THUNDERBIRD ‘BevGO. oF GLOBAL WANAGEMENT “rBo173 December 21,2001 SINGAPORE INTERNATIONAL AIRLINES: STRATEGY WITH A SMILE Mr. Cheong Choong Kong, the CEO of Singapore International Airlines (SIA) put away his papers as the SIA Megatop circled co land at Changi International Airport in Singapore. Hee could sce the mag, nificent lights of the city as it prepared for the much-awaited arrival of the new millennium just owo weeks away. Singapore had promised a spectacular show because it would be among the frst countries to rwelcome the New Year. Mr. Kong was returning from meetings in London with Mr. Richard Branson, CEO of Virgin Adantic Airways. The two companies had been exploring the potential for a formal ‘equity alliance. While he was happy with the performance of the company under his leadership, he knew that much remained to be done. The next sequence of strategic moves would be crucial in cement ing SIN’ meteoric rise. SIA had managed to weather the storms of declining traffic and yields especially in the Asian. region. The regional economics had been showing signs of a nascent recovery. However, the economic recovery was by no means complete. For example, Japan was stil unsteady and the other Asian tigers were tentative at best. Some of the quintessential sources of competitive advantage for SIA were increas ingly coming under fire. Labor costs had been showing a remarkable upward rend, growing along with the prosperity of Singapore itself. Specialized labor was difficult to find locally, and when available proved to be much more expensive than before. This could not have happened at a worse time since the main competitors were showing signs of cost-based competition and the customer was increasingly attracted to low fares. This posed a dilemma for SLA, which had traditionally relied on Singaporean personnel for most of its operations. Looking overseas for specialized talent, although not new for SIA, ‘could have strong political and economic ramifications that had not been fathomed as yet. Competitors had been quick to copy many of the remarkable service innovations pioneered by SIA. The avenues for tangible differentiation that SIA had used in the past to set itself apart had soon become the norm. Every major air cartier now offered a choice of meals in economy class, innovative ‘entertainment options in the cabins, and all che trappings of luxury that used to be the sole domain of SIA. Of particular concern was the increasing competition from international carriers headquartered in nncighboring countries such as Thai Airways, Cathay Pacific, Malaysian, and Qantas, These carriers had carat to duplicate some of the key features of SLAs competitive strategy from recruitment to in-flight service and fleet management. Thus, there were fewer and fewer avenues left for SIA to distinguish itself from the others. This placed growing pressure on the firm to refine its differentiation strategy. In che international markets, alliances had become a way of life. It was probably the only reason- able way to realize global aspirations. After weighing these factors for a considerable time, SIA had recently joined the well-acclaimed Star Alliance, Itwas also pursuing numerous other partnerships with other carriers as well as exploring direct investment options as a means of growth in overseas markets, While this positioned SIA to take advantage of the booming markets for travel in Europe and the United States, it raised concerns among SIAS loyal clientele. There was some apprehension about the ability of the other partners to be able to live up to the standards that SIA had set. Should there be Copyright © 2001 Thunderbird, The American Graduate School of International Management. All righ reserved. ‘This case was prepared by Profesor Kannan Ramaswamy, with research assitance from Mr Manesh Modi, MIM2000, forthe purpote of clasroam discussion only. and not to indicate ether effective or ineffective management. “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.significant differences in service quality across network partners, some feared that SIA\s sterling reputa- tion and brand image in the aitline industry could be tarnished. There was indeed a lot riding on the partnerships that SIA had entered or might enter in the near future The International Airline Industry ‘The airline industry had traditionally remained fragmented primarily due co the limiting effects of national and international regulations. Enforced in the form of landing rights and associated competi tive constraints, even large airline companies had only been able co develop dominance over their own regional markets at best. With the exception of the United States, dominant national flag carriers, typically owned by the national governments, had remained the only international representatives of their countries. However, the competitive dynamics in chis industry had starced to change dramatically in recent years. Deregulation, privatization, and the advent of new technologies have started to reshape the industry on a global level “The United States deregulated its airlines in 1978 and had since witnessed heightened competi tion and aggressive jockeying for market position. Europe entered the throes of a similar escalation of competition following the creation of the European Union and the disbanding of country-specific barriers to free market competition among air cartiers. In Asia, deregulation occurred in fits and starts with some major regions allowing greater access to foreign carriers. For example, India, a regional mar kket of some significance, announced that it would privatize its stace-owned aisline company. It had already allowed its raditionally domestic airline co compete against its international air cartier in many of the regional markets comprising neighboring counties. Japan made major strides in deregulation after selling off is shares in the then state-owned Japan Airlines and permitted All Nippon Airways (0 serve international markets. In Latin America, many of the smaller national flag carriers wete privatized. Counties such as Mexico and Argentina infused significant levels of market competition in theit airline industries by removing anti-competitive barriers and privatizing thei national airlines Mexicana and ‘Aerolineas Argentinas. ‘The trend seemed certain to gain further momentum and open skies might be closer to reality than ever before. The major European nations were already in discussions with the United States to implement an open Trans-Atlantic market area where landing tights would be determined by fiee mar kket forces rather than regulatory policy. Open skies agreements ate bilateral agreements between coun. tries that agree to provide landing and take-off facilities for air cartiets originating in any of the partner countries. Such an agreement does not have the typical restrictions related co landing rights that are determined on a city-pair basis. For example, Singapore and the U.S. had signed an open skies agree ment under which a Singapore carrier could travel to any destination city in the U.S. and vice versa (Exhibit I provides a list of countries that negotiated open skies agreements with the U.S.) ‘The twin tends of privatization and deregulation resulted in an increasingly global approach to strategic positioning in this industry. Although most large carriers still retained their regional domi nance, many forged alliances with other leading carriers to offer seamless services across wider geo: graphic areas. These alliances made most of the larger aitline companies de facto global organizations. ‘With increasing geographic reach and decreasing regulatory barriers, many of the regions were witness ing acute competition often in the form of fare wars. Consumers in general became much more price sensitive than ever before. In attempting to keep up with the competition, many carriers upgraded their service offerings contributing to declining yields in a price-conscious market. Chronic excess capacity worldwide only exacerbated this situation. Not surprisingly, there was a decline in passenger revenue yield in all geographic regions and the airlines were fighting an uphill battle to extract higher levels of efficiencies from their operating struc tures. (Exhibit II provides data on financial and operating statistics for the leading cartiers by geo: graphic region.) For example, passenger yield dropped by 1.9% and 2.5% in 1998 and 1999, respec tively, in Europe and 0.8% and 1.5% in North America during the same period. The drop was far more 2 ‘rE0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.significant in the Asia-Pacific region where the yields fell by 3.9% and 4.1% in 1998 and 1999. A sosraphic rpion-wie summary of key trends in paenger cic growth potential and major payne North America ‘The North American region in general and the United States in particular is by far the most significant arena of competition in the international aviation industry. According to Air Transport World, a leading industry journal, U.S. traffic accounted for close to 40% of worldwide revenues and revenue passenger Kilometers between 1997 and 1999 (see Exhibit IM). American Airlines, Delta Airlines, and United Airlines, who collectively accounted for roughly 58% of total U.S. airline revenues in 1999, dominated this market. Northwest Airlines, U.S. Airways, and Continental formed the second tier of the majors accounting for approximately 29% of total revenues for U.S. carriers. Although most of these large carriers had carved out significant regional markets in the U.S. where they continue to dominate, many are looking to alliances with overseas carriers to help meet growth targets. This was especially critical since U.S. airline companies witnessed a 16% decline in profitability in 1998 alone. A large part of the decline was blamed on operational inelficiencies and increases in input costs. For example, personnel ‘costs had increased by 3% between 1997 and 1999. Increases in oil prices, it was feared, would further ‘erode profit margins since all cost increases could not be passed along to consumers who were already price sensitive Europe “The European region was poised to grow between 5% and 6% annually between 2000 and 2001 ac- cording to ICAO (International Civil Aviation Organization) estimates. In 1999 this region accounted for 26% of total revenue passenger kilometers worldwide placing it second to che North American market. Much of the region remained fragmented in terms of market dominance although a small ‘group of leaders had started establishing control over key routes. British Airways and Lufthansa com- prised the top tier of this market and accounted for roughly 45% of coral 1999 revenue passenger kilometers in the region while KLM, Iberia, Swissair, SAS, and Sabena formed the second tier with litle over 37%. With che enactment of the EU (European Union) standards, all regulatory barriers had vircually evaporated between member countries. As consequence, the market shares of national carriers in their own home markets fell by close co 15% on average between 1993 and 1998. The move to fare- based competition was stil in its infancy. It was estimated that only 2% of Europe's travelers chose to fly ‘on low-cost cartiers as opposed co 18% in the U.S. This may be an indication of the potential for low- ‘cost competition in Europe. Asia-Pacific Region By 1999, traffic in the Asian region had become quite important to the overall success of the air trans- portation industry. Collectively, this region represented 24% of worldwide revenue passenger kilome- ters. The ICAO estimated that the Asia-Pacific region had grown annually by 9.7% over the last ten years. This upward trend was expected co continue albeit at slightly lower levels, moderating between, 6%-79% until 2001. Trans-Pacific traffic was expected to grow at 6.6% and intra-Asia-Pacific traffic by 59%. Some analysts predicted that Asia would play a key role in over half ofthe top twenty international markets ranked in cerms of revenue passenger miles by 2002 (see Exhibic IV) ‘The aviation market in Asia, while similar to Europe of the pre-EU era, did indeed have some dominance players. Japan Airlines and Singapore Airlines were the clear leaders and together accounted for 40% of the market share. The second tier included Cathay Pacific, Thai, and Korean Ais, which ‘comprised 33% of the market.’ Asian carriers in general had significantly lower operating costs com- pared co their American and European counterparts. For example, in 1998, according to Warburg, ‘World Aitlines in Review, Jnteravia Business & Technology, June 1999. ‘TB0173, 3 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.Dillon & Read, personnel costs for North American carriers accounted for approximately 32% of total revenues. For European carriers, it was 219. However, for the Asia-Pacific carriers, it was only 17%. Most of the Asian carriers also had much higher labor productivity levels and lower unit labor costs than, airlines in North America or Europe (see Exhibic V). This location-specific advantage was a primary reason why carriers from other regions were setting up significant hub operations in the Asia-Pacific region. While the yields for many carriers such as China Airlines, Korean Air, Thai, and Malaysian, che second and third tier competitors, were much lower than internacional levels, the top tier carriers such as Japan Aislines, and Singapore Airlines had yields consistent with their North American and E ‘counterparts. The avenues for diflerentiating airline services in chis region were shrinking. The elite carriers who had built a reputation for superlative service such as Singapore Ailines were now facing stiff competition from carriers such as Thai Airways and Cathay Pacilic who had geared to deliver similar services. Thus, diflerenciation was becoming much more demanding and difficult to sustain, fopean The Rise of Alliances By the late 1990s alliances between air cartiers in different parts of the world had become the norm rather than the exception. The initial drive co find alliance partners could be traced to the historic strategic moves by KLM and Northwest in 1992 to partner and begin offering code share services. This arrangement gave KLM a foothold in the rapidly growing U.S. market and allowed Northwest to ex pand its horizons in Europe. Today, most of the leading carriers around the world were part of mega alliances which had evolved to include several carriers under a single alliance brand. The Star Alliance for example, included ten carsiers representing Asia-Pacific, North America, Latin America, and Eu rope. Oneworld, a similar network of partnerships, encompasses eight carriers spanning a similar geo- graphical territory to Star (see Exhibit VI). Alliances such as these were expected to redirect trafic, increase profitability help leverage scale economies in operations, and differentiate services in the minds ‘of consumers who wanted to buy travel services through a single carrier ‘While they did seem like a wonderful strategic option even to established carriers, alliances brought their own set of thorny issues. There were invariably questions relating to level of service across carries, safety records of the partners, and willingness to cede control to an alliance. The key issue seemed to be the difficulty in developing a consensus about how the partners would establish common safety, service, and performance standards. Further, in the European markets there was a potential for cross-sharcholdings between carriers as privatization accelerated. It was feared that this could create a parallel network that might undercut alliances. Since individual airlines were typically allowed to negotiate side deals with other carriers on their own irrespective of their alliance membership, the likelihood of inter-newwork rivalry was also high. Singapore International Airlines: Country and Company History and Culture of Singapore Singapore had witnessed bountiful growth and become the envy of many neighboring countries as it ‘entered the new 21" cencury. Its per capita GNP increased by a phenomenal 75% between 1990 and 1999 and currently stood at $39,724." This meteoric rise could be directly traced to Mr. Lee Kuan Yew, the most powerful Prime Minister in Singapore's history. He was able to tap the patriotic spitit of his people when he announced his intent to develop Singapore to rival Switzerland in terms of standard of living. His emphasis on superior education standards, a controlled labor environment, significant out lays for training and development, all helped to enhance the quality of human capital. At the end of 1999, Singapore boasted a literacy rate of 93%, among the highest in the region. Singapore's Confucian, work ethic dovetailed very well with his ambitions. Itemphasized responsibilities over rights and placed ‘enormous value on attributes such as hospitality, caring and service. Asa result of these efforts, Singapore » Government of Singapore, Department of Statistics, www singstat gov. 4 ‘rE0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.today ranked among the best countries in terms of human capital and was ofien rated among the world’s friendliest places to do business. Rising standards of living meant higher wages (see Exhibic VII). Coupled with the small size of the local population and a very low unemployment rate (3.2% in 1998), the availability of labor was seen as a potential stumbling block in the drive coward further growth. Many of the larger companies already depended on a sizable number of expatriates from neighboring countries as well as the West to stall positions ‘A staunch believer in free trade and internally driven growth, Mr. Yew made it clear from the start that the “world does not owe Singapore a living.” For example, in the air transportation sector, Mr. Yew's government declared that SIA, although the national cartier, would not receive any subsidies, protec- tion, financial assistance, or economic benefits from the government. It would have to sink or swim based on its own resources and ingenuity: Singapore literally adopted a free skies approach whereby foreign flag carriers from other countries were welcome to serve the city-state without any restrictions. ‘This meant heightened competition for SIA right from the start. However, the free market philosophy also resulted in sharper rates of market growth. For example, roughly 35% of the equity base of Singapore ‘was foreign in origin, and foreign investors owned 17% of all companies in the country, both testaments to the successful programs that attracted foreign capital and commerce to the island nation ‘The tourism industry played a very significant role in the overall development of the country. Handicapped by the small size and the lack of nacural resources, Singapore had to rely on service indus- tries such as tourism and finance to generate growth. It had always enjoyed an enviable status as an important geographic hub dating back to the pre-British Colonization era. During its history as a British colony, Singapore provided an important stop-off point for travelers from Europe and Britain to the outlying colonies of Australia and New Zealand. Building on this historical reputation, Singapore evolved into an important Asian tourist hub (see Exhibit VII), Singapore International Airlines: The Company SIA traced its roots to an organization called Malayan Airways that offered its first commercial passen- {get service in May 1947. The modern incarnation, SIA was born in 1972 when the Malaysia Singapore Airlines was officially split into two new airline companies, SIA and Malaysian Airlines System (now called Malaysia Airways). The long association with the Malaysian counterpart had proved to be quite beneficial to the fledgling company. The crews garnered significanc flight experience operating over rough geographical terrain in Southeast Asia. Theis safety records were impeccable. This association also provided SIA personnel with crucial operating experience ranging from flight operations to matters of administrative importance. As part of the split, SIA got half the combined assets, most of the overseas offices, its headquarters building in Singapore, and a fairly new computer reservation system. SIA was ready to spread its wings in the international aviation industry while its erstwhile partner, Malaysian Airlines System, was intent on focusing on domestic flights within Malaysia. The choice was actually pre-determined for SIA since Singapore was a very small city-state with a geographic arca of only 240 square miles, smaller than New York City! In eatly 1999 SIA reached 95 destinations in 43 counties in Asia, Europe, North America, Middle East, Southwest Pacific, and Alrica (see Exhibit IX). Its subsid iary Silk Air served feeder routes and reaches 18 destinations in the Southeast Asian region. SIA had established an enviable record both in terms of its operational performance and its profitability history. It was one of the few Asian airlines chat had continuously posted profits even during lean years such as the 1990s economic downturns in Asia. Its return on equity (ROE) averaged roughly 10% over the five-year period prior to 1999, while its return on sales was around 14% during the same period. These profitability metries were far more superior to those posted by SIAS rivals, and in some cases as high as twice or thrice what the rivals were earning, SIA had positioned itself to execute a surategy of differentiation, predicated on offering its passengers a level of service that was seldom sur passed at the price levels that SIA offered. ‘TB0173, 5 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.On the Ground SINS legendary commitment to superior service began on the ground. It built a nevwork of wholly ‘owned subsidiaries and joint ventures to provide operational support in areas such as catering, terminal management, and aircraft maintenance. These subsidiaries were largely managed as autonomous enti- ties that had to bid for orders from the parent and were rated number one in many of their core arcas. “The Singapore Airlines ‘Terminal Services (SATS) subsidiary was one of the largest in the group. It offered a variety of terminal management services including catering, passenger and baggage handling, and ramp operations. SATS operated one of the largest flight kitchens in the world at Changi Interna. tional Airport, producing an average of 45,000 meals a day. It had an impressive client list that included British Airways, Quantas, Lufthansa, and Japan Airlines. It served more than 70% of all airlines flying into Singapore. SATS had also gone global through joint ventures in Beijing, Hong Kong, Ho Chi Minh City, Macau, Chennai, Male, Manila, Osaka, and Tipe “The Changi International Airport was indeed a crown jewel for SIA. Given its status asa national flag carrier, it occupied pride of place at Changi, an airport that it also managed. The airport itself was rated among the best in the world by several global organizations. It often got top honors for its people. handling efficiency and cleanliness. For example, SIA made a promise to deliver a passenger's baggage within ten minutes upon arrival in Changi and consistently delivered on that promise. Such a high standard would be difficult but for the excellence ofits subsidiary network, especially SATS. Changi was also the headquarters of SIs Engineering Company, a subsidiary that provided aircraft maintenance and engine overhaul services. As a testament to its engineering prowess, many global carriers engaged SIA Engineering to service their fleets. SIA Engineering also had a global presence through joint ven- tures with reputable companies such as Rolls-Royce and Pratt & Whitney. It was expected that both SATS and SIA Engineering would be taken public in the neat future to give them the independence and the incentive to grow faster internationally. Iewas unclear whether this move would dampen the control that SIA held in these subsidiaries and how it might impact the superior ground operations that these divisions have been instrumental in building “The almost obsessive attention to detail began the moment the passenger decided to travel on SIA “The company was at the forefront of introducing electronic ticketing through its Web site. Online ticketing was being rolled out across all destinations in its network. To make it easy on the passengers, the company had introduced automated check-in systems on certain flights that tended to attract a large number of travelers. Ic embraced technology in a variety of forms, allowing check-in via e-mail, cele- phone, and fax. ‘The Silver Kris Lounge that SIA offered its First and Raffles class (business class) passengers could be best described as “oases of peace and quiet”® amidst the hustle and bustle of the airport. Ic featured an environment with plush armehaits, deep-pile carpeting, aquariums, tropical gar dens, and a décor that included original paintings by Singapore artists. Top-of-the-line-business equip ‘ment such as computers, fax services, and a stock ticker were standard amenities. twas one of the largest and most luxurious aisport lounges in the world. Fleet acquisition and management: Singapore Airlines came a very long way fiom its origins as company that had a fleet of just 10 aircraft serving a network of 22 cities. By late 1999 it operated a fleet ‘of 96 aircraft, almost all of them capable of long-haul, large-capacity lights. It had 37 aircraft on firm ‘order mostly with Boeing and another 36 on options to acquire should the need arise. It had planned its fleet acquisitions judiciously such that its fleet was only five years old on average.‘ It was the world’s largest operator of the Boeing 747-400 Megatops, a roomy aircraft capable of long distance flights. ‘Among the largest air carriers in the world, Delta Aitlines came closest to SIA in terms of fleet age with an average of roughly eight years. Most of the other carriers had large segments of their fleets in the 14+ yeats range.’ Continuously maintaining youth in its flight operations was no small achievement. It was BBC program, “ Fleet daca and age obtained from www singaporeair.com. » Airline Analyzer, Warburg, Dillon, Read, August 1999. ‘6 ‘rE0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.a facet of competition that SIA took very seriously. It maintained an office in Seatele, Washington, just Co liaise with Boeing designers and oversee the development of new additions to the SIA fleet. Newer aircraft were typically more fuel efficient and less maintenance intensive than older generations. SIA used a mix of leasing and outright purchase, primarily during economic lulls, to feed its appetite for new fleets, thus extracting maximum value for its investment. SIA emphasized fleet selection because ofits strong signaling value. I implicitly tells the potential ‘customer that s/he can expect top-of-the-line technology, comfortable seating, and a safe «ip, all of which are critical aspects around which differentiation can be built. Keeping up with the changes in technology allowed SIA to design aircraft interiors that encompassed the latest amenities. For example SIA was among the first co offer a personal video screen in every seat, even in its economy class. Its in- flight entertainment system KrisWorld delivered 22 video channels, 12 audio stereo channels, and ten Nintendo game channels a every seat, with a Dolby surround sound system that was specially designed for SIA. Its first class cabins became the gold standard in the industry. They were outfitted with arm- chair type seats that converted into comfortable beds atthe push of a burton. Clad in Connolly leather (the company that supplies leather products to Rolls Royce, Ferrari, and Jaguar) and trimmed in burl ‘wood, the seats included built-in communication devices and an inflatable air mattress. The cabin crew provided a “curn-down” service where the bed linen was replaced on long trips. The famous French fashion house Givenchy designed all the service-ware. SIA tried co convey this air of exclusivity in its other cabins as well. Even in coach class, the seats were wider than average, with spacious legroom, leg rests, video screens, and ergonomic headrests. As part of its drive to be a top-notch air carries, SIA had gathered several firsts along the way. In 1991, it was the first anscontinental cartier to introduce in- fligh« telephones using advanced communications technology. Itwas the first with the Dolby surround sound and personal video sereens in coach. It was the frst to offer fax services in the ait. The lst goes on. Plans were under way to upgrade the communications package to allow Internet access while inthe ait. Ik would shortly debut an on-demand entertainment system called WISEMEN in its First and Raffles class cabins The Softer Side of SIA ‘The company firmly believed that its employees were the primary drivers of the success that it enjoyed in the marketplace. Through a deft mixture of organizational culture, indoctrination, and ritual, SIA ‘was able to meld the human asses into a formidable source of competitive advantage. A large number of its employees came from Singapore and Malaysia. As of 1999 it employed 27,400 people worldwide of which roughly 11,000 worked in Singapore making SIA the largest private sector employer in the coun. ty. The company established an expansive SIA Tzaining Center in Singapore that served as the focal point for training programs targeted at cabin crew, commercial staff, flight crew, and flight operations personnel SIA executed a finely tuned recruitment and training strategy to keep its ranks stocked with excep- tional talent. Most of the employees arrived at the company either through a cadetship (similar to an internship) program that attracted generalists, or a specialist program geared to functional experts in areas such as computer services and finance. ‘The cadetship was an intensive on-the-job training pro: ‘gram that cycled employees through a variety of functions as they moved up the hierarchy. Its commit ‘ment co employee taining and development was reflected in the fact that it spent roughly 14 times as much per employee as the average Singapore company. The company instituted a system of proven controls and mentoring guidelines that helped the employees develop their potential to contribute to the success of the organization. Over time, this built an enormous sense of camaraderie among the team, a very strong sense of identity and belonging where the employees truly took pride in their organization. For example, during the recent economic crisis that plagued Asia, SIA was able co manage without significantly trimming its workforce because many ofits employees willingly turned down their annual ‘wage increments while improving operational efficiency at the same time ‘TB0173, 7 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.‘The pool of talent with respect to pilots was indeed global in complexion. At last count SIA had pilots from over fifty countries flying its fleet. Many of these pilots were expatriates drawn by the allure of flying the latest equipment under professional working conditions at very generous levels of compen- sation. The company operated its own flying college with campuses in Singapore and Jandakot, Austra- lia, that focused on improving training efficiency and producing qualified pilots. The college served as an incubator for developing Singaporean pilots co meet SIA’s growing demands. The company had a state-of-the-art flight training facility in Singapore which housed eight flight simulators where pilots ‘were trained. All flight personnel were required (o go through mandatory biennial proficiency checks. It ‘was generaly believed that the training programs in this regard were quite well administered as reflected in the very high levels of safety that the company was able to achieve. It was the long-term intent (0 induct more Singapore nationals into the cockpic, a daunting proposition especially since the number of local pilots available was quite low. This was augmenced by graduates of the Singapore Armed Forces (SAF) which trained pilots for defense purposes. Afier completion of the mandatory employment with SAF some of the trained personnel took up jobs with SIA. The company employed roughly 1,500 flight ‘erew of whom half were expatriates. Normally the expatriates were more expensive since the company had to bear a variety of expenses such as housing, schooling for children, travel, etc., in addition to base pay ‘The complement of cabin crew, numbering roughly 6,000, were chosen through a very rigorous selection process. SIA considered them co be the “brand ambassadors” who should reflect the high standards of service excellence that its passengers expected. Although they were drawn from many ethnicities within the South/Southeast Asian region (mainly Malaysia, India, Japan, Korea, Taiwan, and Indonesia), they were mostly Singaporean. Of late, this recruitment strategy had posed a stumbling block since the pool of available talent within Singapore was insullicient to draw from. Given the fact that SIA had some of the lowest labor costs among leading carriets,chis home-based cost advantage had proven to be a critical ingredient in the success of the company. Any fall-off in the availability of local talent could adversely impact operating costs, especially if ic necessitated the recruitment of expatriate personnel. Such a move would also raise questions about how globalizing its workforce would fit in with its historic branding approach, the Singapore Girl. When SIA was formed, it had to compete against other aislines that had much more sophisticated fleets and passenger options. In combating this handi- cap and to distinguish itself in the marketplace, SIA launched the Singapore Girls the embodiment of caring, comfortable, hospitable serviee. Italso played well to the oriental mystique that was then preva- lene in the Western world where the company sought to establish a footing. ‘The image of the Singapore Girl was carefully nurtured. It began with a rigorous selection process and extensive training soon thereafter. The training program emphasized aspects such as passenger han- dling, social etiquette, and grooming. While no different on the surface from other competitors, the SIA program was far more intense and demanding. For starters, it lasted much longer than competitors training programs and embraced some non-traditional aspects. For example, many of its cabin crew spent extensive periods of their training program in homes for the aged to gain a better appreciation of the special needs of this fast-growing passenger segment. The company’s approach to molding attitudes and service-oriented behaviors transcended mere internalization of a set of physical practices, and do's and don'ts by the cabin crew. The arduous training process was to be repeated periodically ehrough, preplanned refresher courses so that the erew could get acquainted with new cabin management tech- nologies and service standards. Once in the fold of the organization, there was a marked effort on the parc of management and staff to help each employee perform at his/her best potential. Various practices such as detailed performance reviews and feedback at all levels, career counseling, and performance- based reward systems were designed toward this end. SIA in-cabin service became legendary, the stan- dard that even other airlines aspired to reach. In a recent survey by Condé Nast Traveler, a well-respected travel magazine, SIA was ranked overall as the Best International Aisline. This was the 10* time that SIA was chosen for the prestigious honor in eleven years that the award had been given. The respondents rated SIA cabin service as the best in the world, a testament to the company’s emphasis on excellence in this arena. Such awards were nothing new for SIA which had garnered over a hundred from august ‘organizations such as Zagat, Condé Nast, Business Traveller, OAG Worldwide, ASEAN (Association of 8 ‘rE0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.South East Asian Nations) Tourism Association, and Asia Money. In January of 1999 alone, the com- any won an astounding 23 awards. Competing in the New Millennium By the late 1990s, competition in the aisline business had become decidedly global, although very few carriers could legitimately claim to be global carriers. Carriers in the Asia-Pacific region had taken a page from the SIA playbook in offering premium services at consistently low fares. Those in Europe and North America had strengthened their positions through alliances. SIA had already taken some impor- tant steps to fortify its position globally. It had recently decided to join the Star Alliance, a powerful network of carriers that included Lufthansa, United, Ansett, Air New Zealand, All Nippon Airways, South Africa Airways, Air Canada, Thai, Varig, and SAS. It was believed that this would allow che members to offer code-sharing services, fine tune traffic flows to increase revenues and efficiency, and combine their buying power to negotiate favorable terms for securing inputs. Translated from an SIA perspective, this could open up several destinations that SIA did not yet serve. It could take advantage of ‘code sharing to carry a greater number of passengers to destinations within Europe and the United Scates. For example, as of 1999 it served only three major cities in the U.S., Los Angeles, San Francisco, and New York. Hence, the relationship with United could extend that limited set of destinations co ‘encompass a considerably larger number of primary and secondary cities. A similar argument could be made with respect co leveraging the new relationship with Varig to fly to more destinations in South America, a region that was not well represented in SIA’ route structure. However, despite the obvious advantages, the alliance network did bring with it some concerns ‘Thai Aitlines, che nearest geographical neighbor for SIA in the alliance, announced its intent to step down from the Star Alliance since it believed that the relationship would not serve its best interests alter SIA was allowed to join. This could indicate some simmering rivalry in the region where Thai was taking active steps to upgrade its service levels and had reached a position where its service would be rated quite highly. From the perspective of loyal SIA passengers, it remained to be seen whether the other network cattiers would be able to rise to the levels of SIAs hallmark service standards. Should there be shortfalls, i is quite likely thac the brand image that SIA has so carefully nourished could be tarnished, especially among its loyal First and Business Class passengers. In essence, joining a network amounted to delegating some aspects of brand management to the collective group of companies such that the identity of the network would transcend the individual identities of the members. The loss of contzol over some key decisions such as scheduling and flight frequency could also pose challenges in the future. Italo raised critical questions about the imitability of core competences. Would the partner firms be able to learn more about the critical aspects of SIA’ recipe for sustainable competitive advan- tage? An alliance is usually not designed to last forever and hence should the partners learn first-hand about SIA operations, it might be disadvantageous to SIA should the alliance be dissolved, In balancing growth potential against the ability to contol the alliance, SIA was considering ‘equity investments. It acquired an 8.3% equity stake in Air New Zealand to cement a long partnership with the New Zealand carrier. Since Air New Zealand already owned 50% of Ansett Airways, SIA would have the benefit of the additional alliance with Ansett as well. It was expected that these moves would surengthen SIA’ position in the Australasia market that was growing significantly. Mr. Kong believed it was in SIA’s best interest to pursue an equity investment in Virgin Airways as a further step toward achieving global status. His team discussed an investment proposal under which SIA would acquire 49% of Virgin Adantic for roughly $975 million. ‘This represented a valuation that was equivalent to four times prevailing market value for Virgin and about 1.2 times of Virgin’ sales revenues In recurn, SIA would gain access to the lucrative trans-Atlantic sector between the U.S. and ULK., thus entering an arena that SIA could not enter previously given the roadblocks imposed by che British Government. It would also obtain landing slots at Heathrow. The route structures of the wo “HSBC report, Feb. 7, 2000. ‘TB0173, 9 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.companies were quite complementary with very litle overlap (see Exhibits IX and X). This would indicate greater potential for increasing revenues through code-sharing flights. While Sir Richard Branson ‘was slated to continue managing Virgin, SIA had been promised three board memberships. Since both organizations adopted an almost obsessive attention to customer service and had similar operating philosophies, ic was believed that they would function wel as partners. However, Virgin appeared to be the more free-spirited company of the two and had a reputation as an iconoclast while SIA portrayed a buttoned-down, conservative image. The Board was sure to raise issues of management compatibility price co acquire, control of Virgin Atlantic, and how the new selationship could impact existing rela- tionships that SIA had built with other carriers. For example, Virgin declared that it would soon launch a low-cost Virgin Australia division that would compete in the Australian market. This might place SIA in an awkward position since its ownership in Air New Zealand could technically make it a competitor to Virgin. Further, Virgin had repeatedly said that it would not join the Star Alliance. This could potentially pit SIA against Star Alliance members. For example, SIA might want to funnel passengers to Virgin on its North Atlantic routes instead of United, a Star Alliance partner. Decisions such as this could muddy the alliance network that SIA cursencly belongs to. In essence, joining forces with Virgin might undo some of the benefits of belonging to the Star Alliance. ‘As Mr. Kong proceeded through Immigration at Changi, he was trying to assemble a mental map ‘of how he wanted to position SIA in the near future. Besides the strategic issues relating to alliances and Virgin Atlantic, the mounting competitive intensity in the Asia-Pacific region also required immediate action. How should SIA continue to differentiate itself from the copycats who seemed to be doing a very creditable job at imitating SIA in terms of cabin service and amenities? What new signaling devices could STA harness to set itself apart from the competition? Should SIA be wedded to the Singapore Girl concept that had historically helped distinguish their service offerings? Would SIA be able to achieve its global objectives while holding steady with its recruitment approach that focused primarily on Singaporeans and Malaysian personnel? Should SIA begin a full-blown strategy analysis based on Internet technologies that appear to be rewriting the rules of business? How could its potential be harnessed within SIA? ‘The chauffeur was holding the door open as Mr. Kong strode to the limousine. Mr. Kong wanted co get a few winks before the Board meeting tomorrow. It was the best of times for SIA on some fronts, but there was uncertaingy in the air. SIA was at a crossroads in its history. The next few strategic moves ‘would determine whether it would rise from its status as a very good Asian aitline to become a global player, commanding the respect of the world’s largest carriers 10 ‘rE0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.Exhibit U.S. Open Skies Agreements as of 1999 Americas Asia/Pacific ‘Aruba Brunei Canada Malaysia Chile New Zealand Costa Rica Pakistan EI Salvador Singapor Guatemala Taiwan Honduras South Korea Dutch Antilles Usbekistan Nicaragua Panama Pera Department of State ‘TB0173, Europe Middle East Austria Jordan Belgium, United Arab Emicated Czech Republic Bahrain Denmark Binland Germany Iceland, Ialy Luxembourg Netherlands Norway Romania Sweden Switzerland ut “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.zor Toe vette Feysor ox re toe o> bo a 5s ex ost ss ess as 6s 5 we, te woe M8 cases oosre fos Se8y 06s sssv ores se ar woot soot = (PIAL DASH pur niodby PRUUY SHIMOg sapssddly wy sun yo suoneyect see oe Ast set wel por £86 oot ou yye abe eu so “st U9 BBBE SLE THOT. SSG Oe OHT sres ypte | T1By LSB S6LL MELLEL YR CTETB CURLS Gep8e 6997 29908 ty wee > Ce) 8h 0M Gee RE keene zt et 1% ot et Le ot ot GE oe oe ty eS sy ps po. Bey 9S ry op ss 98 ey ore oes pu yer ost oy HS SS re 8 68 see vel gor ee Seve ra set os ree ete ote oe ts 19 yo “9 tL 6k syoo9s 89 ws sate woo BLE vey Th HLL rs cn er 9889 LMHS 5499 BHEEE SHESE BHELE NH 6D HGS NBD MENDED Prop uore-tig 9669 KEBLE HEFL SHEL MH6'TL H6L'TL © — HL. «HRD HOLT LD HED 96699469 M469 S60 HID SHEED SHBID —MHII GID. M409 NEIL 49H MOL BEIE OF HHS THOS NRE GIGEE GIES —_HEOE BuNET HOSE _FILEY GAO} zOGBE wa vor 99PY —99LOT BOOT ISG GTZ $504 FS0L «TSOP SRE Lode OGL SIZE TSEL SLY IE24 Sura rey sesh totes S9LI8 LESI8 OpHIs HHS YOY L600" —_S6zO9_s6z09 HOLES sy Siu eu e9st PoE IST 28801 G99 TH GID eBETT e801 ooFOT vw 96 we 8G sor 66 9 u @ T BOOT HOOT TOOT | BOOT HOT T6GT © ORT GGT T6GT © URT NGI ZBGT sodas Fee sory ee SuBeE Keep sypag-oisy saan abuses ay go 14 sss Basin pn povouy Koy HEY ‘rB0173, 2 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.a sot pug. 06s Sse Zou wo ve 069 ‘wot 09 F se sty. woe 92 sce Gut ate S6S GI9S GL 76995 OERRS 166s ses aS yor 998 S665 oro v0 ou 6 re tse Sse ewor ior $L¥6 19 89 Hoot Toot WORT CGT TROT RATS spy ost ost Scat 39021 est 1 e698 sot 6094 wet ost sv Sys HE6t Seeet poRET eave ogptt an oF out zee vse sie geo esor 96IS 6RLE gett seat Woor Tet WE doing sy wesy T98E zao0e 68zce esi9e sos use gust yo 89 set pet ETL 96 Raraeaca ‘Foot Geet RTT ost ony Nay “PI wut 8asp st9st ae oot 8096 ort abou svoe oot eu 201 9558 axes. O19 v6 tere Ie6y ose 1 89991 ase ‘AT00e mamong “yg “eiodos enuury 222n0§ en ov ws 1st 608 ce 9588 spe 199099, vor sod. Tape 9sez louy sey 368'69 LOE HBL LL (ue) ASV HENNY best 11S (ug) NAY 2I¢EREY Doz BceT EPH (mo sayy auossng yaa) uses sso pen ppm Koy HER 3 ‘TB0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.st set Sosa <9 1 ols vse ozt9 yes TLE S91 NT OTT BTL LL wT ew LEEL oyeD ereL StL pet ge COLTL SHVOL EDL BIEL 6OFL —NEPIL 86ETL S69TL NEE TOL BSED SHOE NHDTTL 9681 iS) STI EFT ORL SLID OTH — SdH STTOT s'¥Or wert over yIzr SBS 9TH STS 9696 IETS FG SOT PLOT OFT V6 OFT 89LT (oq) Wy Pesce GEGT 366T Z66T Z6GT G61 G6GT Z6GT B66T GGT Ze6T B6GT GGT Z66T 8661 G66T . wsn (uo) ssoyany saBuassog ay joqeyo 29} ssusunis Buysiedy pun ppumu hey 1 YANG ‘rB0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020. “4Exhibit Ill Projected Ailine Passenger Trafic Growth Region (1987 1997 ‘1998 1999, 2000 2001 ‘Atica 35.9 56.2 35.2 574 60.3 635 ‘Asia/Pacific 2535 «63953016572 96044 Europe 4942 655.2 69S 7219 763.1808 Middle East 46 767 777 305 4 39.3 NorhAmeica 6846 10204 = 102108271239 1756 LatinAmeries 7671251 1338813931472 1568 World 15895 25731 26304 «27391 «2874.8 3038.0 Revenue Passenger Kilomersbilions Source: Ingermational Civil Aviation Organization, Exhibit Top 20 Internationel Markets Projected Growth in RPMs by Region Rank Region 1998-2002E 1998-2007E 1 Affica-South America 3.3% 3.2% 2 Northeast Asia~ Southwest Asia 8.2% 42% 3 Africa ~ Southwest Asia 7.8% 78% 4 Ceneral Ameriea~ South America 77% 75% 5 lS region ~ International 75% 739% 6 Europe ~ South America 74% 79% 7 Europe ~ Northeast Asia 73% 77% 8 Oceania — South Ameria 72% 71% 9 China Southwest Asia 71% 7236 10 Middle East ~ Northeast Asta 69% 7.6% 11 Europe ~ Southwese Asia 67% 6.8% 12 North America~ South America 6.6% 67% 13 Affica~ North America 6.6% 6.9% 14 North America ~ Southeast Asia 65% 6.9% 15 China ~ Burope 6.4% 6.8% 16 Africa ~ Middle Ease 6.2% 6.1% 17 China Northeast Asa 6.0% 6.6% 18 Southeast Ava ~ Southwest Asa 59% 6.3% 19 Northeast Asia ~ Southeast Asia 5.7% 65% 20. North America ~ Northeast Asa 5.7% 62% Source: U.S. Dot Form Al, Bosing Comp ‘TB0173, 15 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.Exhibit V Annual Staff Cost Per Employee in the Global Aitine Industry Region/Airline 1999 US$ Europe Swissair 47,000 KIM 56,000 Air France 58,000 Lufthansa 58,000 Brivsh Airways 59,000 SAS 60,000 North America ‘Ait Canada 46,000 American 50,000 Continental 58,000 United 60,000 Northwest 61,000 Delta 68,000 US. Aieways 75,000 Asia-Pacific Malaysian Ailines 18,000 Thai Airways 24,000 Air New Zealand 36,000 Korean 38,000 Singapore Aielines 46,000 Qantas 50,000 Cathay 67,000 AL Nippon Airways 36,000, TAL 104,000 "Nose: Daca drawn from bar charee deemed approximate Source: Warburg, Dillon Read, Airline Analyer, Aug. 1999. Exhibit VI_Major Partners in Global Aitine Allemces (1999) Sear Wings Oneworld Delta ‘Air Canada KIM ‘American Delta Lufthansa Northwest British Airways ‘Austin SAS Alicalia Canadian, Sabena Thai Continental Cathay Pacific Swissair United Qaneas Air France Varig Einnaie Air New Zealand Iberia Ansete Austalia Lan Chile {All Nippon Airways Source: Merill Lynch 16 ‘rB0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.Exhibit VIL" Globel Comparison of Wages Country 1989 191 1993 1995, 1997 Malaysia 16.47 189.26 223.22 263.75 293.50 India 18.85 22.85 21.92 2752 26.64 Singapore 717.46 895.96 1049.62 1246.03, 1436.08 ‘Thailand 76.60 94.29 105.80 127.69 151.75 USA 1676.80 1788.80 1878.40 1979.20 2107.20 UK 1391.78 1677.5, 1881.76 2000.50 2194.38 Germany 1053.33, 1060.99 1087.79 Note: All wages are expressed in non-inflation adjusted 2000 U.S. $ per month of employment. They are apeage wage actos all forms of non-agueltual actives, Service Wages tpl highe than terages Source: International Labor Organisation, Laborsta Database Exhibit Vi ‘Tourist Arrivals and Outbound Departures to and from Singapore 1993 1997 1998 ‘Tourise Arzivals 6,425,800 7,198,000 6,341,000 Outbound departures 1587416 2,391,149 2,197,759 Tourists per capita 192 176 Departures per capita 0.64 ost Source: Government of Singapore, Department of Statistics, Primary Regions of Origin of Singapore Bound Tourists, 1998 Region/Country Number ASEAN 1,878,600 Japan 843,700 Australia 427,200 Taiwan 362,400 UK. 357,900 Source: Government of Singapore, Department of Statistics ‘TB0173, 7 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.Exhibit IX Route Structure for Singapore Airlines Exhibit X— Route Structure for Virgin Airways 18 ‘rB0173, “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.‘Appendix Available‘Ton Kilometer (ATK) A measure of capacity expresed in terms of aircraft payload multiplied by kilometers flown Available Seat Kilometers (ASK) A measure of seat capacity available defined by the number of seats ‘multiplied by kilometers flown, Revenue Ton Kilometers (RTK) The total craffic carriage measured by the revenue generating weight (in tons) of load carted multiplied by kilometers flown, Revenue Passenger Kilometers (RPK) A passenger eraffic measure expressed asthe total number of passengers carried multiplied by kilometers flown Passenger Load Facto: (PLP) Passenger Load Factor in RPKs is expressed as a percentage of ASKs ‘which indicates ulization of seat capacity (RPK/ASK) (Cargo Load Factor (CLE) (Cargo load in RTKs expressed as a percentage of ATKs which indicates uulzation of total capacity Overall Load Factor (OLP) “Total passenger and cargo load expressed as a percentage of total pas- senget and cargo capacity (ATKS) which indicates wilization of total capacity Break-Even Load factor Unit cost per ATK divided by overall yield —provides an indication of the load factor needed for the airline to break even at the operating profic level Yield ‘Amount of revenue generated by each unit of load expressed in cents per Unie Cose Expenditure required co produce a unit of capacity expressed in cents pet ATK for catgo of cents per ASK for passengers CT for cargo of cents per RPK for passengers ‘TROI73 19 “This documents authorized tr use onlyin Or Kamalka Chatrabortys PGOM General 8.20202 FM Business School fom Jan 2020 t 2020.