38207422-amit-khoje-singapore-airlines

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Singapore

International

Airlines

September 27

2010

Business Case Study of Singapore International Airlines for the class IB 207 (MBA

2011 batch)

Amit Khoje



Amit Khoje Case Study: Singapore International Airlines International Business

Contents

A. The Problem ....................................................................................... ............................................. 3

a. Define the problem ...................................................................................................................... 3

The causes of the problems.............................................................................................................. 4

b. Define the Issue ............................... ............................................................................................ 6

The causes of the issues ................................................................................................................... 6

B. SWOT Analysis ..................................................................................... ............................................ 7

Strengths ......................................................................................................................................... 7

Weaknesses ..................................................................................................................................... 8

Opportunities................................................................................................................................... 9

Threats ............................................................................................................................................ 9

C. Alternatives to problems ................................................................................................................ 11Problem Motivating Staff ........................................................................... ................................. 11

Problem Threat of low cost air careers ........................................................................................ 12

Problem Sour deals ................................................................................. .................................... 12

Evaluation of Alternatives .................................................................................................................. 13

Motivate staff ................................................................................................................................ 13

Threat of low cost air carriers ......................................................................................................... 13

D. Recommendations ................................ ......................................................................................... 13

E. Plan of Action................................................................................................................................. 14

a. Tactical............................................................................................Error! Bookmark not defined.

b. Execution ........................................................................................ Error! Bookmark not defined.

c. Details ............................................................................................. Error! Bookmark not defined.




A. The Problem

When Mr. Chew Choon Seng came aboard as a CEO, Singapore International Airlines (SIA) was going

through hard time. It was facing some major challenges and issues which were supposed to be taken

care of. SIA was recognized as the worlds most admired airlines. It had also received number of awards

for the best service in the industry and to maintain the crown, it was necessary for Mr. Seng to take

immediate strategic actions to make the SIA again a leading competitor.

a. Define t he problem

1. De-Motivated staff

The building blocks of the image of SIA in the world, the human strength of SIA, were upset and

disgruntled after the staff layoffs and salary cuts. Analysts suggested that such moves adapted by SIA

would bring down the moral of the employees and this will severely impact the passenger service. SIAs

passenger service was known number one in its class and this has been one of main business strategies

of SIA. Also people were thinking that SIA had backing of its majority shareholder of 57%, the

Government of Singapore, in the form of subsidies and hence can sustain the financial turndown but it

was not the case. Hence the strategies to lower the operating costs spread a negative message in

peoples mind about SIA and people started losing faith in the company.

2. Threat of low cost competition

Sectors in Asia which SIA dominated for a long time were threatened by local low cost air careers. The

Government of Singapore authorized a new low cost start-up to be based in Changi the capital of SIAs

empire. Also it was suggested that the Government will sell its 57% stake in SIA. This would make SIA to

compete with more airlines i.e. even with low cost carriers.

3. Sour Deals




While trying to broaden its reach in the world, SIA acquired ownerships in other airlines. Two of such

acquisitions had cost SIA a big chunk of money. SIA lost $157 million in Air New Zealand deal. Market

analysts suggested that the 49% ownership in Virgin costing SIA $1.6 billion was losing its value and was

already at 40% of original value. Also SIA turned down an offer from Virgin Blue to participate in joint

venture in Australia which proved to be a bad decision.

The causes of t he problems

1. SARS outbreak in Singapore, Hong Kong, China and nearby regions had already declined the

passenger travel rate through airlines. Also the Iraq war contributed more to decimate the passenger

traffic. Not only SIA but other major airlines also were in a great loss because of less business. To sustain

in the current situation, SIA took the decision to cut down its operating cost. For that, SIA had to cut

short its employee strength. It laid off 400 employees in June and again additional 156 cabin crew in late

July. Also the senior management salaries were cut by average 22% and negotiations were in process for

further salary cuts.

SARS outbreak + outbreak of hostilities in Iraq -> Dampened traffic -> less business -> SIA need to lower

Operating Cost -> Lay off Staff and Cut short salaries

2. The traditional barriers to entry in Asia for other competitors; like longer flight distances, fewer

alternative airports and lower passenger densities, seem to fall off by the end of 2002. Taking advantage

of this, legitimate low cost carriers were enthusiastic to enter using Singapore as a base.

Air Asia based in Malaysia used operational model which was targeting Kuala Lumpur as its central

hub. It was also planning to expand in Johor which is very near to Singapore. Thus posing potential

threat to SIA as it planned to carry close to two million passengers in just 2 years. It inspected Changi

International and Seletar Airport in Singapore to explore the possibility of setting up operations there.

Air Asia came up with attractive prices which were definitely take away passengers from other network

airlines.




b. Define t he Issue

1. New Signaling Device

From the beginning, SIA had known that if at all it wanted to succeed in this industry, it would have to

come up with a completely new, different strategy and provide world class service to its passengers. It

has also come up with so many different innovative ideas that had placed SIA at the top of the industry.

It has received many prestigious awards for its service in the industry because of its innovativeness and

differentiation from other air carrier service. But now, other airlines were implementing its ideas and

sometimes the ideas used by SIA had become simply a norm in the whole industry. Also since they

offered same services as SIA, SIA had to develop new strategies to attract customers.

2. Address Low Cost Emergence

Low Cost carriers in Asia was becoming a new threat to SIA. There was a considerable difference in the

pricing models of the low cost airlines and that of SIA. Obviously it would cost SIA a significant loss of

passengers and hence business.

The causes of t he issues

1. The strategies used by SIA for significant differentiation from other carriers had now become

norm. Every major carrier offered meals in economy class, new options of entertainment in cabins and

all the luxury ideas that were pioneered by SIA. International carriers headquartered in neighboring

countries, such as Thai Airways, Cathay Pacific, Malaysian and Qantas copied the competitive strategy of

SIA. E.g. recruitment strategies, in-flight service innovative ideas, fleet management.

2. Virgin Blue thorough its example had proved that the network competitors were vulnerable to

low-cost competition. Virgin Blue had acquired 30% of the domestic Australian market with just three

years. The main losing airline because of this was Qantas.




B. SWOT Analysis

Strengt hs

Profitable Business

SIA has been setting a good record on operational performance and profitability. Even in economic

downturn in 1990, SIA was able to outperform in posting profits.

High quality service

SIA has always been frontier in providing high quality services to its customers which attracted a large

number of flyers to SIA. It

y Introduced electronic ticketing through websites.

y Online ticketing was rolled out at all destinations in its network.

y Introduced automated check-in system on certain flights.

y Silver Kris Lounge for first and business class people offering peace and tranquility in the hustle

and bustle of the airport.

y Provided top of the line business equipments such as computers, fax services and a stock ticker.

Singapore Girl Image

The Singapore Girl Image represented caring, comfortable and hospitable service. This image was

carefully nurtured as it represented the brand of SIA. SIA paid great attention in the selection process

and training of the candidates applying for the jobs. Apart from emphasized aspects of passenger

handling, social etiquettes and grooming, these candidates also spent extensive periods of the training

program in homes for aged. This gained a better appreciation for that segment.

Taking advantage of labor law, SIA had about 60% of the cabin crew as females.




Employee Training

SIA had pilots from over 50 countries. The company operated its own flying college with eight flight

simulators. All flight personnel were required to go through biennial proficiency checks. The

complement of cabin crew was chosen through a very rigorous process. SIA spent 14 times as much as

other airlines on per employee training program.

Strategy of differentiation

SIA has always been keen in developing innovative options to attract customers. The choice of meals in

economic class, innovative entertainment programs in the cabins then became the norm of the major

air carriers. SIA has always provided the best of its service to its customers in the best possible lowest

price.

Weak nesses

Sour Deals

SIA was somehow not able to form successful partnerships. The deals which SIA expected to be fruitful

turned out sour. As New Zealand Government put money into the company, the SIAs share in Air New

Zealand dropped dramatically and SIA lost about $157 million. Also the 49% ownership deal with Virgin

Atlantic which cost SIA $1.6 billion was 40% of its value.

Virgin Blue, before starting its service in Australia offered the opportunity to participate in venture but

SIA turned down that opportunity relying on Air New Zealand deal which went in loss.

Also the Government of Singapore declared that although SIA is a national carrier, it wont receive any

subsidies or protection from the government. It would have to develop based on its own resources.

International flights




Singapore Airlines doesnt offer domestic flights. 100% of total transported passenger fall under

international segment. As of 2009, SIA carried about 19 million passenger all of which were international

flyers.

Unbalanced Model

In addition to airline operations, SIA is also handling airport terminal services and engineering services.

Although company operates in different segments, the main revenue comes from airline operations.

Opport unities

Enter into Low cost-operating airline

SIA can definitely think of entering the low cost-operating airline service. If this hampers the brand

image of SIA, it can start with a different name and/or brand. The profit of the low cost-operating

airlines is basically based on the cost savings in in-flight services, higher fleet utilization, high load factor,

etc. SIA can earn a significant amount of revenue from there.

Future prospects of air hubbing in Singapore

According to developed projections by Boeing air freight traffic is expected to grow in Asia-Pacific

region during 1993 and 2014 at a rate of 5.3% to 7.9% annually. Even though Singapores geographical

location does compare less favorably with cities like Hong Kong, steps must be taken by Singapore

Government and different segments of the air freight industry to take advantage of new developments.

Reference: Hamdi, R. (2003). Singapore Airlines flies into turbulence. Media: Asia's Media & Marketing

Newspaper , 19. Retrieved from Business Source Premier Database.

Threats

Low cost operating airlines




Low cost operating airlines definitely pose a great threat to SIA. The unbelievably low air fairs for short

distances. Even though these carriers do not offer quality in-flight services, the business model works

great and can attract most of the consumers towards it.

Rising Fuel Prices

Due to global rise in oil prices, the aviation fuel prices have gone up substantially. The Fuel operating

cost for Singapore International Airlines for 4 years in $/ATK is shown below table.

Operating Cost 2000 2001 2002 2003 E

F

uel ($/AT

K) 4.6 6.7 5.5 6.6

These rising fuel prices may have immediate impact on the companys margins making the operating

expenses high and having lowered sales.

Foreign currency rates

Since SIAs 100% customer base is international, SIAs revenue is dominated by foreign currencies

exposing its margin to the threat of volatility due to currency rate changes. Currency rate fluctuations of

Australian Dollar, Euros, and Japanese yen have a substantial impact on the revenue streams of SIA.




C. Alternatives to problems

Problem Motivating St aff

Operating costs has been the main reason in laying off people after the outbreak of SARS and Iraq war.

But while cutting down the cost, SIA management in fact started cutting down its main strength which is

human resources. Its the personal service with which SIA has built its brand image. Layoffs de-motivate

the remaining staff members right from pilots to ground crew. Already laid off people join other airlines

and the training expenses done on those employees is wasted. Instead, SIA can adopt other measures to

cut down its operating cost.

1. Cut back on expensive fleet

SIA has considerably spending its capital on the luxury of its fleet. Its trying innovative ideas to make the

in-flight experience more luxurious. It has setup an office in Seattle in Washington near Boeing to

suggest design changes for its new fleet additions. Also its fleet age is less than 6 years. That means the

airplane is out of the fleet if its more than 6 years old. SIA can use these flights for its low cost

operations.

2. Cut short on training and expatriate expenses

SIA is spending about 14 times as much per employee as the average Singaporean company. Also the

number of local pilots available is quite low. This makes SIA to borrow pilots from Singapore Armed

Forces who are expatriates and company has to bear a variety of expenses such as housing, schooling

for children, travel, etc. in addition to busy pay.

3. Restructure work hours

If work hours are reduced, company has to pay for less hours. Also the work regulations allow working

for 35 hours in a week. So instead of working for 40 hours, 35 hours of each employee will be beneficial

for the company as well as the employee.




Problem Threat of low cost air careers

1. Attract customers with loyalty schemes

SIA should try to retain its customers through customer loyalty programs which will make customers

think before going to another airline. Frequent flyers program, Miles accumulation, redemption,

partnership program can be implemented for this purpose.

2. Enter Low cost carrier market

Entering low cost carrier market can be a good option for SIA to generate new traffic and revenues. Low

cost carriers provide low grade service to its customers and the target customer base is totally different.

Low Cost Carrier will operate in the local region and hence it wont affect SIAs current customer base

which is 100% international passenger. If starting a low cost carrier is damaging SIAs brand image, then

SIA can enter in this business using a different brand.

3. Private Jets

Because of the waiting periods at airports during flight, because of various reasons, companies have

started hiring/buying private jets for their business. These private jets are partly or completely owned by

the companies. SIA can think of entering into this business and provide service in this niche market.

Problem Sour deals

1. Careful evaluation and forecasting

Although Air New Zealand and Virgin Atlantic deals have been proved costly to SIA, it should be

considered that sometimes business decisions go wrong and unexpected. A careful evaluation of the

deals and proper study of the local and international politics, International Businesses would Yield a

positive result for the further deals of SIA. As Tourism Australia signed a deal of £ 5 million marketing

agreement with SIA as of December 2005; this deal has been found profitable as of now.

Reference: (2005). Tourism Australia signs SIA deal. T ravel Weekly: The C hoice of T ravel Pr of essi onals (00494577), (1798), 62.

Retrieved from Business Source Premier Database.




Evaluation of Alternatives

Motivate st aff

Higher operating costs has been the main reason for the layoff of the employees. Layoffs imprint a

negative impact on the retained employees minds. To clear the image, management should talk to

employee unions and through its actions it must show that its taking steps to reduce the operating

expenses. Considering the alternatives suggested, cutting down the expenses on the fleet can be

possible to a certain extent but not completely. Expenses on the trainings can be reduced to a maximum

extent. Restricting working hours means need of more employees which is not possible at the moment.

Hence I suggest the best alternative to reduce expenses on the training.

Threat of low cost air carriers

With customer loyalty programs, SIA can just hope to attract the customers which will not boost

revenue substantially but is necessary for the survival of the business. Giving an option of private jet

service is again on a lower scale and has a completely different customer base. Entering into the low

cost carrier is the best option since the industry is already booming in that area of business and people

are attracted towards low cost, low service flights. SIA can come up with a different name and or brand

to offer those services. This way, it will be possible for SIA to cover the local region also.

D. Recommendations

After analyzing each and every alternative to all the problems, I come to a conclusion that Singapore

International Airlines should cut down its operating expenses by cutting down its training costs. Entering

into a low cost carrier services should be the next move for SIA to compete effectively in the industry.

SIA should look for new deals and alliances using which it can share resources and maximize its

operating territory to increase benefits.




E. Plan of Action

It is now evident that SIA should now strategically place itself in a different position to capture

the larger segment of the available airline market. SIAs reputation is based on the employees

and the quality of service it provides to its customers. So SIA must do everything to protect the

good will and faith of the employees in the company. At this point of time, SIA should take

steps to cut short on the operating expenses and to maximize its business in wider regions. It

has been observed that, just for the sake of being innovative, and falling to the false reputation,

SIA maintains a young fleet of hardly 6 years old maximum. When other airlines use airplanes

which are about 14 years old, its very much agreeable that SIA keep its flights for at least 10

years. SIA is also providing top of the notch technological alternatives for its consumers to be

availed of in the airplane. SIA can certainly keep a hold on the technological innovativeness and

concentrate on saving operational costs. Instead of buying new planes every year, it can

certainly keep the present planes in the fleet and reuse them till they are more than 10 years

old. Passengers definitely do not concentrate on how old one plane is. They are always happy if

they receive a good cabin service.

As one of their main strengths, Culture of SIA is important for the success of the company and

hence it should not be compromised. Hence while implementing the option of entry to the low

cost carrier business, company should always maintain its reputation about its service.

The airline market in South Asia region has been open to new competitors. Deregulation and

liberalization in the industry has opened many new opportunities in Asian countries. Low cost

airlines serving domestic and short haul routes have emerged posing a great threat to existing

airlines. The most important difference between the low cost carrier and conventional airline is




not only the price but also the point-to-point and no-frill service instead of hub-and-spoke full

service provided by conventional airlines. Point-to-point services have advantages as they offer

direct and hence shorter flights, simpler baggage handling processes lowering airlines baggage

handling costs. In return, the customer has inconvenience to the connecting flights or baggage

handling for connected flights. In addition, cheaper and less crowded secondary airports are

used. No in-flight meals or entertainment system is provided.

The low cost carrier marketing structure also differs from conventional airlines. When

conventional airlines depend on the travel agent networks and websites for distribution, low

cost air carriers can depend on direct selling, call centers, bank and super market networks.

Reference: (October 2005) Yose Rizal Damuri and Titik Anas, Strategic Directions for ASEAN Airlines in a Globalizing

world The Emergence of Low Cost Carriers in South East Asia. REPSF Project number 04/008

Another important step SIA can take is partnership. SIA can become a part of alliances which it

has already become and share its resources. This way, it will be able to cover the operational

cost from other airlines as well as it will be able to take advantage of other routs in the foreign

countries which it was not able to take previously. Cathey Pacific for example has operating

cost (ATK) in 2003 of 26.6 when SIA was at 45.5. Also the sales of the SIA were lowered. By

becoming part of bigger network alliance, SIA will be able to negotiate better deals and take

advantage of more facilities and knowledge across the other airlines. When SIA can think of

getting these services from other airlines, it will also have to think of offering some of its core

competencies. It may have to share its customer care and service department expertise. Thus

in a group, all the airlines will be able to form a good reasonably priced, worldwide reached air

group.

38207422-amit-khoje-singapore-airlines

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