case study Singapore International Airlines: Strategy with a Smile Kannan Ramaswamy r. Cheong Choong Kong, the the performance of the company CEO of Singapore International under his leadership, he knew that Airlines (SIA), put away his papers much remained to be done. The as the SIA Megatop circled to land next sequence of strategic moves Mat Changi International Airport in would be crucial in cementing Singapore. He could see the mag- SIA’s meteoric rise. nificent lights of the city as it pre- pared for the much-awaited arrival SIA had managed to weather of the new millennium just two the storms of declining traffic weeks away. Singapore had prom- and yields, especially in the ised a spectacular show because it Asian region. The regional would be among the first coun- economies had been showing tries to welcome the New Year. signs of a nascent recovery. Mr. Kong was returning from However, the economic recov- meetings in London with Mr. ery was by no means complete. Richard Branson, CEO of Virgin For example, Japan was still Atlantic Airways. The two compa- unsteady and the other Asian nies had been exploring the tigers were tentative at best. potential for a formal equity Some of the quintessential alliance. While he was happy with sources of competitive advan- Thunderbird International Business Review, Vol. 44(4) 533–555 • July–August 2002 • © 2001 Thunder- bird, The American Graduate School of International Management. All rights reserved. This case was pre- pared by Prof. Kannan Ramaswamy, with research assistance from Mr. Manesh Modi, MIM2000, for the purpose of classroom discussion only and not to indicate either effective or ineffective management. A teach- ing note is available by contacting Thunderbird Case Clearinghouse, Prof. Michael Hoffert, (602) 978-7674. Published online at Wiley InterScience (www.interscience.wiley.com). 533 DOI: 10.1002/tie.10027 Kannan Ramaswamy tage for SIA were increasingly tries such as Thai Airways, coming under fire. Labor costs Cathay Pacific, Malaysian, and had been showing a remarkable Qantas. These carriers had upward trend, growing along learnt to duplicate some of the with the prosperity of Singa- key features of SIA’s competi- pore itself. Specialized labor tive strategy from recruitment was difficult to find locally, and to in-flight service and fleet when available, proved to be management. Thus, there were much more expensive than fewer and fewer avenues left for before. This could not have SIA to distinguish itself from There was happened at a worse time, since the others. This placed growing the main competitors were pressure on the firm to refine its some appre- showing signs of cost-based differentiation strategy. hension about competition and the customer the ability of the was increasingly attracted to In the international markets, other partners low fares. This posed a dilemma alliances had become a way of to be able to for SIA, which had traditionally life. It was probably the only live up to the relied on Singaporean person- reasonable way to realize global standards that nel for most of its operations. aspirations. After weighing these SIA had set. Looking overseas for special- factors for a considerable time, ized talent, although not new SIA had recently joined the well- for SIA, could have strong acclaimed Star Alliance. It was political and economic ramifica- also pursuing numerous other tions that had not been fath- partnerships with other carriers omed as yet. as well as exploring direct invest- ment options as a means of Competitors had been quick to growth in overseas markets. copy many of the remarkable While this positioned SIA to service innovations pioneered take advantage of the booming by SIA. The avenues for tangi- markets for travel in Europe and ble differentiation that SIA had the United States, it raised con- used in the past to set itself cerns among SIA’s loyal clien- apart had soon become the tele. There was some norm. Every major air carrier apprehension about the ability now offered a choice of meals in of the other partners to be able economy class, innovative enter- to live up to the standards that tainment options in the cabins, SIA had set. Should there be sig- and all the trappings of luxury nificant differences in service that used to be the sole domain quality across network partners, of SIA. Of particular concern some feared that SIA’s sterling was the increasing competition reputation and brand image in from international carriers head- the airline industry could be tar- quartered in neighboring coun- nished. There was indeed a lot 534 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile riding on the partnerships that In Asia, deregulation occurred in SIA had entered or might enter fits and starts, with some major in the near future. regions allowing greater access to foreign carriers. For example, India, a regional market of some THE INTERNATIONAL significance, announced that it AIRLINE INDUSTRY would privatize its state-owned airline company. It had already The airline industry had tradition- allowed its traditionally domestic ally remained fragmented, prima- airline to compete against its rily due to the limiting effects of international air carrier in many national and international regula- of the regional markets compris- tions. Enforced in the form of ing neighboring countries. Japan Deregulation, pri- landing rights and associated made major strides in deregula- competitive constraints, even tion after selling off its shares in vatization, and large airline companies had only the then state-owned Japan Air- the advent of been able to develop, at best, lines and permitted All Nippon new technologies dominance over their own Airways to serve international have started to regional markets. With the excep- markets. In Latin America, many reshape the tion of the United States, domi- of the smaller national flag carri- industry on a nant national flag carriers, ers were privatized. Countries global level. typically owned by the national such as Mexico and Argentina governments, had remained the infused significant levels of mar- only international representatives ket competition in their airline of their countries. However, the industries by removing anticom- competitive dynamics in this petitive barriers and privatizing industry had started to change their national airlines Mexicana dramatically in recent years. and Aerolineas Argentinas. Deregulation, privatization, and the advent of new technologies The trend seemed certain to gain have started to reshape the indus- further momentum, and open try on a global level. skies might be closer to reality than ever before. The major The United States deregulated European nations were already in its airlines in 1978 and had since discussions with the United witnessed heightened competi- States to implement an open tion and aggressive jockeying for transatlantic market area where market position. Europe entered landing rights would be deter- the throes of a similar escalation mined by free market forces of competition following the cre- rather than regulatory policy. ation of the European Union Open-skies agreements are bilat- and the disbanding of country- eral agreements between coun- specific barriers to free market tries that agree to provide competition among air carriers. landing and takeoff facilities for Thunderbird International Business Review • July–August 2002 535 Kannan Ramaswamy air carriers originating in any of regulatory barriers, many of the the partner countries. Such an regions were witnessing acute agreement does not have the competition, often in the form of typical restrictions related to fare wars. Consumers in general landing rights that are deter- became much more price-sensi- mined on a city-pair basis. For tive than ever before. In attempt- example, Singapore and the U.S. ing to keep up with the had signed an open skies agree- competition, many carriers ment under which a Singapore upgraded their service offerings, carrier could travel to any desti- contributing to declining yields in nation city in the U.S. and vice a price-conscious market. Chron- versa. (Table 1 provides a list of ic excess capacity worldwide only countries that negotiated open- exacerbated this situation. skies agreements with the U.S.). Not surprisingly, there was a The twin trends of privatization decline in passenger revenue yield and deregulation resulted in an in all geographic regions, and the increasingly global approach to airlines were fighting an uphill strategic positioning in this indus- battle to extract higher levels of try. Although most large carriers efficiencies from their operating still retained their regional domi- structures. (Table 2 provides data nance, many forged alliances with on financial and operating statis- other leading carriers to offer tics for the leading carriers by seamless services across wider geographic region.) For example, geographic areas. These alliances passenger yield dropped by 1.9% made most of the larger airline and 2.5% in 1998 and 1999, companies de facto global organi- respectively, in Europe and 0.8% zations. With increasing geo- and 1.5% in North America dur- graphic reach and decreasing ing the same period. The drop Table 1. U.S. Open Skies Agreement as of 1999 Source: U.S. Department of State 536 Thunderbird International Business Review • July–August 2002 Thunderbird International Business Review • July–August 2002 Table 2. Key Financial and Operating Statistics for Global Air Passenger Carriers Singapore International Airlines: Strategy with a Smile Note: Definitions of terms in Appendix Source: Annual Reports and HSBC Research 537 538 Table 2. Key Financial and Operating Statistics for Global Air Passenger Carriers (Continued) Thunderbird International Business Review • July–August 2002 Source: Annual reports, S.G. Securities Research, ABN Amro Singapore International Airlines: Strategy with a Smile was far more significant in the regional markets in the U.S., Asia-Pacific region, where the where they continue to dominate, yields fell by 3.9% and 4.1% in any are looking to alliances with 1998 and 1999.