Singapore Airlines has long stood as a model of service excellence. But the rise of upstart competitors has brought new challenges in the industry, and pressure on SIA’s bottom line. Associate Professor Nitin Pangarkar says this demands a change of approach by the airline if it is to retain its leading position.
In late 2005, I co-authored a book on the strategies of Singapore Airlines. At the time, the story of a company that could consistently make healthy profits despite difficult industry economics and maintain world-leading service standards was of considerable interest as a case study for scholars and managers alike.
At the same time, younger competitors such as Emirates, Qatar and Etihad are gaining ground, offering comparable levels of service, often at a more competitive price.
While it remains profitable, SIA’s profits levels are much lower than they used to be. Some of the trends that have diluted the uniqueness of the story have been in motion for quite some time and SIA has been well aware of these trends.
SIA made a few key investments around the turn of the millennium which were aimed at keeping it in the forefront of an increasingly global and deregulated industry. In 1999, lured by the prospect of the lucrative London-New York routes, SIA acquired a 49% stake in British carrier Virgin Atlantic for around £600 million.
A year later it acquired a 25% stake in Air New Zealand for another outlay of several hundred million dollars.
Both were failures.
In the case of Air New Zealand, with the airline’s financial woes mounting the New Zealand government re-nationalized it, diluting the value of SIA’s holding in the airline which was later divested at a fraction of the acquisition price.
The Virgin Atlantic stake meanwhile was divested to Delta airlines in 2012.
It is often said in the airline business that the best way to make a small fortune in aviation is to start with a large fortune
These beg the question of why an airline with a record of four decades of world-leading performance has struggled with large investments in foreign carriers.
There are many reasons in what can often be a challenging industry. Indeed, such are the huge range of pressures it is often said in the airline business that the best way to make a small fortune in aviation is to start with a large fortune.
Airlines often face a higher degree of government involvement than most other industries and the governments in other countries are not as hands-off (or free-market oriented) as in Singapore.
Regulations might hamper an ambitious airline – Richard Branson, the 51% owner of Virgin Atlantic alleged that his airline’s struggles were the result of a lack of access to Heathrow airport.
In some instances, the unions are quite strong. Air New Zealand was impacted severely because of the poor performance of Ansett Australia, which was highly unionized. Ansett eventually collapsed in 2001, shortly after Air New Zealand took full control of the airline.
Managing the uncontrollables
In our book Flying High in a Competitive Industry we argued that ‘managing the uncontrollables’ – for example the impact of wars, epidemics, fluctuations in oil price and government intervention – is one of the key success factors of an airline.
In big initiatives, the impact of the ‘uncotrollables’ is magnified– the September 11th terrorist attacks, for instance, impacted the performance of Virgin Atlantic because of its focus on the London-NY route.
Over the last two decades, SIA has also formed alliances, including in 1997 joining the Star Alliance – now the world’s largest airline alliance with 27 members.
More recently the airline has stepped up moves to tie-up with other carriers as part of its network growth strategy in an ever more challenging business environment. In the last couple of years alone, for example, SIA has announced at least 16 alliances or tie-ups with other airlines.
Although not all of these are either new or broad alliances (some are rather narrow—code shared flights for a particular route), the sheer number of them suggests that SIA’s focus is more weighted towards selected partnerships with occasional small equity stakes or joint ventures, if the opportunities arise.
For instance, in 2012 it acquired a 10 per cent stake in Virgin Australia for just over A$100 million.
This new approach of a series of alliances seems to offer the best way forward for SIA to stay ahead of the game as a global aviation leader.
They don’t involve large investments (even the investment in Virgin Australia was modest compared to Virgin Atlantic or Air New Zealand ventures) and, hence, correspondingly lower risks.
They are also adaptable since their scope as well as focus can change based on environmental developments.
Sometimes, SIA might invest somewhat larger stakes in alliances—as in the case of the recent joint venture with the Tata group in India establishing the new domestic carrier, Vistara, which is expected to begin flights in the coming months.
But this is a very different proposition from the Virgin Atlantic stake. For one, the Indian airlines are struggling badly and it is in the interests of the Indian government to have some capital flow into the sector and also have healthy airlines operating in India.
Secondly, the Tata group has a long history of operations as well as forming alliances and a strong reputation.
With that in mind SIA can rest assured that the Tata group will do its utmost to ensure the success of the alliance.
Thirdly, being a new venture, the airline will not be saddled with legacy issues such as poor union management relations.
So, what are the lessons from the SIA story?
Even in an industry with high degree of government involvement, it is indeed possible to have a global strategy.
In fact, in an industry with increasingly aggressive competitors (such as Emirates and Qatar) and new hubs (such as Dubai) that are aiming to lure transfer passengers away from Changi, being a global player is no longer a matter of choice for SIA.
Nonetheless SIA must choose the most appropriate path which is adaptable and less risky, yet offers the potential to reap the benefits of a global strategy.
This path must also be consistent its own strengths.
Alliances and small stakes are the best way forward for SIA since it may be ill-equipped to handle the political and other forces (e.g., unions) involved in owning a foreign airline (especially on its own) that would come with a full scale-acquisition, or even a large and expensive stake.
Large scale, multi-hundred-million dollar ventures may be sexy and headline-grabbing, but SIA would be wise to follow the path of picking and choosing alliances carefully, rather than be tempted into mega-projects that are fraught with risks.
This article first appeared in the Straits Times on 22 October 2014