STRATEGIC TEGIC ISSUES IN THE AIRLINE INDUSTRY AND THE ROLE OF SINGAPORE INTERNATIO

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1 Dehi Business Review X Vo. 5, No. 1, January - June 2004 STRATEGIC TEGIC ISSUES IN THE AIRLINE INDUSTRY AND THE ROLE OF SINGAPORE INTERNATIO TIONAL AIRLINES Amit C. Kamath * Jonas Tornquist ** I NTRODUCTION THIS case study investigates the strategic environment of the airine industry operates. In particuar, the roe of Singapore Internationa Airines (SIA) in the goba airine industry is considered. The study uses the concept of the Three Ring Circus (KCI, 2002), as an overarching framework, whereby the Past, the Present and the PFuture is used for studying the strategic issues in the airine industry and SIA. The past focuses on the key strategic drivers in the airine industry over the past years and provides a historic industry overview. The present serves the roe of ooking at the airine industry and SIA s present strategic drivers and what is important to consider in this environment. The Possibe Futures, or PFutures, ooks at what potentia drivers or strategic advantages may be present in future, and how SIA is responding to some of these issues. The research in this project is mainy quaitative. It is based on interviews with key peope within the airine industry, government officias, industry anaysts and stakehoders. The anaysis is aso based on a review of the airine industry iterature as we as the persona refections of the authors in drawing together some key issues and insights that may hep formuate, inform and prepare SIA s strategy for moving forward into the unpredictabe future. This paper begins with a simpe mode for considering strategic and economic issues in the goba airine industry. After this, we examine the Past, where a brief history of the airine industry is foowed by sources of uncertainty and an examination of key strategic drivers. The section on the Present contains, among other things, a brief description of the industry structure, the rise of budget airines, and the competitive advantages and strategy of Singapore airines today. The PFutures section ooks at the Possibe Futures of the airine industry, and begins with an environmenta anaysis for Singapore Airines, and the scenario anaysis technique is used to consider possibe future. The paper concudes with some key essons and issues facing the industry and Singapore Airines, and makes recommendations as to how Singapore Airines may prepare and potentiay mitigate some of these risks moving into future. The Economic and Strategic Issues of Airines in a Reguated Word Before starting to investigate the airine industry, it is worthwhie to consider the network of air traffic routes domesticay and internationay. The reason for this is to evove an understanding as to how reguation of the internationa airine industry may eave an obvious impact on a particuar firm s strategy. This wi assist in ooking into the network effects that are so important for airines when considering profitabiity and strategy. A simpe mode of the internationa airine industry network might ook something aong the ines of what is shown in Figure 1. * Lecturer, The Open Poytechnic of New Zeaand, Lower Hutt, New Zeand. ** Ex-Anayst, New Zeaand Treasury, New Zeaand. 1

2 Amit C. Kamath & Jonas Tornquist C1 C5 Country C2 C3 C4 Country Country Figure 1: A Simpe Mode of Internationa Airine Industry Figure 1 shows a mode of how a simpe internationa air services network might operate. The mode contains three countries (Country 1, 2 and 3) and each country has two types of cities. The major cities are denoted with stars and the medium-sized cities with squares. The fight paths domesticay are indicated with dashed ines, whereas soid ines mark the internationa routes. The five major cities in the mode are abeed C1 through to C5, for City 1 to 5. Each of the three countries has its own airine, named Country A Air, Country B Air and Country C Air. Current technoogy does not aow trave between Country 1 and 3 without a stop in between. Hence, a internationa routes between major centres fy via the hub in Country 2 for refueing. Country 1 and 3 are major economies whereas Country 2 is a reativey sma economy. In addition to technoogica constraints, presume that we have reguatory constraints that does not aow onrights 1 or cobotage 2. In other words, an airine from Country A is not aowed to continue to a domestic city within a foreign country. This means that Country A Air might fy C1-C3-C5, C2-C3-C5, or perhaps C2-C3-C4. However, for efficiency purposes, it might be better for Country A Air to take a route from C1-C2-C3-C4. This woud aow carrying domestic passengers between the two major domestic centres C1 and C2, to then continue internationay. However, the restrictions mean that they are not aowed to, say, continue on from C4 to C5 within Country C. However, if they coud do that, this woud potentiay add to their revenues by being abe to carry passengers between Country 3 s two major centres C4 and C5. If this was possibe, perhaps they woud be abe to reduce airfares? This exampe iustrates the probems reguation causes in the airine industry, and is very reaistic. The reguatory constraints significanty hamper the strategic options avaiabe to airines. Country A Air, has the advantage, within its own country, to be abe to feed traffic from their domestic network of air services, from the smaer (square) cities to the major centres for connections internationay. Country A Air operates a hub and spoke network. However, regardess of their efficiency they are unabe to expand further into a foreign country as they are unabe to offer many domestic destinations. Imagine what it is ike for Country B Air who does not have a strong domestic network. They do not have any of the advantages of Country A Air and Country C Air. The ony option is to focus on the big internationa routes and to focus on being a hub, and to do this we. In this way, the reguatory constraint prescribes the strategy they are abe to pursue! If Country B is a sma country, such as Singapore is, it is easy to see just how constrained their position is. 2

3 Dehi Business Review X Vo. 5, No. 1, January - June 2004 So how can technoogy infuence this system? Quite a ot. Say that an aircraft with onger reach is invented that enabes fights directy from Country A to Country C. This woud render the stop in C3 unnecessary, and uness peope woud ike to trave to C3 in itsef, it woud be possibe for Country A Air to start operating services directy to C4 and C5! The strategy of Country B Air is now non-workabe. Hence, it cannot compete effectivey on these routes as there is no feeder traffic from either Country A or C. The reason they do not have access to this is because the reguation does not aow them to fy within Country 1 or 3. In short, internationa reguation hampers strategic choice and deveopment of the word s airines. Country B Air might be very efficient and the customer s choice, but reguation wi not aow them to compete effectivey outside their home country. This in turn eads to an internationay inefficient airine industry and a ack of competition means that customers, at the end of the day, pay more for airfares. The Past: Two Decades in the Airine Industry This section investigates what has infuenced the airine industry in the past. The anaysis covers sources of uncertainty, the infuence of externa events and identifies the key strategic drivers in the industry over this time period. The Asia Pacific Region and Singapore Airines: A Brief History The Asia Pacific is an important region in terms of commercia air trave. The region has witnessed steady growth over the ast coupe of decades; the strong economic growth has ed to rapid increase in air trave. In 1985 the region accounted for 26.2% of the tota internationa schedued passengers, it increased to 36.2% in (APATF 1997). One of the key payers in the Asia-Pacific area is Singapore airines. Singapore Airines was born on 1 May 1947 when a Maayan Airways Counse took off from Kaang Airport, Singapore. The aircraft had a seating capacity of five passengers and no cabin crew. The service was a tri-weeky one to Kuaa Lumpur, Ipoh and Penang. By 1955 the airines had a feet of Dougas DC-3s and had expanded its operations to Jakarta, Medan, Paembang, Siagon, Bangkok, Sabah, Sarawak, Rangoon and Brunei.The airines witnessed further growth in 1962 when Comet jets were introduced on internationa and major routes 4. This represented a major discontinuous change in the industry, as fight times were cut substantiay, and reach was extended significanty. Singapore Airines has come a ong way to become Asia s most admired company. Its icon the Singapore Gir which is a smiing cabin attendant outfitted in tight batik sarong kebaya (a traditiona Singaporean costume) is a we-known internationa service icon and has found a pace since 1994 in Madame Tussaud s museum as a commercia figure which represents the popuarity of the airine. The airine has demonstrated superior profitabiity and an enviabe commitment to customer service despite the tremendous competition from European and Austraian competitors and the brutay cycica nature of the industry. It ceebrated its Goden Jubiee Anniversary on 1 May The infuence of Externa Events and Past Strategic Drivers The airine industry has evoved very rapidy since the word wars, and a number of factors have infuenced the industry evoution over this time. The Asia-Pacific market is one of the fastest growing markets for airines. However, there are severa factors that have hampered growth. Let us now ook at some of the factors that have infuenced the airine industry and more specificay Sinagapore Airines within the Asia.Pacific region. Governments The Chicago Convention on internationa air transport was signed in 1944 with a view to reguating the commercia rights for air services (Oum et. a., 2000), so as to ensure that countries such as US woud not be too we paced to dominate internationa air services. This has resuted in essentiay a significant network of biatera Air Service Agreements (ASAs), which were effectivey deveoped as a resut of the Convention s faiure to aow mutiatera exchange of air traffic rights (Maciree, 1998). As a resut, 3

4 Amit C. Kamath & Jonas Tornquist economic reguation of internationa air services is now governed by these compex biatera ASAs agreements between governments. Air rights are negotiated over issues such as: Logistics (such as air routes, capacity, frequency, and aircraft types); the number of airines that are aowed to operate under an agreement; reguation of any tariffs; rights to set up airine offices in the other country right to code-share; airine ownership provisions; and cabotage the right to carry passengers within the foreign market. beyond rights the right of an aircraft to carry on to destinations within a country. The existence of these agreements has reay given rise to the notion of the nationa airine, which is seen as a strategic asset which assists the rest of the economy It is easy to imagine how these agreements constrain the potentia strategic choices an airine has. It can, for exampe, not necessariy pursue a growth strategy to other markets. Furthermore, it may be restricted in aunching other brands, such as a ow cost no fris types airine to operate internationay. The mode introduced at the start of this paper discussed some of these issues. In severa Asian countries which may have a singe nationa airine, fag carriers are aowed to infuence the biatera negotiations process Aso traditionay the State which hods a certain percentage of stake in the nationa airines wi oppose any proposa to aow foreign competitors in their territory uness there is mutua benefit to the fag carrier. Some countries such as New Zeaand do encourage biatera partners and mutua iberaisation of internationa arrangements. The emergence of open skies agreements, as the one between Austraia and New Zeaand, is an exampe of how the airine industry is starting to be dereguated. However, progress is sow, and this intervention has in the past been a key strategic hindrance for airines. Large inefficiencies resut, and the constraints on growth are immense. Utimatey it is the customer whose benefit is compromised as a resut of higher airfares. Technoogy There are a number of technoogica drivers for change in the aviation industry, and some of the more recent key drivers for change incude: eectronic booking systems provided a basis for which major efficiencies coud be achieved. growing use of highy compicated yied management systems and software aowing profit maximisation through optimising yieds and network hubs and spokes through compex network economics concepts. more modern panes which are quieter, faster and have onger ranges, resuting in ess necessary stops, a raft of new possibe non-stop destinations and so forth. This has, and wi continue to, resut in airine route restructuring. technoogica progress within fight entertainment and communication systems, providing the possibiity of Internet access, arger movie seections, games, etc. This technoogica change has resuted in an opportunity for airines to provide differentiated services to their customers. Internet booking systems, yieding the use of trave agents unnecessary for booking your trave. This essentiay cuts into or streamines, the suppy chain of the air trave product. These factors have, and to some extent continue, to shape the airine industry as we know it today. Some of these changes have been very important, and can be seen as quantum eaps in terms of the improvement they brought aong, whereas others may more accuratey be cassified as incrementa improvements. 4

5 Dehi Business Review X Vo. 5, No. 1, January - June 2004 Labour Markets Union reationships have traditionay been very important in the airine industry. Strikes and pay disputes, needess to say, are extremey costy. Any disruptions have arge fow on effects and rippes through the network quicky. These abour reations issues have a payed an important part in shaping the airine business for a ong time, and pay rates are of concern for major payer who have operated for some time. For exampe, air scheduing and other concerns may add significanty to the payro bi of the airine. The companies need to provide hote accommodation extra pay for having staff overseas or away from home, and pay more to compensate for working inconvenient hours. Perhaps some of these issues stem from the traditiona perspectives of working in the aviation industry being seen as a sexy high status job. Unbaanced Distribution of Traffic Geographic ocation has payed a significant roe in the airine industry and in particuar for Singapore Airines. The coming of arger, faster and further reaching aircraft, in combination with Asia s expansion, have a meant that Singapore, because of its centra ocation, has been abe to reap arge benefits. Being centra is a significant strategic advantage for Singapore Airines. Unbaanced distribution of traffic is one of the core issues that has faced the airine industry in the recent past. In 1993, a tota of 1000 airports in 182 countries, 45% of air traveers embarked and disembarked at ony 25 airports in seventeen countries. Fifteen airports in tweve countries accounted for fifty percent of the tota amount of internationa cargo oaded and unoaded wordwide 5. This iustrates the fact that there is not ony competition between the airines, but aso that the airports do pay a key roe. Severa disputes over unfair exercise of traffic rights highight the competition between airports and countries. In 1993 Austraia had sought independent internationa arbitration on its agreement between United States and Japan sighting unfair commercia advantage to US carriers operating between Tokyo and Sydney. Another simiar dispute has aso existed between Austraia and New Zeaand, where Austraia fet that New Zeaand woud benefit unequay from the ibera traffic rights agreements between the two countries 6. Airport Capacity Airport capacity has major impications in formuating internationa aviation poicies. The iberaisation poicy may have ensured ifting of restrictions on frequency and capacity on point-to-point services between foreign countries. However merey having rights with no physica pace to oad and unoad passengers is a meaningess arrangement. A majority of the airports in Asia-Pacific are congested and experiencing infrastructure probems. The need woud therefore be to invest in infrastructure deveopment, which wi have a direct impact of iberaisation measures. Again, the airport, as opposed to just the airine, is of key importance. Carrier Competitiveness Airines compete on the basis of yieds and cost competitiveness. Airines in certain Asian countries are viabe due to yied ike Japan or due to ow input costs ike Thaiand. However in terms of efficiency Oum and Yu (1998) argue that Asian airines rank very ow as compared to European and American airines. High yieds are no onger guaranteed especiay after the Asian crisis which saw a massive drop in passenger traffic from Asia. Moreover ow input costs are essentiay due to ow abour costs, which are bound to be ost with the current pace of iberaisation. Consumer Behaviour The behaviour of consumers, their wiingness to fy, whether they can afford to fy and so on, has obviousy been a key driver of the industry. As technoogy has evoved, the affordabiity to fy has increased. The rea price of air trave has, on average, reduced 2% per annum over the past 30 years (Maciree, 2001). Customer demands abiity to afford to fy, attractiveness of being a fight attendant, status, novety vaues, etc have aso contributed to the state of today s industry. 5

6 Amit C. Kamath & Jonas Tornquist Community and other Stakehoder Concerns Airport noise has been of increasing concern to communities where major airports have become surrounded by newy buit houses as a resut of city expansions. At the same time, the city expansion has meant that air traffic has increased. These concerns tend to create pressure for further reguation of the airine industry. The avaiabe hours that panes are aowed to fy or frequency may become restricted. There are aso major concerns with regiona transport networks and air space congestion. Increasing use of Strategic Aiances Because of the reguatory issues and constraints in the internationa aviation industry, firms have worked around these reguatory issues by forming strategic aiances. Forming aiances wi to some extent mean that the firms which join them overcome some of the reguatory concerns. One coud ca these aiances virtua airines that have consoidated the industry in many fewer virtua airines than there are actua airines. However, this does not sove a probems. Whie the networked airine aiances can code-share and ensure they get feeder traffic from other firms networks, they are sti unabe to compete against each other, and inefficiencies and monopoy situations wi resut. There are some 100 airine-aiances in operation, athough the two major ones are OneWord, and Star Aiance the argest airine aiance. Tabe 1 shows the reative sizes of some of the argest aiances. By pooing together, these aiances have managed to drive some of the efficiencies that woud otherwise not have been possibe. For exampe, the more peope you have on your internationa trunk routes, the higher wi be your profit. If your fi-rate, the percentage of seats that are occupied, is high, your profit margin increases. So it is important that the feeder traffic network, usuay the domestic network, is optimised to feed traffic into profitabe internationa ong-hau routes. Tabe 1: The Reative Sizes of Some of the Largest Airine Aiances Passenger Traffic (RPK) Passenger Numbers Group Revenues biion word share miion word share $ US biion word share Star Aiance % % % One Word % % % Wings % % % Air France/Deta % % % Quaifyer % % % Source: Airine Business, November A number of important benefits may accrue from forming strategic aiances. Some incude: Economies of scae and speciaisation Cross country speciaisation First mover advantage and technoogica sophistication Market access Risk sharing Branding Seamess service networks Cost efficiency Service improvement Market power 6

7 Dehi Business Review X Vo. 5, No. 1, January - June 2004 Marketing advantages and frequent fyer programs becoming more vauabe catering to the new goba citizens These factors are important and in a probabiity wi aso shape future potentia aiances. However, depending on the reguatory frameworks in pace and any technoogica achievements, aiances may we aso become redundant. The factors presented above provide a usefu too for assessing, given certain conditions, why or why not aiances might form. Industry Evoution and Sources of Uncertainty Air transport can be considered to be a high growth industry as there are very few industries that have witnessed such an enviabe growth rate spanning a ong period of time. In 1945 air traffic has grown at an average growth rate of 12% which fe sighty to 11% during These impressive growth rates can be attributed to immature nature of the industry. As the industry gets bigger and bigger and the market matures, the growth rate tends to decine. The same principe appies to the airine industry, which grew at an average rate of 5% between The effects of the Guf war were fet in eary 1991 and continued in 1992 and 1993 when growth decined to 2.3%. However the industry bounced back to achieve growth rates between 7% to 9% during The Asian crisis after this period has sowed down growth, a forecast by the Internationa Civi Aviation Organization reveas a growth rate of 5.5% ti year The Asia-pacific region witnessed rapid growth during the 80 s and 90 s up to 1997 due to strong economic growth, reaxation of trave restrictions, foreign exchange contros and so on. The Asia Pacific accounted for 26.2% of the tota internationa passengers in 1985, which grew to 36.2% in However the sudden economic downturn in Southeast Asia in 1997 brought a sudden hat to the fow of passenger traffic. The impact was even greater in 1998 when the growth figures were repaced by decine as traffic fe by 20% eading to a subsequent reduction of 7.6% in word trave during this time. Reviva measures ike reduction in fares has imited effects as most economies were caught in the midst of heavy recession and thus Asia Pacific experienced the worst of both the word s as yied and oad factors were simutaneousy affected. Other externa factors have aso infuenced the airine industry. For exampe, market voatiity such as fue prices infuence arge amounts of the costs faced by airines. There is a need for airines to have good hedging practices. However, shocks in this area are ikey to impact a payers in the market equay. The main resut is increasing airfares resuting in a drop in demand for air services as they are substituted by other means of transport or video conference cas. Foreign exchange rates can aso cause probems for airines if they are regionay or nationay based in particuar. For truy goba payers, of course, they shoud be abe to manage the internationa currency transactions we and ensure that the overa position for the company as a whoe is reativey stabe. Figure 2 shows how a number of factors infuence air service demand. GDP is a good measure to estimate the demand for air transport. In a study conducted by Boeing in 1990, North America had the highest demand for air services with each person making two trips per year. On the other hand in countries ike China and India ony one out of every 100 peope can afford one air trip per year. This is an indication that eisure trave is price sensitive whereas business trave is price ineastic. Hanon (1999) remarks that in the eary post second word war period the ratio between business and eisure trave was approximatey 80/ 20, whereas in recent times this ratio seems to be reversing. The Frequent Fyer Programme (FFP), a purchase incentive pan, which rewards passengers for their oyaty to a particuar airine can be termed as an innovation in the history of the airine industry. Under this scheme, passengers are eigibe for points depending upon the nature of the ticket and the distance traveed. American Airines aunched the first FFP in 1981 and its immense success ed other US airines to foow suit. An estimated 30 miion peope in the US are members of this scheme. Today a major airines have their own programmes. Budget airines, off-peak fares, free hote accommodation are other incentives used to attract eisure traveers. Mergers and acquisitions occur on a negigibe scae in airines industry around the word as we as in the Asia-Pacific region, except the recent acquisition of Ansett Austraia by Air New Zeaand. However airine 7

8 Amit C. Kamath & Jonas Tornquist Effect of fare Economic growth Number of Fights & routes Popuation Actua market = Passengerkiometers Source: Airbus industries. Figure 2: Components of Air Trave Demand companies do hod stake in one another. Qantas owns a certain percentage of equity in Air New Zeaand so does Singapore Airines. A major reason for these negigibe acquisitions is that most airines are the fag carriers for their respective countries and enjoy specia protection from their governments. This goes to prove that governments of different countries have aways resisted moves to se-out an aiing fag carrier but instead have spent huge sums to rescue them from time to time. On aiances the Asia-Pacific market has been quite restrictive as we despite The Open Skies agreement between North America and a number of countries incuding Singapore, New Zeaand, Taiwan, Brunei, Thaiand, Phiippines, Macau and South Korea. The Present: Singapore Airines Market Position Industry Structure Despite the size of the industry dereguation process has been very sow in Asian countries with many countries averse to iberaisation ti recenty, biatera agreements have not kept pace with changes possibe because of protectionism. Aso the Asia-Pacific region is poiticay, sociay as we as cuturay diverse as compared to North America and Europe which has had an impact on their strategies as we. Airines in this region have gained on both oad and yied factors. The popuation in economies such as Japan ensures certain oad at a times. Simiary abour is cheaper in severa Asian economies, which eads to ower operationa costs. Surprisingy however the eve of efficiency is very ow as compared to their European or American counterparts. Another reason coud be over empoyment or high saaries being paid to staff as witnessed in Air India. This has ed to higher fares for Asia-Pacific based airines. Recenty Asian airines are finding it increasingy difficut to sustain themseves due to reduced passenger traffic from within Asia and increased operating expenses couped with heavy competition. A this has put the pressure on carriers to make themseves efficient for better prospects in markets overseas, which in turn has ed them to put pressure on the government to sign Open Skies agreement with severa countries. The recent ones being the Open Skies dea between Indonesia, Maaysia and Thaiand to iberaise trade and growth. Another exampe is the Brunei, Indonesia, Maaysia, and Phiippines- East Asia Growth Area regiona pact. 8

9 Dehi Business Review X Vo. 5, No. 1, January - June 2004 The growing cooperation between airines in the Asia-Pacific region has extended to carriers joining Goba Aiances formed by airines from Europe and America to maintain their presence in the region. Recenty Japan has entered into separate marketing partnership with OneWord eaders, American Airines and British Airways. The Rise of Budget Airines The airine industry has been significanty restructured and chaenged over the past few years with the rise of budget airines. These airines cater to passengers who seek ow cost air services, and do not offer business cass seats. The airines operate the same types of aircraft, owering maintenance costs, earn revenue from seing food, acoho and duty free items in fights. They further have very tight contracts with staff, focussing on eiminating strikes and saary arguments by having a compete contract based workforce. Low cost airines have controed this cost very we. They have reduced additiona services, by fying the reativey shorter routes they are abe to cut costs further, as no staff is required to be away for proonged periods. In fact, some airines are offering the fight itsef for free. How can they do this? They make money from seing additiona services on the fight. They aso arrange to fy from ess busy airports, arranging with that airport to share of the revenue received from taxes and airport fees on a per passenger basis. This is the traditiona business mode turned on its head, with the airine capitaising on its reputation and network of airine services to make money. The commodity fight in itsef is not the vauabe business here! They are seing their network capacity, as this is where they actuay make their money. These airines have driven down costs by operating very tight abour poicies with good HR practices and minima work stoppages resuting in high profit margin September 11, 2001 The Impact of a Major Externa Event The tragic event of September the 11 th of 2001 has had a major impact on the goba airines industry mainy because of consumer confidence. Margins have been squeezed significanty and traffic voumes have decreased significanty, especiay in the US. For exampe, Credit Suisse First Boston (CSFB, 2002) estimate that the events on September caused a drop of neary 30% in air service demand. Figure 3 shows their estimates. Figure 3: The Impact of the Events of September 11 in the US on the Word Air Trave Demand, as Forecast by the Investment Bankers CSFB. As Figure 3 shows, CSFB estimates a deep downturn in airine demand, and that this shock wi be present for a reativey ong period of time. Such extreme externa events do indeed seriousy impact the industry! 9

10 Amit C. Kamath & Jonas Tornquist The Major Airine Internationa Markets The two major markets for airine services are the US and Europe. Airines from EU countries are free to fy anywhere they ike within the EU, however, foreign airines are restricted by agreements made with individua countries within the EU. In the United States, the domestic market is effectivey cosed to foreign airines. Because of the cose markets, the airine with arge domestic market has a quite significant strategic advantage. This is because the arger the market, the greater the opportunity to optimise feeder traffic from that market to the internationa trunk routes. The resut of this highy reguated network of air transport services means that an airine based outside the US and EU is unabe to optimise their traffic fow. Singapore Airines Competitive Advantage and Strategy To understand the strategy of Singapore Internationa Airines (SIA), it is important to consider the country from which they operate and its characteristics. A Favourabe Location Singapore Airines operate out of Singapore a sma country of about 4 miion inhabitants. Singapore is physicay so sma that there is no domestic airine service within Singapore itsef. Instead, the Singapore airport operates as a hub within South East Asia. The geographic ocation of Singapore pays a significant roe. With current technoogy, non-stop fights are possibe from virtuay anywhere in Europe, Africa and Asia, however the West Coasts of North and South America are sti out of reach. Singapore s near perfect ocation as a hub heaviy infuences SIA s strategy. SIA is a major ong hau carrier, with a arge percentage of their passengers in transit for other destinations. Strategy Restricted by Internationa Air Reguation Because of the major issues that SIA face in reation to the reguated wordwide airine industry, growth is difficut. Without rights to fy within most countries, SIA freectify heaviy on airine aiances to enabe them to service feeder air traffic on their airine network of major trunk ines and attract higher voumes of traffic through their Singapore Airport hub. Furthermore, SIA finds it difficut to grow because of the restrictions they face regarding on-rights and cabotage. Singapore Airines versus Singapore the Country: A Joint Strategy The Singaporean Government has a significant interest in the airine. The Government has appointees on the board of SIA. This is perhaps one of the reasons why SIA is abe to fructify some of its strategy. For exampe, favourabe tax treatment aows SIA to utiise favourabe acceerated depreciation methods. This effectivey comprises a subsidy by the Singaporean Government in that they are happy to forego tax revenue. This is perhaps one of the reasons they can afford to operate such a modern feet of aircraft, and why they are abe to offer the atest technoogy in their in fight entertainment systems. However, there is aso a benefit in operating new equipment. SIA does not have the same high maintenance and repair bis as other airines, as their equipment is much newer. Singapore is as a country positioning itsef as a major transport centre, with the airport acting as a arge hub internationay, as does the port. They are aso reaising that, by being a hub, they can attract a ot of businesses and business into their economy. Singapore is indeed capitaising in their geographic ocation in the Asia region. The arge Government interest in SIA aows it to have a strategy that is more effectivey co-ordinated and reaised. Indeed, Singapore-the-country and SIA s strategies are acting in concert. There is a co-ordinated effort to maintain the Singapore airport to a high standard. Singapore s airport offers a ot of high quaity activities for transit passengers. They offer great shopping, a gof course, coseness to the city, city tours if you have enough time at your disposa, and a cean and inviting city to stay in for a few days if you have even more time. In other words, the strategy of SIA is cosey inter-inked with the other high quaity activities 10

11 Dehi Business Review X Vo. 5, No. 1, January - June 2004 passengers are abe to undertake between their fights. As previousy discussed, the airport may be just as important as the airine when it comes to the strategy of SIA. Emphasises on Quaity The other aspect of SIA s strategy in the past has been the emphasis on service and quaity. SIA has a very new aircraft feet, state-of- the-art in fight entertainment systems and exceence in customer service. As a resut of this differentiation, SIA is not positioning itsef as a ow cost airine, but rather as an airine of choice for peope who want quaity. By differentiating themseves, they can charge a premium for their services. Business cass passengers are one of the key profit for every airine and SIA is no exception. With its exceptiona service and high standards, this is their natura target audience. Fu service incudes power points for aptops and even Internet connections whie in fight. Partnership in a Strong Aiance SIA benefits immensey from being part of the Star aiance network of airines. Arguaby, SIA has more to gain from the aiance than any other partner, as this is the ony way they can achieve feeder traffic. SIA effectivey uses the aiance partners to feed traffic into its internationa high quaity network. Without this aiance participation, SIA woud find success more difficut. SIA s strategic tie-up with airines in Europe and North America is ikey to favour customers. The tie-up with Lufthansa in 1998 has aowed SIA anding rights and access to Frankfurt and other destinations in Germany and Europe. SIA passengers wi have the option to fy beyond Frankfurt on either of these airines. Simiary Lufthansa wi have access to Singapore and other destinations in Asia. An increasing number of such tie-ups wi increase consumer expectations providing a wide choice. For exampe, Maaysian Airways fying from Auckand to New Dehi via Kuaa Lumpur offers free hote accommodation for a day in Kuaa Lumpur. Consumers wi switch to airines that offer better vaue for money through superior service. The PFuture: Possibe Futures for Singapore Airines The PFuture stands for the Possibe Futures that an organisation, or indeed the word, may face. This concept, introduced by KCI (2002), recognises that the future is uncertain and shoud, therefore, best be represented as an outcome space, or a number of possibe outcomes. One important and usefu too for anaysing the environment of future in which organisations may operate within in future is a scenario anaysis. Scenarios are not predictions about future. They represent a way to think outside the square, and to prepare an organisation for potentia future radica changes (Grant, 2000). Scenarios are aso not desired end states, nor do they, or shoud they, represent particuar points of views, persona preferences, or organisationa poitics. Such biases and vaue judgements must be ruthessy excuded from the anaysis (Hensha, 2001). Scenario anaysis instead provides a too to prepare an organisation for the inevitaby uncertain and unpredictabe future, by having practised responses to various future scenarios, and by investigating what if type questions. Many methodoogies exist for deveoping scenarios, the most common being the matrix approach, whereby the two most important and uncertain infuences on the organisation is used as axes in a four quadrant matrix (Erasmus, 2001). We use this methodoogy here, athough others prefer different approaches (Keiner, 1999). The environment surrounding SIA was scanned using STEEP anaysis, out of which some key possibe strategic drivers for the airine industry are deveoped. These drivers comprise the axes in the scenario matrix, from which we eicit some key essons for SIA s strategy and severa recommendations for action to mitigate some risks or to prepare for the future. Scanning the Environment: Anaysis of Possibe Future Strategic Drivers STEEP anaysis is usefu, as it focuses attention on Socia, Technoogica, Economic, Environmenta and Poitica infuences on the organisation. A number of these factors may infuence significanty not ony SIA 11

12 Amit C. Kamath & Jonas Tornquist but aso the industry as a whoe. Incuded beow are descriptions of some of these factors that formed part of our STEEP anaysis. Socia Customer demands, abiity to afford to fy, attractiveness of being a fight attendant, status, novety vaues, and so forth a impact the way an airine is perceived. Furthermore, events such as the terrorist attacks of September 2001 significanty impact the industry. Those events ceary show how vunerabe the wordwide industry is to customer attitude changes. Technoogica Technoogy is certainy one major source of future uncertainty for the industry. Imagine, for exampe, what a ong range aircraft coud do for SIA? This woud on the one hand mean that they coud reach the Americas in one non-stop fight. On the other hand, there coud potentiay be many routes from the EU where there woud be in no need to stop in Singapore, the SIA main hub. What woud the impact be? It woud ikey be very profitabe to not stop in Singapore but to, perhaps, carry on straight between London and Sydney! Shopping ma panes, such as the Airbus A380 currenty under deveopment. This coud assist SIA in providing exceent services on their ong hau fights! What premium woud you be abe to charge from aowing passengers have a restaurant, shops and gyms for their use whie in fight? Smaer fast panes: This coud potentiay create a market for operating many point to point fights which woud cut traveing times significanty for passengers. This is the converse way to hande traffic to the hub and spoke networks. Supersonic near-spacecraft panes, which coud cover distances at mind-bogging speed. Sydney to London may take just three hours. Invention of aircraft using aternative sources of energy ike soar power coud aso change the face of aviation industry. Booking systems: Deveopment of the internet has aready had its impact on severa aspects of the airine industry. However its impact on the booking system sti remains to be seen. Present day anaysts fee that major airines do not prefer onine booking services because of stiff competition where booking agents pay a key roe in promoting a particuar airine. Environmenta There may be concerns about the environmenta integrity of a sustainabe operating airine industry. However, this dimension may not perhaps be as important an infuence as some of the other dimensions in this case. Of course, consumer demands may change and socia behaviour may change as a resut of issues raised in this category. However, it appears that some of the main risks may not show up in this category. Economic Market Voatiity, Externa Factors and Shocks Fue prices have and continue to remain one of the most uncertain factors. The Guf war saw a massive increase in fue prices eading to a subsequent increase in airfares. Simiary recession in economies around the word has a direct bearing on the airine industry as was evident during the Asian crisis. The unfortunate incidents of September 2001 have impications on aircraft safety and security. Economic conditions, more generay, have a tremendous impact on demand and are very important. Poitica Factors/Governments Governments are discussing the possibiity of a mutiatera agreement covering air cargo services that might incude a ess restrictive approach to foreign ownership, and some are advocating iberaised approaches to foreign ownership. An enormous amount of progress has been made in this area over the ast five years, but there is a ong way to go. There may be some possibiities that the September 11 terrorist attach may form a greater wi to dereguate the industry, especiay as the arge market payers have significant everage and opportunities in a dereguated environment. STEEP Anaysis: A Summary A summary of some factors in the steep anaysis that may significanty infuence SIA is provided in the tabe 2. 12

13 Dehi Business Review X Vo. 5, No. 1, January - June 2004 Tabe 2: Summary of STEEP Anaysis Dimension Factor Impact Uncertainty Socia Reduction in eisure trave Med Med Preference to aternate sources of transport Med High Fear of fying Med/High Med Technoogica Invention of aircrafts pying on aternate sources of energy Med/Low High Invention of high speed supersonic aircrafts High Med/ow Environmenta Stringent environmenta aws by major countries in Asia Med High Cosure of major airports due to noise poution High Low Economic Recession in major economies in Asia-Pacific High/Med High Rise in fue prices Med High Devauation of the Singapore doar Low High ow Bad Poitica Fa of the European Union Low/Med High Repeat of Sept 11 incidents in US Med/High Med Increase in tourist infow in to NZ Med High Dereguation in the airine sector internationay High High ECONOMIC CONDITIONS Good Choice of Axes for Scenarios As per the STEEP anaysis, Technoogica factors ike invention of supersonic panes or aircrafts that fy on aternate sources of energy create a great dea of uncertainty and have a high impact on the future of the airine industry. Technoogy wi therefore form the y-axis of the scenario diagram. Economic conditions, in the dereguation of the airine industry appear to be highy uncertain and a factor ikey to have the biggest impact. So it forms the x-axis of the chart. REGULATION high Figure 1: Schematic Presentation of Four Possibe Future Scenarios 13

14 Amit C. Kamath & Jonas Tornquist Some Possibe Future Scenarios Four scenarios have been deveoped from the two most uncertain and important dimensions identified from the STEEP anaysis the economic conditions and the government reguation dimensions. Famingos Waiting to Fy In this scenario, where the airine markets are dereguated, but the economic conditions are a itte tough, Singapore Airines are ready, waiting for better economic conditions, for the tide to turn and for the season to shift. Just ike Famingos, the migratory birds that fy across the word once the mating season is over, once the conditions are right. Once the economy picks up, it is ikey that SIA wi be abe to start competing vigorousy to become one of the major payers in the airine industry. Internationay, the markets are fuy dereguated, and this is very good from SIA s point of view. But the economic conditions represent an annoyance the demand is simpy not there to grow. One the other hand, SIA s strong baance sheet means they survive the harsh economic conditions a bit better than its competitors. Who knows, at the shores of Singapore, where SIA is waiting for their ong successfu journey to the overseas markets, they wait, and perhaps even mate with one or two of the airines that are doomed to fai under the probematic conditions. Perhaps they wi even get some cheap firms in rea troube that wi enabe them to grow a itte fatter for the ong journey ahead? The Dancing Peacock Singapore Airines is in fu dance when the word airine markets are fuy dereguated and the economic conditions are good, and SIA is reay showing very strong coours indeed. SIA has been abe to compete effectivey to be one of the major payers in the now highy consoidated airine industry. Ony a handfu of the word s airines are eft. Why bother forming aiances when you can just buy the company and have the stage dancing coourfuy a by yoursef? This is a major breakthrough for SIA, who is abe to pursue a strategy of growth, and abe to reay show off themseves at their coourfu bests. SIA is indeed showing off its feathers to their rivas, performing a beautifu and coourfu dance on the airine industry word-stage. Times are reay so good that SIA wi need to be carefu not to budoze peope, or indeed countries, so as to again impose reguations that woud reay hurt. SIA wi have to make sure they don t swing those feathers so vioenty that they fa off! Lame Duck Oh dear, the duck is reay in troube. Not ony has SIA faied to get those bady needed reguatory changes through that are so necessary for them to move beyond the Singaporean pond which is kind, nice, but sma. The duck is aso ame, and it cannot move to another pond even nearby, as SIA faced dire economic conditions. There is no room to move internationay, because no other feow foreign citizen ducks wi share their ponds. Each airine is restricted to its own country through reguations each duck to their own pond thank you very much. To top it off, there is not much energy eft to do anything about it anyway, the economic conditions are so tough that there is not much room to think about expansions or increased profits. Each to their own, trying to simpy stay afoat. Perhaps the Government wi come aong to bai us out? The duck is ame, sitting firmy in its own pond, unabe to move. Fightess EMU EMUs are pretty big, fat and happy. But they surey cannot fy. They re simpy not made for it the wings are ways too sma and their whoe structure is not made for fying a ot. As for Singapore Airines, they too are sitting happiy reaping the profits from heated customer demand. But the reguatory structure is not particuary conducive to easy fying. Like the EMU, a few structura changes such as bigger wings and ess fat on the body, woud do a word of difference in its abiity to fy, SIA coud do with some structura changes. For exampe, dereguation into at east a few markets and some industry consoidation, osing some of the fat in the industry, woud do SIA a word of good. SIA is focussing its profits on obbying for significant dereguation in this scenario. Let s try making some of those structura changes that hamper the abiity to reach out and fy out into the big wide word. The future of Singapore Airines Strategy The SIA strategy is very cear and focussed. Their cuture is aso very aigned with success. However, this is at times a probem, as foreign Governments see SIA as a threat, which may at times hinder progress for SIA in expanding. 14

15 Dehi Business Review X Vo. 5, No. 1, January - June 2004 SIA needs to estabish other hubs to be abe to grow successfuy. However, Government reguation forbids this at the current time, eaving SIA to focus on estabishing aiances in the airine industries overseas. The recent agreement with Lufthansa as per which SIA has access to Frankfurt and visa versa is a right step in this direction. There are a number of important considerations for today s airines. Some of the most important considerations in maximising profits incude the way in which the airines utiise the foowing toos: Yied management: How the pricing of tickets and structuring of routes is used to maximise profits. Business cass passengers are normay the major profit generators for airines, and the economy cass seats are essentiay sod on the premise to recover the costs of fying the aircraft. Strategic partners: Aiances are increasing in terms of size, scope and scae. Besides equity swaps, codesharing, seing seats on each other s fights aiances of the future wi have to poo marketing efforts, frequent fyer programs, mutua access to airport capacity and so on Network optimisation: Networks with major countries in Asia wi mean more business and higher revenues. China is fast becoming a major economic super power in the Asia Pacific region, and its annua passenger traffic stood at miion in 1998 and is expected to grow at an annua rate of 5.6% per year. Forming networks with major airines ike Air China, China Eastern Airines and China Southern Airines, China s three major airines shoud be a priority. Buiding networks wi strengthen SIA s fight for dereguation. Mergers and amagamations: Mergers and amagamations wi be a key strategy for surviva in future. Buying up other airines is an option that the board shoud ook into. SIA shoud pursue these factors vigorousy into the future. Because of the current environment of reguations, the forming of aiances is key. In the future, perhaps dereguation wi aow SIA to pay out some of the strategies prepared for as part of the scenario anaysis. However, in the short term, the focus shoud be in their superior service, creating aiances and expanding their networks. Concusion The airine industry is undergoing profound changes. Shrinking profits, rising fue costs, government reguations and increasing competition wi make surviva difficut. One can expect a tota shakeout of some key payers. For exampe, the rise of the budget airines has made ife very difficut for some payers. The present very profound reguatory constraints ca for some changes to a traditiona growth strategy which some payers may be abe to pursue. This is because a traditiona growth strategy is difficut to achieve in the airine industry. Instead, airines with a future outook wi be expected to concentrate on key issues ike formation of strategic aiances, network maximisation, creating more hubs or entry points and so on. At the customer eve, expectations for quaity service are bound to increase and marketing efforts and service quaity wi need to go hand and hand for better resuts. SIA is in a strong position in this regard. Notes 1 Beyond rights refer to the right of an aircraft to carry on to destinations within a country after having come from overseas. 2 Cabotage refers to the right to carry passengers within the foreign market where beyond rights have been negotiated. 3 Asia-Pacific Air Transport Forecast: Geneva: IATA, Shaping Air Transport in Asia Pacific, p The Air Letter, Nov 8, References Airbus Industrie (1993) Market Perspectives for Civi Jet Aircraft, Report No A1/CM-P /93, Bagnac, France. APATF (1997) Asia-Pacific Air Transport Forecast: Geneva: IATA. Credit Suisse First Boston (CSFB) (2002) Goba Transportation Quartery Review, January. Erasmus, D. (2001) Mastering information management: A common anguage for strategy, Nationa Post, 18 September. 15