| BUS349: Strategic Management |
Case Study: Singapore Airlines, Reacting to the Asian Crisis
INTRODUCTION
On September 11, 1998, Singapore Airlines (SIA) announced its biggest-ever product launch, with brand new products and services being introduced in all three classes on its Boeing 747, Airbus A340, and Boeing 777 planes. The cost of the launch was expected to be S$500 million (Approximate exchange rate, S$1.65 = US$1).
Coming in the midst of the worst economic crisis experienced by several East Asian economies, the product launch was viewed with caution by many analysts. Though most analysts agreed that the move would have a positive impact in the long run, they were divided regarding the short-term impact. While arguing that it was a risky maneuver, Chia Cheow Ming of Tat Lee Securities in Singapore said:
“Singapore Airlines is pulling away from the pack, which is fine if it can attract wealthy Americans and Europeans willing to pay a premium for upgraded services and seating. Otherwise, Singapore Airlines will have to eat 2 their loss.”
Simultaneously with the product launch, SIA also announced that its earnings for the year ending March 1999 would drop significantly versus previous years. As SIA’s stock price fell 8% on the day the launch was announced, many observers were left 3wondering if SIA’s ambitions had got the better of its judgment. Had it abandoned its policy of prudence? Was it not aware that even its closest competitor, Cathay Pacific, was struggling in the current
economic environment?
STRATEGY AND ORGANIZATION POLICIES
Singapore Airlines came into existence on October 1, 1972. Since its inception, it had followed a set of consistent strategies including the following:
- Maintaining the youngest fleet of aircraft among all major carriers;
- Deploying the latest technology in in-flight & other operations;
- Pioneering customer conveniences such as free headsets, drinks in the economy class;
- Marketing campaigns emphasizing its in-flight service (the Singapore girl
campaign) and young aircraft fleet; - Building excellence in related operations such as building and maintaining airports, maintaining planes, operating kitchens, and transporting cargo.
SIA also followed a series of internal organization policies;
- Rigorous recruitment and selection procedures;
- Heavy emphasis on training at all levels in the organization;
- Actively seeking customer feedback;
- Rewarding staff that provided superior customer service;
- Empowerment and total involvement of employees through the creation of smaller units within the company, job rotation, and extensive communication between management and employees.
PAST PERFORMANCE
SIA was routinely acknowledged as one of the world’s premier airlines. In 1998, SIA was voted the Best Airline in the World by the readers of Business Traveller Asia Pacific for the seventh consecutive year. In 1995, SIA was voted Asia most admired company by the Asian Business magazine.
SIA had a diversified base of revenues and was not overly dependent on any one geographic region (see Exhibit 1 for a geographic breakdown of SIA’s revenues). SIA group’s financial position was extremely strong. In 1998, the group’s shareholders funds stood at S$11,380 million, enough to pay for most of its purchases of aircraft in the foreseeable future. Over the last five years, the shareholder’s funds had grown at a rate exceeding S$700 million every year. The group had no debt.
ASIAN CRISIS’ IMPACT ON ASIAN AIRLINES
The Asian Economic Crisis had adversely affected most Asian airlines. On August 5, 1998, Cathay Pacific Airways announced that it had plunged into the red for the first time in twenty years as tourism dried up in the wake of the Asian Economic Crisis. For the year ended March 1998, Malaysian Airlines posted a net loss of 260 million ringgit (US$62 million) versus a profit of 350 million ringgit (US$70.6 million) the year before, mainly due to amortization of 3.5 billion ringgit in foreign-currency debts.
In the second half of 1997, Thai Airways had seen a 40 % drop in passengers. In August 1998, the airline said that it had suffered a net loss of 4,32 billion baht (US$103.4 million) in the third fiscal quarter compared to a loss of 310.3 mill6ion baht for the same period one year earlier. The economic downturn had, coupled with racial riots at home, caused Garuda’s (Indonesia) load factor to drop from around 80% to 49%. Four out of six Indonesian airlines were planning to return all of their leased planes.
By January 1998, Korean Air was worth less than three of its fleet of 45 jumbo jets (Boeing 747s). Even reputed airlines from the region were suffering. Australia’s Qantas had issued a profit warning7. ANA (Japan) recorded a 28.9% fall in net profit in the six months to September 1997. Many of the affected airlines were taking one or more of the following steps to mitigate the impact of the crisis: selling planes (Garuda, Korean), returning leased
planes (Philippine Airlines, Garuda, Korean), offering reduced fares or special packages for tourists (Cathay Pacific, Asiana, Korean), and reducing headcount (Philippine).
SIA’S RESPONSE TO THE CRISIS
In addition to its ambitious product launch, SIA was taking a variety of steps to minimize the impact of the crisis. In February 1998, SIA announced a 2.5% reduction in capacity for flights serving the Southeast Asian region and increased services to the U.S., Europe, and Australia.
In May/June 1998, SIA offered Hello Kitty, the Japanese character dressed in the costume of an SIA stewardess, to travelers. The promotion proved to be quite popular. In August 1998, SIA Group managers (numbering 316) volunteered to forego annual salary increments for the 1998-99 fiscal year, as a contribution towards containment of costs. The twenty highest-ranking executives of the SIA group had also decided to forego their annual salary increments.
In September 1998, in another belt-tightening measure, SIA deferred the delivery of eleven aircraft over the next two years.
APPROPRIATENESS OF SIA’S STRATEGIC RESPONSE
In the aftermath of the crisis, industry analysts were wondering about SIA’s response to the crisis. Was the response extremely risky or was it cleverly thought out to build on SIA’s competitive advantage? Had SIA become complacent due to its past success or was it unwavering in its ambition to be the best airline in the world?
Based on the information provided in the case study above, you are required to prepare a 2,000 essay that discusses the key strengths, weaknesses, opportunities, and threats (SWOT) of Singapore International Airlines (SIA).
You are further required to include in your essay a discussion of what you believe to be the core competencies of the company as well as the relevance of the company’s vision and mission statement. Lastly, you are to provide your opinion on the strategy undertaken by SIA in the case study by justifying the merits and demerits of SIA’s strategic response. You may structure your essay as follows:
- Cover page
- Content page
- Introduction
- Vision
- Mission
- Core Competencies
- Strengths
- Weaknesses
- Opportunities
- Threats
- Appropriateness of SIA’s Strategic Response
- Conclusion
