CASE: IB-34 DATE: 03/08/04 SINGAPORE AIRLINES: GLOBAL CHALLENGES Our long-term aim is to be a group of airlines linked through common equity holdings. There are political difficulties, a whole range of difficulties. But it is a necessity because in the long term, we don’t see any alternative for the airline company to grow, unless we reduce our reliance on revenues derived from operating out of a single base, Singapore. We still think there are lots of opportunities in the airline and in related businesses and we do not need to get out of this basic business. But if you stay with the airline business, in order to grow we will have to have ownership of other carriers, or we have to start airlines in other places. — Dr. Cheong Choong Kong, Deputy Chairman and CEO 1 In March 2002, Singapore Airlines (SIA), recognized internationally for quality, profitability and management, was faced with the most difficult operating conditions it had ever had to face. Dr. Cheong Choong Kong, deputy chairman and CEO, gazed out his office window at the activity at Changi International Airport. He considered how he and his management committee would respond to the forces of globalization, regulatory adjustment, and the impact of terrorist attacks in America on the airline and the industry. Dr. Cheong’s management committee was made up of long-time airline people including senior executive vice presidents Mr. Chew Choon Seng (administration) and Mr. Michael J N Tan (commercial), and relative newcomers: Mr. Bey Soo Khiang, executive vice president (technical) and Mr. Loh Meng See, senior vice president human resources. Their challenge: to position the airline for continued growth in a globalizing industry while maintaining the airline’s loss-free record. SINGAPORE AIRLINES SIA was distinguished from other international airlines by its local context. Singapore’s small population and country size meant that, from the beginning, SIA had had to build a preference for the airline among foreign travelers over their own national carriers. In 2002, SIA carried over 15 million passengers on a route network that covered 91 destinations in 40 countries. 1 All quotations in this case, unless otherwise attributed, are from the authors’ interviews in March 2002. Margot Sutherland prepared this case jointly with Professor Bruce McKern as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2003 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business. Singapore Airlines IB-34 p. 2 Taking into account its alliance partners, SIA’s service extended to 119 destinations in 41 countries (Exhibits 1 and 2). Since 1972, when the airline became a separate airline from the former Malaysia-Singapore Airline, SIA’s management had successfully differentiated the airline from its competitors through its focus on top quality service (Exhibit 3). Joseph Pillay, the airline's chairman since its formation until 1996, described the airline’s objective: SIA’s goal from the outset was to offer superior service in every area, at competitive prices, while yielding a surplus to finance expansion and modernization, and to provide a satisfactory return to shareholders. All this while keeping employees satisfied, happy and motivated.2 The airline provided a standard of in-flight service that was admired worldwide. The Singapore Girl, recognized across the globe as an icon for service excellence, was part and parcel of a product offering made possible through a long chain of strategies, initiatives, and disciplined execution. Mr. Pillay: The SIA Girl’s high standard of service in the air inspired passengers to believe, correctly, that the airline excelled in all other departments that supported the quality cabin service, that is flight-deck competence, fleet maintenance and ground services.3 In 2002, Dr. Cheong credited SIA’s historic focus on consistency for the airline’s success: Through consistency we evolve a culture, and we reinforce that culture of customer awareness and care for the customer. We are consistent even in the matter of change — we are always introducing new things into our product and into our service. An example of consistency is our advertising. We haven’t gone the way of other airlines in playing around with our logo, our colors, or the Pierre Balmain uniform.4 It works and it’s the same consistent message of good service, quality service, care for the passenger and, from the early 1980s on, technology. Using technology to serve the passenger. Technology in the form of the most modern fleet, the youngest fleet. Technology in the use of IT. Technology in the cabin with our in-flight entertainment system. Dr. Cheong, Mr. Tan and Mr. Chew were key factors in SIA’s consistent approach, having guided the airline through turbulent times in earlier decades. In 2002, with a solid grounding in the airline’s past, they set their sights on positioning SIA for the future. Mr. Tan: We are moving towards being, not just an international airline, but a global airline. Consolidations are taking place in the commercial aviation industry. It is 2 Speech by Mr. J Y Pillay, Chairman of Singapore Exchange Limited, at The Right Angle Seminar “Rising above the crowd — Maintaining your presence in a rough marketplace,” Friday, March 15, 2002, p. 4. 3 Ibid., p. 6. 4 Pierre Balmain was the French couturier who designed the Singapore Airlines Girl sarong uniform in 1972. Singapore Airlines IB-34 p. 3 no longer adequate to be just where you are or what you were in the past. You have to look to the future. Of course the past is pretty important for us, and we have kept our focus on how the industry and market are developing. The new regulatory system is clearly one of liberalization. Dr. Cheong described SIA’s strategy for dealing with the risks of global diversification: If you want to pursue your long-term objective of diversifying your streams of revenue and owning other airlines, you’ve got to take a risk. And if you take those risks on one or two occasions you are going to get hurt. The most important thing is that you don’t bet the shop. You don’t come close to betting the shop. So that if something happens, we are hurt, but we are never in any danger. Newcomers Loh and Bey outlined specific challenges the airline was facing in 2002: Growth: We used to grow about 20% a year 20 years ago, and about 15 years ago in the mid teens. And as we mature, we grow at 6 to 8%. So, how do we continue to get high growth? Acquisition is one of the strategies. But, we can’t expect to get that kind of high rate of growth by simply acquiring any airline. We must be looking for airlines that are firstly in the growth stage, as we were, say 20 years ago. That kind of airline must have a very good product, in terms of sustainability, and good management. So in a sense we are trying to look for what we were like 20 years ago, and to invest in that airline so that, with a strong management, we don’t have to be distracted or divert a lot of our managerial focus and attention on the acquired airline. Then we can focus on our own organic growth. So in that way we are not compromising or taking away anything from ourselves. (Bey) Managing Alliances: When you get into investment situations with your alliance or equity partners, how do you deal with partners that are so different from your own company? For example, Virgin,5 it’s a totally different relationship that you have to manage. It’s very new. How do you get more people to be familiar with dealing with alliance and equity partners? Because of growing numbers and working with people coming from different cultures and backgrounds, we have to find better ways to manage these relationships. So we have a new division, Alliance and Partnerships, just to cater to those relationship issues that we want to get involved with. (Loh) Product Decisions [The terrorist attacks of] 9/11 require us to think about our service classes: first class, business class, two classes, three classes, two-and-one-half classes! What 5 Virgin Atlantic, in which SIA had acquired a 49% stake for S$1.6 billion in December, 1999. Singapore Airlines IB-34 p. 4 is it going to be? We still have to think about it. It may not stay three classes forever. (Loh) Globalization: The nature of flying is different now. In some instances, we haven’t realized that we are a global airline and we operated as though we were still a regional airline. Our systems were arranged to support regional operations rather than global ones, for example. We now realize the need for the company to review all aspects of operations and for the organizational structure to support a global airline. (Loh) Managing Discontinuous Change: The need for us to respond quickly is greater now. It’s not what is happening, it’s how you respond to what is happening 90% of the time.