Singapore International Airlines: Strategy with a Smile Kannan Ramaswamy

case study

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 investment 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

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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 Singapore International Airlines: Strategy with a Smile Definitions of terms in Appendix Note: Source: Annual Reports and HSBC Research Table 2. Table Key Financial and Operating Statistics for Global Air Passenger Carriers

Thunderbird International Business Review • July–August 2002 537 ) Continued Annual reports, S.G. Securities Research, ABN Amro Source: Table 2. Table Key Financial and Operating Statistics for Global Air Passenger Carriers (

538 Thunderbird International Business Review • July–August 2002 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. A geographic overseas carriers to help meet summary of key trends in passen- growth targets. This was especial- ger traffic, growth potential, and ly critical since U.S. airline com- major players by region follows. panies witnessed a 16% decline in profitability in 1998 alone. A North America large part of the decline was The North American region in blamed on operational inefficien- general and the United States in cies and increases in input costs; particular is by far the most signif- for example, personnel costs had icant arena of competition in the increased by 3% between 1997 international aviation industry. and 1999. Increases in oil prices, According to Air Transport it was feared, would further erode World, a leading industry journal, profit margins, since all cost U.S. traffic accounted for close to increases could not be passed 40% of worldwide revenues and along to consumers who were revenue passenger kilometers already price-sensitive. between 1997 and 1999 (see Table 3). American Airlines, Delta Europe Airlines, and United Airlines, who The European region was poised collectively accounted for roughly to grow between 5% and 6% 58% of total U.S. airline revenues annually between 2000 and 2001, in 1999, dominated this market. according to ICAO (International Northwest Airlines, U.S. Airways, Civil Aviation Organization) esti- and Continental formed the sec- mates. In 1999 this region ond tier of the majors, accounting accounted for 26% of total rev- for approximately 29% of total enue passenger kilometers world- revenues for U.S. carriers. wide, placing it second to the Although most of these large car- North American market. Much of riers had carved out significant the region remained fragmented

Table 3. Projected Airline Passenger Traffic Growth

Source: International Civil Aviation Organization

Thunderbird International Business Review • July–August 2002 539 Kannan Ramaswamy

in terms of market dominance, chose to fly on low-cost carriers, as although a small group of leaders opposed to 18% in the U.S. This had started establishing control may be an indication of the poten- over key routes. British Airways tial for low-cost competition in and Lufthansa comprised the top Europe. tier of this market, accounting for roughly 45% of total 1999 rev- Asia-Pacific Region enue passenger kilometers in the By 1999 traffic in the Asian region region, while KLM, Iberia, Swis- had become quite important to sair, SAS, and Sabena formed the the overall success of the air trans- second tier, with a little over 37%. portation industry. Collectively, With the enactment of the Euro- this region represented 24% of pean Union standards, all regula- worldwide revenue passenger kilo- tory barriers had virtually meters. The ICAO estimated that evaporated between member the Asia-Pacific region had grown countries. As a consequence, the annually by 9.7% over the last ten market shares of national carriers years. This upward trend was in their own home markets fell by expected to continue, albeit at close to 15%, on average, between slightly lower levels, moderating 1993 and 1998. The move to between 6% and 7% until 2001. fare-based competition was still in Transpacific traffic was expected its infancy. It was estimated that to grow at 6.6% and intra-Asia- only 2% of Europe’s travelers Pacific traffic by 5%. Some analysts

Table 4. Top 20 International Markets Projected Growth in RPMs by Region

Source: U.S. Dot Form 41, Boeing Corp.

540 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile predicted that Asia would play a had significantly lower operating key role in over half of the top 20 costs compared to their American international markets ranked in and European counterparts. For terms of revenue passenger miles example, in 1998, according to by 2002 (see Table 4). Warburg, Dillon & Read, personnel costs for North American car- The aviation market in Asia, riers accounted for approximately while similar to Europe of the 32% of total revenues. For Euro- pre-EU era, did indeed have pean carriers, it was 21%. Howev- some dominant players. Japan er, for the Asia-Pacific carriers, it Airlines and Singapore Airlines was only 17%. Most of the Asian were the clear leaders, together carriers also had much higher accounting for 40% of the market labor productivity levels and share. The second tier included lower unit-labor costs than air- Cathay Pacific, Thai, and Korean lines in North America or Europe Air, which comprised 33% of the (see Table 5). This location-spe- market.1 Asian carriers in general cific advantage was a primary rea- son why carriers from other 1World Airlines in Review, Interavia Business & Technology, June 1999 regions were setting up signifi-

Table 5. Annual Staff Cost per Employee in the Global Airline Industry

Note: Data drwn from bar charts deemed approximate. Source: Walrburg, Dillon Read, Airline Analyse, Aug. 1999

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cant hub operations in the Asia- to the historic strategic moves by Pacific region. While the yields KLM and Northwest in 1992 to for many carriers such as China partner and begin offering code- Airlines, Korean Air, Thai, and share services. This arrangement Malaysian, the second- and third- gave KLM a foothold in the rap- tier competitors, were much idly growing U.S. market and lower than international levels, allowed Northwest to expand its the top-tier carriers such as Japan horizons in Europe. Today, most Airlines and Singapore Airlines of the leading carriers around the had yields consistent with their world were part of mega-alliances North American and European that had evolved to include sever- counterparts. The avenues for al carriers under a single alliance differentiating airline services in brand. The Star Alliance, for this region were shrinking. The example, included ten carriers elite carriers who had built a rep- representing Asia-Pacific, North utation for superlative service, America, Latin America, and such as Singapore Airlines, were Europe. Oneworld, a similar net- now facing stiff competition from work of partnerships, encompass- carriers such as Thai Airways and es eight carriers spanning a similar Cathay Pacific, who had geared geographical territory to Star (see to deliver similar services. Thus, Table 6). Alliances such as these differentiation was becoming were expected to redirect traffic, much more demanding and diffi- increase profitability, help lever- cult to sustain. age scale economies in operations, and differentiate services in The Rise of Alliances the minds of consumers who By the late 1990s alliances wanted to buy travel services between air carriers in different through a single carrier. parts of the world had become the norm rather than the excep- While they did seem like a won- tion. The initial drive to find derful strategic option even to alliance partners could be traced established carriers, alliances

Table 6. Major Partners in Global Airline Alliances (1999)

Source: Merrill Lynch

542 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile brought their own set of thorny directly traced to Mr. Lee Kuan issues. There were invariably Yew, the most powerful prime questions relating to level of minister in Singapore’s history. service across carriers, safety He was able to tap the patriotic records of the partners, and spirit of his people when he willingness to cede control to announced his intent to develop an alliance. The key issue Singapore to rival Switzerland in seemed to be the difficulty in terms of standard of living. His developing a consensus about emphasis on superior education how the partners would estab- standards, a controlled labor lish common safety, service, and environment, and significant out- performance standards. Fur- lays for training and development ther, in the European markets all helped to enhance the quality there was a potential for cross of human capital. At the end of shareholdings between carriers 1999 Singapore boasted a litera- as privatization accelerated. It cy rate of 93%, among the high- was feared that this could create est in the region. Singapore’s a parallel network that might Confucian work ethic dovetailed undercut alliances. Since indi- very well with his ambitions: It vidual airlines were typically emphasized responsibilities over allowed to negotiate side deals rights and placed enormous value Singapore’s Con- with other carriers on their own on attributes such as hospitality, fucian work ethic irrespective of their alliance caring, and service. As a result of dovetailed very membership, the likelihood of these efforts, Singapore ranked well with his inter-network rivalry was also among the best countries in ambitions: high. terms of human capital and was often rated among the world’s SINGAPORE INTERNATIONAL friendliest places to do business. AIRLINES: COUNTRY AND Rising standards of living meant COMPANY higher wages (see Table 7). Cou- pled with the small size of the History and Culture of local population and a very low Singapore unemployment rate (3.2% in Singapore had witnessed bounti- 1998), the availability of labor ful growth and become the envy was seen as a potential stumbling of many neighboring countries as block in the drive toward further it entered the new twenty-first growth. Many of the larger com- century. Its per capita GNP panies already depended on a siz- increased by a phenomenal 75% able number of expatriates from between 1990 and 1999 and neighboring countries as well as stood at the time at S$39,724.2 the West to staff positions. This meteoric rise could be A staunch believer in free trade 2Government of Singapore, Department of Sta- tistics, www.singstat.gov. and internally driven growth, Mr.

Thunderbird International Business Review • July–August 2002 543 Kannan Ramaswamy

Table 7. Global Comparison of Wages

Note: All wages ar expressed in non-inflation adjusted 2000 U.S. $ per month of employment. They are average wages across all forms of non agricultural activities. Service wages are typically higher than average shown. Source: International Labor Organisation, Laborsta Database

Yew made it clear from the start development of the country. that the “world does not owe Handicapped by the small size Singapore a living.” For example, and the lack of natural resources, in the air transportation sector, Singapore had to rely on service Mr. Yew’s government declared industries such as tourism and that SIA, although the national finance to generate growth. It carrier, would not receive any had always enjoyed an enviable subsidies, protection, financial status as an important geograph- assistance, or economic benefits ic hub dating back to the pre- from the government. It would British colonization era. During have to sink or swim based on its its history as a British colony, own resources and ingenuity. Sin- Singapore provided an impor- gapore literally adopted a free- tant stop-off point for travelers skies approach whereby foreign from Europe and Britain to the flag carriers from other countries outlying colonies of Australia were welcome to serve the city- and New Zealand. Building on state without any restrictions. this historical reputation, Singa- This meant heightened competi- pore evolved into an important tion for SIA right from the start. Asian tourist hub (see Table 8). However, the free market philos- ophy also resulted in sharper rates Singapore International of market growth. For example, Airlines: The Company roughly 35% of the equity base of SIA traced its roots to an organ- Singapore was foreign in origin, ization called Malayan Airways and foreign investors owned 17% that offered its first commercial of all companies in the country, passenger service in May 1947. both testaments to the successful The modern incarnation, SIA, programs that attracted foreign was born in 1972, when the capital and commerce to the Malaysia Singapore Airlines was island nation. officially split into two new airline companies, SIA and The tourism industry played a Malaysian Airlines System (now very significant role in the overall called Malaysia Airways). The

544 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile

Table 8. Tourist Arrivals and Outbound Departures to and from Singapore

Source: Government of Singapore, Department of Statistics long association with the was a very small city-state, with a Malaysian counterpart had geographic area of only 240 proved to be quite beneficial to square miles, smaller than New the fledgling company. The York City! In early 1999 SIA crews garnered significant flight reached 95 destinations in 43 experience operating over rough countries in Asia, Europe, North geographical terrain in Southeast America, the Middle East, Asia. Their safety records were Southwest Pacific, and Africa impeccable. This association also (see Figure 1). Its subsidiary, Silk provided SIA personnel with Air, served feeder routes and crucial operating experience, reaches 18 destinations in the ranging from flight operations to Southeast Asian region. matters of administrative impor- tance. As part of the split, SIA SIA had established an enviable got half the combined assets, record both in terms of its most of the overseas offices, its operational performance and its headquarters building in Singa- profitability history. It was one pore, and a fairly new computer of the few Asian airlines that reservation system. SIA was had continuously posted profits ready to spread its wings in the even during lean years such as international aviation industry the 1990s’ economic down- while its erstwhile partner, turns in Asia. Its return on Malaysian Airlines System, was equity averaged roughly 10% intent on focusing on domestic over the five-year period prior flights within Malaysia. The to 1999, while its return on choice was actually predeter- sales was around 14% during mined for SIA, since Singapore the same period. SIA’s prof-

Thunderbird International Business Review • July–August 2002 545 Kannan Ramaswamy

Figure 1. Route Structure for Singapore Airlines

itability metrics were far more of the largest in the group; it superior to those posted by its offered a variety of terminal rivals, and in some cases as high management services, including as twice or thrice what the rivals catering, passenger and baggage were earning. SIA had posi- handling, and ramp operations. tioned itself to execute a strate- SATS operated one of the largest gy of differentiation, predicated flight kitchens in the world at on offering its passengers a level Changi International Airport, of service that was seldom sur- producing an average of 45,000 passed at the price levels that meals a day. It had an impressive SIA offered. client list that included British Airways, Quantas, Lufthansa, On the Ground and Japan Airlines. It served SIA’s legendary commitment to more than 70% of all airlines fly- superior service began on the ing into Singapore. SATS had ground. It built a network of also gone global through joint wholly owned subsidiaries and ventures in Beijing, Hong Kong, joint ventures to provide opera- Ho Chi Minh City, Macau, tional support in areas such as Chennai, Male, Manila, Osaka, catering, terminal management, and Taipei. and aircraft maintenance. These subsidiaries were largely man- The Changi International Air- aged as autonomous entities that port was indeed a crown jewel had to bid for orders from the for SIA. Given its status as a parent and were rated number 1 national flag carrier, it occupied in many of their core areas. The pride of place at Changi, an air- Singapore Airlines Terminal Ser- port that it also managed. The vices (SATS) subsidiary was one airport itself was rated among

546 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile the best in the world by several tronic ticketing through its global organizations. It often got website. Online ticketing was top honors for its people-han- being rolled out across all desti- dling efficiency and cleanliness. nations in its network. To make For example, SIA made a prom- it easy on the passengers, the ise to deliver a passenger’s bag- company had introduced auto- gage within ten minutes upon mated check-in systems on cer- arrival in Changi and consistent- tain flights that tended to attract ly delivered on that promise. a large number of travelers. It Such a high standard would be embraced technology in a variety difficult but for the excellence of of forms, allowing check-in via e- its subsidiary network, especially mail, telephone, and fax. The Sil- SATS. Changi was also the head- ver Kris Lounge that SIA offered quarters of SIA’s engineering its First and Raffles class (busi- company, a subsidiary that pro- ness-class) passengers could be vided aircraft maintenance and best described as “oases of peace engine overhaul services. As a and quiet”3 amidst the hustle and testament to its engineering bustle of the airport. It featured prowess, many global carriers an environment with plush arm- engaged SIA engineering to chairs, deep pile carpeting, Top-of-the- service their fleets. SIA engineer- aquariums, tropical gardens, and line-business ing also had a global presence a decor that included original equipment through joint ventures with rep- paintings by Singaporean artists. such as com- utable companies such as Rolls- Top-of-the-line-business equip- puters, fax Royce and Pratt & Whitney. It ment such as computers, fax services, and a was expected that both SATS services, and a stock ticker were stock ticker and SIA engineering would be standard amenities. It was one of were standard taken public in the near future to the largest and most luxurious give them the independence and airport lounges in the world. amenities. the incentive to grow faster internationally. It was unclear Fleet Acquisition and whether this move would damp- Management en the control that SIA held in Singapore Airlines came a very these subsidiaries and how it long way from its origins as a might impact the superior company that had a fleet of just ground operations that these ten aircraft serving a network of divisions have been instrumental 22 cities. By late 1999 it operat- in building. ed a fleet of 96 aircraft, almost all of them capable of long-haul, The almost obsessive attention large-capacity flights. It had 37 to detail began the moment the aircraft on firm order, mostly passenger decided to travel on with Boeing, and options to SIA. The company was at the forefront of introducing elec- 3BBC program

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acquire another 36 should the safe trip, all of which are critical need arise. It had planned its fleet aspects around which differentia- acquisitions judiciously such that tion can be built. Keeping up its fleet was only five years old on with the changes in technology average.4 It was the world’s allowed SIA to design aircraft largest operator of the Boeing interiors that encompassed the 747-400 Megatops, a roomy air- latest amenities. For example, craft capable of long-distance SIA was among the first to offer flights. Among the largest air car- a personal video screen in every riers in the world, Delta Airlines seat, even in its economy class. came closest to SIA in terms of Its in-flight entertainment sys- fleet age, with an average of tem, KrisWorld, delivered 22 roughly eight years. Most of the video channels, 12 audio stereo other carriers had large segments channels, and ten Nintendo of their fleets in the 14-plus years game channels at every seat, with range.5 Continuously maintain- a Dolby Surround Sound system ing youth in its flight operations that was specially designed for The famous was no small achievement—it was SIA. Its first-class cabins became French fashion a facet of competition that SIA the gold standard in the industry. house, Givenchy, took very seriously. It maintained They were outfitted with arm- designed all the an office in Seattle just to liaise chair type seats that converted serviceware. with Boeing designers and over- into comfortable beds at the see the development of new addi- push of a button. Clad in Con- tions to the SIA fleet. Newer nolly leather (the company that aircraft were typically more fuel- supplies leather products to efficient and less maintenance- Rolls-Royce, Ferrari, and Jaguar) intensive than older generations. and trimmed in burl wood, the SIA used a mix of leasing and seats included built-in communi- outright purchase, primarily dur- cation devices and an inflatable ing economic lulls, to feed its air mattress. The cabin crew pro- appetite for new fleets, thus vided a “turn-down” service for extracting maximum value for its which the bed linen was replaced investment. on long trips. The famous French fashion house, Givenchy, SIA emphasized fleet selection designed all the serviceware. SIA because of its strong signaling tried to convey this air of exclu- value-it implicitly tells the poten- sivity in its other cabins as well: tial customer that s/he can Even in coach class, the seats expect top-of-the-line technolo- were wider than average, with gy, comfortable seating, and a spacious legroom, leg rests, video screens, and ergonomic 4Fleet data and age obtained from www.singa- headrests. As part of its drive to poreair.com be a top-notch air carrier, SIA 5Airline Analyzer, Warburg, Dillon, Read, August 1999. had gathered several firsts along

548 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile the way. In 1991 it was the first gy to keep its ranks stocked with transcontinental carrier to intro- exceptional talent. Most of the duce in-flight telephones using employees arrived at the compa- advanced communications tech- ny either through a cadetship nology. It was the first with the (similar to an internship) pro- Dolby surround sound and per- gram, which attracted general- sonal video screens in coach. It ists, or a specialist program, was the first to offer fax services geared to functional experts in in the air. The list goes on. Plans areas such as computer services were under way to upgrade the and finance. The cadetship was communications package to an intensive on-the-job training allow Internet access while in the program that cycled employees air. It would shortly debut an on- through a variety of functions as demand entertainment system they moved up the hierarchy. Its called WISEMEN in its First and commitment to employee train- Raffles class cabins. ing and development was reflected in the fact that it spent A large number of The Softer Side of SIA roughly 14 times as much per its employees The company firmly believed that employee as the average Singa- came from Singa- its employees were the primary porean company. The company pore and Malaysia. drivers of the success that it instituted a system of proven enjoyed in the marketplace. controls and mentoring guide- Through a deft mixture of organi- lines that helped the employees zational culture, indoctrination, develop their potential to con- and ritual, SIA was able to meld tribute to the success of the the human assets into a formida- organization. Over time, this ble source of competitive advan- built an enormous sense of tage. A large number of its camaraderie among the team, a employees came from Singapore very strong sense of identity and and Malaysia. As of 1999 it belonging where the employees employed 27,400 people world- truly took pride in their organi- wide, of which roughly 11,000 zation. For example, during the worked in Singapore, making SIA recent economic crisis that the largest private-sector employer plagued Asia, SIA was able to in the country. The company manage without significantly established an expansive SIA train- trimming its workforce because ing center in Singapore that many of its employees willingly served as the focal point for train- turned down their annual wage ing programs targeted at cabin increments while improving crew, commercial staff, flight crew, operational efficiency at the and flight operations personnel. same time.

SIA executed a finely tuned The pool of talent with respect recruitment and training strate- to pilots was indeed global in

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complexion. At last count SIA crew members, of whom half had pilots from over fifty coun- were expatriates. Normally, the tries flying its fleet. Many of expatriates were more expensive, these pilots were expatriates since the company had to bear a drawn by the allure of flying the variety of expenses, such as hous- latest equipment under profes- ing, schooling for children, trav- sional working conditions at very el, etc., in addition to base pay. generous levels of compensation. The company operated its own The complement of cabin crew, flying college with campuses in numbering roughly 6,000, was Singapore and Jandakot, Aus- chosen through a very rigorous tralia, that focused on improving selection process. SIA considered training efficiency and producing them to be the “brand ambassa- qualified pilots. The college dors” who should reflect the served as an incubator for devel- high standards of service excel- oping Singaporean pilots to meet lence that its passengers expect- Of late, this SIA’s growing demands. The ed. Although they were drawn recruitment company had a state-of-the-art from many ethnicities within the strategy had flight training facility in Singa- South and Southeast Asian posed a stum- pore that housed eight flight region (mainly Malaysia, India, bling block, simulators where pilots were Japan, Korea, Taiwan, and since the pool of trained. All flight personnel were Indonesia), they were mostly available talent required to go through manda- Singaporean. Of late, this within Singapore tory biennial proficiency checks. recruitment strategy had posed a was insufficient It was generally believed that the stumbling block, since the pool to draw from. training programs in this regard of available talent within Singa- were quite well-administered, as pore was insufficient to draw reflected in the very high levels from. Given the fact that SIA of safety that the company was had some of the lowest labor able to achieve. It was the long- costs among leading carriers, this term intent to induct more Sin- home-based cost advantage had gapore nationals into the proven to be a critical ingredient cockpit-a daunting proposition, in the success of the company. since the number of local pilots Any falloff in the availability of available was quite low. The local talent could adversely numbers were augmented by impact operating costs, especially graduates of the Singapore if it necessitated the recruitment Armed Forces, which trained of expatriate personnel. Such a pilots for defense purposes. After move would also raise questions completion of the mandatory about how globalizing its work- employment with SAF, some of force would fit in with its historic the trained personnel took up branding approach, the Singa- jobs with SIA. The company pore Girl. When SIA was formed, employed roughly 1,500 flight it had to compete against other

550 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile airlines that had much more ed with new cabin management sophisticated fleets and passen- technologies and service stan- ger options. In combating this dards. Once in the fold of the handicap and to distinguish itself organization, there was a marked in the marketplace, SIA launched effort on the part of management the Singapore Girl as the embod- and staff to help each employee iment of caring, comfortable, perform at his/her best potential. hospitable service. It also played Various practices such as detailed well to the Oriental mystique performance reviews and feed- that was then prevalent in the back at all levels, career counsel- Western world where the compa- ing, and performance-based ny sought to establish a footing. reward systems were designed toward this end. SIA’s in-cabin The image of the Singapore Girl service became legendary, the was carefully nurtured. It began standard that even other airlines with a rigorous selection process aspired to reach. In a recent sur- and extensive training soon vey by Condé Nast Traveler, a thereafter. The training program well-respected travel magazine, emphasized aspects such as pas- SIA was ranked overall as the senger handling, social etiquette, Best International Airline; this The training pro- and grooming. While no differ- was the tenth time that SIA was gram empha- ent on the surface from other chosen for the prestigious honor competitors, the SIA program in the 11 years that the award had sized aspects was far more intense and been given. The respondents such as passen- demanding. For starters, it lasted rated SIA’s cabin service as the ger handling, much longer than competitors’ best in the world, a testament to social etiquette, training programs and embraced the company’s emphasis on and grooming. some nontraditional aspects. For excellence in this arena. Such example, many of its cabin crew awards were nothing new for spent extensive periods of their SIA, which had garnered 100, training program in homes for from august organizations such the aged to gain a better appreci- as Zagat, Condé Nast, Business ation of the special needs of this Traveller, OAG Worldwide, fast-growing passenger segment. ASEAN (Association of South The company’s approach to East Asian Nations) Tourism molding attitudes and service- Association, and Asia Money. In oriented behaviors transcended January 1999 alone, the compa- mere internalization of a set of ny won an astounding 23 awards. physical practices or do’s and don’t’s by the cabin crew. The Competing in the New arduous training process was to Millennium be repeated periodically through By the late 1990s, competition preplanned refresher courses so in the airline business had that the crew could get acquaint- become decidedly global,

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although very few carriers could new relationship with Varig to fly legitimately claim to be global to more destinations in South carriers. Carriers in the Asia- America, a region that was not Pacific region had taken a page well-represented in SIA’s route from the SIA playbook in offer- structure. However, despite the ing premium services at consis- obvious advantages, the alliance tently low fares. Those in Europe network did bring with it some and North America had concerns. strengthened their positions through alliances. SIA had Thai Airlines, the nearest geo- already taken some important graphical neighbor for SIA in the steps to fortify its position glob- alliance, announced its intent to ally. It had recently decided to step down from the Star join the Star Alliance, a powerful Alliance, since it believed that network of carriers that included the relationship would not serve Lufthansa, United, Ansett, Air its best interests after SIA was New Zealand, All Nippon Air- allowed to join. This could indi- ways, South Africa Airways, Air cate some simmering rivalry in Canada, Thai, Varig, and SAS. It the region, where Thai was tak- was believed that this would ing active steps to upgrade its allow the members to offer code- service levels and had reached a However, despite sharing services, fine-tune traffic position where its service would the obvious flows to increase revenues and be rated quite highly. From the advantages, the efficiency, and combine their perspective of loyal SIA passen- alliance network buying power to negotiate favor- gers, it remained to be seen did bring with it able terms for securing inputs. whether the other network carri- some concerns. Translated from an SIA perspec- ers would be able to rise to the tive, this could open up several levels of SIA’s hallmark service destinations that SIA did not yet standards. Should there be serve. It could take advantage of shortfalls, it is quite likely that code sharing to carry a greater the brand image that SIA has so number of passengers to destina- carefully nourished could be tar- tions within Europe and the nished, especially among its loyal United States. For example, as of first-class and business-class pas- 1999 it served only three major sengers. In essence, joining a cities in the U.S.: Los Angeles, network amounted to delegating San Francisco, and New York. some aspects of brand manage- Hence, the relationship with ment to the collective group of United could extend that limited companies such that the identity set of destinations to encompass of the network would transcend a considerably larger number of the individual identities of the primary and secondary cities. A members. The loss of control similar argument could be made over some key decisions such as with respect to leveraging the scheduling and flight frequency

552 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile could also pose challenges in the expected that these moves would future. It also raised critical ques- strengthen SIA’s position in the tions about the imitability of Australasia market that was core competences. Would the growing significantly. partner firms be able to learn more about the critical aspects of Mr. Kong believed it was in SIA’s recipe for sustainable com- SIA’s best interest to pursue an petitive advantage? An alliance is equity investment in Virgin Air- usually not designed to last for- ways as a further step toward ever and hence, should the part- achieving global status. His ners learn firsthand about SIA’s team discussed an investment operations, it might be disadvan- proposal under which SIA tageous to SIA should the would acquire 49% of Virgin alliance be dissolved. Atlantic for roughly $975 mil- lion. This represented a valua- In balancing growth potential tion that was equivalent to four against the ability to control the times prevailing market value alliance, SIA was considering for Virgin and about 1.2 times equity investments. It acquired of Virgin’s sales revenues.6 In an 8.3% equity stake in Air New return, SIA would gain access to Zealand to cement a long part- the lucrative transatlantic sector nership with the New Zealand between the U.S. and UK, thus carrier. Since Air New Zealand entering an arena that SIA already owned 50% of Ansett could not enter previously given Airways, SIA would have the the roadblocks imposed by the benefit of the additional alliance with Ansett as well. It was 6HSBC report, Feb. 7, 2000.

Figure 2. Route Structure for Virgin Airways

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British government; it would This could potentially pit SIA also obtain landing slots at Lon- against Star Alliance members. don’s Heathrow Airport. The For example, SIA might want to route structures of the two funnel passengers to Virgin on its companies were quite comple- North Atlantic routes instead of mentary, with very little overlap United, a Star Alliance partner. (see Figures 1 and 2). This Decisions such as this could would indicate greater potential muddy the alliance network that for increasing revenues through SIA currently belongs to. In code-sharing flights. While Sir essence, joining forces with Vir- Richard Branson was slated to gin might undo some of the continue managing Virgin, SIA benefits of belonging to the Star had been promised three board Alliance. As Mr. Kong proceeded memberships. Since both organ- through Immigration at Changi, izations adopted an almost he was trying to assemble a men- obsessive attention to customer tal map of how he wanted to What new sig- service and had similar operat- position SIA in the near future. naling devices ing philosophies, it was believed Besides the strategic issues relat- could SIA har- that they would function well as ing to alliances and Virgin ness to set itself partners. However, Virgin Atlantic, the mounting competi- apart from the appeared to be the more free- tive intensity in the Asia-Pacific competition? spirited company of the two and region also required immediate had a reputation as an icono- action. How should SIA contin- clast, while SIA portrayed a ue to differentiate itself from the buttoned-down, conservative copycats who seemed to be image. The board was sure to doing a very creditable job at raise issues of management imitating SIA in terms of cabin compatibility, price to acquire, service and amenities? What new control of Virgin Atlantic, and signaling devices could SIA har- how the new relationship could ness to set itself apart from the impact existing relationships competition? Should SIA be that SIA had built with other wedded to the Singapore Girl carriers. For example, Virgin concept that had historically declared that it would soon helped distinguish their service launch a low-cost Virgin Aus- offerings? Would SIA be able to tralia division that would com- achieve its global objectives pete in the Australian market. while holding steady with its This might place SIA in an awk- recruitment approach that ward position, since its owner- focused primarily on Singapore- ship in Air New Zealand could ans and Malaysian personnel? technically make it a competitor Should SIA begin a full-blown to Virgin. Further, Virgin had strategy analysis based on Inter- repeatedly said that it would not net technologies that appear to join the Star Alliance. be rewriting the rules of busi-

554 Thunderbird International Business Review • July–August 2002 Singapore International Airlines: Strategy with a Smile ness? How could its potential be fronts, but there was uncertainty harnessed within SIA? in the air. SIA was at a crossroads in its history. The next few strate- The chauffeur was holding the gic moves would determine door open as Mr. Kong strode to whether it would rise from its sta- the limousine. Mr. Kong wanted tus as a very good Asian airline to to get a few winks before the become a global player, com- board meeting tomorrow. It was manding the respect of the the best of times for SIA on some world’s largest carriers.

APPENDIX

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