Singapore Airlines

In spite of periodic hiccups, caused by wars and economic cycles, the growth in
airline passenger transport has been remarkable. By the late 1990s more than
1.5 million passengers were being carried every year, with this figure set to
double by 2010 according to some forecasts. It is surprising then, that so few
airlines seem to be able to make serious profits. One notable exception is
Singapore International Airlines (SIA), one of the most consistently profitable
airlines in the world, the winner of numerous service quality awards and an
industry leader in service innovation. In the 1970s SIA was the first airline to
introduce complimentary drinks, a choice of meals and free headsets in its
economy class. During the 1980s, with its personalized service from flight
attendants and constant communication between the pilot and passengers, the
airline was successful in differentiating itself with superior service. In the early
1990s business class travelers could utilize the first global in-flight telephone,
together with fax and online services on SIA’s Megatop Boeing 747s.

By the mid-1990s SIA had begun a two-year programme to install a new in-flight
entertainment system for passengers in all its Megatop B747s. This offered 22
channels of video entertainment, 12 digital audio channels, 10 Nintendo video
games, destination information, a telephone at every seat, tele-text news service,
an interactive in-flight shopping facility and - for business and first class
passengers – audio and video programmes on demand. In the late1990s new
services included online hotel, airline, car hire and restaurant booking services –
for a free. Another money maker for SIA is ‘in-flight gaming’ with electronic one-
armed bandits and other casino specials. Interactive entertainment systems allow
passengers to gamble between the safety demonstration and the film. Recent
innovations include armrest portals for client’s PC notebooks to access the
internet. In 1990, Singapore Airlines were investing just $1,800 per seat for their
systems. By 2000, the cost was around $10,000. Typically, that equates to an
expenditure of around $3-5 million per aircraft on such technology – or around
some $100 million across the fleet – with the investment written off over three to
five years. Nor is SIA’s investment limited to in-cabin technology. It has a history
of purchasing and operating long range, state-of-the-art aircraft, while balancing
the increase in its operational capacity with the opening up of new routes. It has
also balanced it purchases, with Boeing and Airbus getting equal attention. At the
same time the company sells aircraft on a regular basis, so that cash can be
generated and the fleet constantly renewed. An example is its 1988 sale of
operationally fit aircraft, including 7f47s, which brought the airlines $110 million
for investment in new Boeing 7f47 – 400s and Airbus A340s.

SIA’s subsidiaries and divisions include SilkAir, providing local and tourist flights,
a cargo operation, and Singapore Air Terminal Services (SATS) which provides
ground services such as baggage handling, check-in ticketing. The maintenance
operation, with over 40 maintenance bays, spun off as an independent unit in
1992, also provides services to other airlines and has joint venture agreements
with Pratt and Whitney, the US engine manufacturer, and the Japanese Taiko
Engineering with whom it operates a maintenance operation in Xiamen, China. In
its passenger operations, alliances enhance geographical reach. The idea is
extend operational frontiers without incurring major capital costs, while winning
customer support by offering seamless travel. Alliances with Air New Zealand
and Ansett increased links with Australasia. The alliance in 1997 with Lufthansa
increased operational capabilities in Europe through giving reciprocal rights to
Lufthansa at Singapore’s Changi Airport. Similarly, the 1998 alliance with South
African Airlines has extended the operational range of SIA in Africa.

Changi, one of the world’s most efficient airports, is the company’s home. It is
also its cargo hub. Around 30 per cent of the airline’s revenues come from cargo
operations. The cargo infrastructure at Changi boasts a state-of-the-art system
which can make an online booking from any of the 75 cities where the airline has
cargo offices and use data warehousing to help keep track of the various
shipments in transit. An Internet site allows cargo shippers to generate their own
airway bills. The ‘super-hub’, Terminal 5, handles cargo extremely efficiently
through the use of specialist equipment.

For most of its recent history SIA has been clear on its strategic approach: ‘Offer
our customers the very best services, cut our costs to the bone and generate a
surplus to continue the unending process of renewal.’ But the first of these
objectives has always been what SIA’s Managing Director, Dr Cheon Choong
Kong, called ‘the importance of the passengers. So the only way to meet the
customers’ need is to consider every detail about service.’ This means both
getting the major decisions on structure and investment right, and never
underestimating the importance of the attention to detail. SIA knows that what
makes the difference between ‘good’ service and ‘excellent’ service can be
something as simple as installing double castor wheels on the cabin carts, which
eases and speeds the service of meals.
 Valuing Intangible Resources

Accountants have considerable trouble when dealing with intangible resources

(or invisible assets as they are sometimes called). Even the more trade able
assets such as patents, copy rights, licensing agreements and brand names can
be valued as part of a company’s capital in its financial accounts only under very
strict conditions. Including such investments as research and development in a
company’s assets is generally not allowed because of the difficulty in precisely
associating future benefits from the investment. Those assets which are even
less tangible, such as ‘knowledge’ or ‘intellectual capital’, cannot be formally
counted at all. Yet intangible assets are often the reason for a firm’s success. Bill
Gates, the head of Microsoft, points out that ‘ … our primary assets, which are
our software and software development skills, do not show up in the balance
sheet at all.

Investors, however, seem to be willing to place a value on intangible assets. In

most stock markets around the world the gap between a company’s formal ‘book’
value and its value on the stock market (judged by what investors are willing to
pay for a share in the company) is getting wider. Table 1.1 shows some
examples.

Table 1.1 Book and market values in selected companies

Company Book value $bn Market value Market to Book

#bn value
Merck 13.6 139.9 11.1 to 1
Johnson & Johnson 12.4 92.9 7.4 to 1
DuPont 11.3 87.0 7.7. to 1
Dow Chemical 7.7 21.8 2.8 to 1

The gap between market and book value, which is at least partly explained by
the extent of a company’s investment in intellectual capital, is important because
it is useful to be able to assess the return on investments in such intangible
assets. Whereas investing in machinery users well-tried techniques to judge
return, there is more difficulty doing the same for investments in, for example,
research and development, or developing employee knowledge or training. A few
organisations, such as the Swedish financial company Skandia, publish details of
their investment in intellectual capital in their financial accounts, but this is rare.
Yet in many growth industries, such as financial services, software and
consulting, the money spent on employees each year is equal to, or more than,
the total capital employed within the company.

One problem in formally counting intellectual capital as part of a company’s total

assets is that much of its intellectual capital can walk of the company’s doors. For
example, as Internet companies boomed in the late 1990s, the experts, who
constituted much of the companies’ value, had an inconvenient habit of leaving to
start their own company or join smaller, faster – growing outfits for more money.
Disney’s fledgling Internet business was plagued by this in its early years. In
parts of the financial services industry the problem was even more severe. April
1999 saw a whole team of expert analysts decamping en masse from Deutshe
Bank to Goldman Sachs, carrying their precious experience and knowledge with
them in their heads.