach.
Related Operations
The SIA Group has 21 subsidiaries includ-
ing the following major ones: Singapore
Technology
Airlines Company, Singapore Terminal
Airlines make extensive use of technology Services (SATS) group, Service Quality
in their operations. One example is the Centre, SIA Properties, SilkAir, Singapore
proprietary reservation system which in- Engineering Company Pte Ltd and Singa-
volves writing extremely complex software pore Flying College.
programs and is typically the domain of
large airlines such American Airlines and SATS Group
United Airlines. Many smaller airlines
have formed consortia to develop rival com- The SATS Group comprises four compa-
puterised reservation systems. In addition nies - SATS Airport Services, SATS Cater-
to ticketing, check-in facilities are exten- ing, SATS Security Services and Aero
sively computerised. Of late, functions like Laundry and Linen Services. The SATS
baggage handling are also becoming in- group is in charge of Changi Airport, regu-
creasingly automated. larly voted as one of the world's best air-
634 Case 8 • The Singapore Airlines Group

ports. During the year ending March 31, SIA Engineering Company
2000, SATS serviced 47 airlines at the
Changi Airport and handled 21.7 million SIA Engineering Company has developed
passengers. It also handled 1.4 million extensive capabilities in repairing aircraft
tonnes of cargo. As of March 2000, it had including overhauling engines and refur -
entered into ten joint ventures in nine bishing aircraft components. The SIA
countries including India and China. Joint , hangar, the world's largest column-free
ventures accounted for 8.9 per cent of hangar, has made SIA fully self-sufficient
SATS' profits during the year. in airframe and engine maintenance and
SATS had recently (mid-2000) com - capable of selling engineering services at
pleted the construction of a S$215 million all levels to other airlines. It operates joint
Inflight Catering Centre with a production venture companies with Pratt and
capacity of 45,000 meals daily. Construc - Whitney, a major aircraft engine manufac -
tion of (S$270 million) Airfreight Terminal turer, in Singapore and in Taiwan. The Sin -
6 was expected to be complete in mid-2001. gapore joint ventures serve as Pratt and
When completed, the new terminal would Whitney's exclusive Center of Excellence
boost SATS' total cargo handling capacity Facility in the Asia Pacific and Indian sub -
2.05 million tonnes a yo.ir continent. 47 In March 2000, SIAEC took a
Airlines Annual Report, 1999-2000 and 10 per cent equity stake in Kong Kong Aero
www.singaporeair.com}. Engine Service Pte Ltd which overhauled
Changi Airport is widely considered Rolls Royce and Trent engines. SIAEC does
the premier express freight hub in the Asia maintenance work for 56 airlines includ -
Pacific region, primarily due to SATS in - ing Air India, Polar Air, Federal Express
vestments and foresight. and China United. As much as 18.6 per
cent of its revenues are drawn from third
SilkAir party work. 48

SIA's regional arm is known as SilkAir. It


primarily operates flights to regional holi - Other Subsidiaries
day destinations. As of March 2000, SilkAir The Service Quality Centre is a joint ven -
operated 88 scheduled revenue flights each ture with the National Productivity Board
week to 19 destinations and maintains a of Singapore. Formed in 1991, it trains sev -
fleet of six aircraft. On December 19, 1997, eral thousand employees from more than
Singapore-bound SilkAir flight MI 185 100 companies in both the service and the
from Jakarta crashed in a swampy terrain manufacturing sector. As of March 2000,
in Sumatra (Indonesia). The Boeing 737 the SIA group owned 20 commercial and
was less than a year old and there were no 25 residential properties. It also leases 430
distress signals from the aircraft before the properties located in 122 cities in 45 coun -
actual crash. The crash, the first in either tries. SIA Properties oversees the develop -
SLA or its subsidiary's history, killed all 104 ment of these properties both within and
people aboard the aircraft. 46 outside Singapore. 49 The airline's other

46
Yahoo News 1997. No Indication of Survivors in SilkAir Crash, December 20. http:/1
w ww .yahoo.com I
47
P r a t t a n d W h itn e y a n d S I A E C F o r m E n g i n e O v e r h a u l V e nht uttp
r e:, 1 1 w w w . s i n g a p o r e a i r . c o m I
48
SIA Annual Report, 1999-2000.
49
Ib id .
Case 8 » The Singapore Airlines Group 635

subsidiaries included SALE, a leasing com- What factors can explain SIA's
pany; Auspice, a Channel Islands-based success?
portfolio investment company; and Sing Bi Optional question:
Funds, a Singapore based subsidiary re- Does Singapore have a national
sponsible for the group's regional portfolio competitive advantage in terms of
investment activities.50 having an international airline? (For
discussing the optional question, the
students will need a fairly good
Study Questions knowledge regarding the Singapore
1. What generic strategy is SIA following? economy.)

50
SIA Annual Report, 1999-2000.

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