Business report on Singapore Airlines principles of strategic management

Air travel remains a large and rapidly growing industry. It promotes the world trade, enhances economic growth, international investment, tourism and this perhaps makes it key to the globalisation process in other industries. The airline industry has been weighed down by numerous macro-level socio-economic factors which include rise in oil price, the Tsunami case, increase in terrorism, SARS epidemic and these have been of negative influence to the profit level of the industry (Journal of Air Transport management, 2010).

Singapore Airline Limited which is the world s second biggest airline by market capitalization with its headquarters in Singapore was formed in 1947 by British interests as the Malayan Airways but became SIA in 1972 after it split from the Malaysian airline. The company along with its subsidiaries is engaged in airlines operations, airport terminal services, engineering services and other related activities with more than 30,088 employees as at March 31, 2010. The group operates in East Asia, south west pacific, Europe, the Americas, west Asia and Africa, with 66 destinations in 36 countries on 726 weekly flights with about 106 fleets (DATAMONITOR, 2010). The group which is owned by the Singapore Government through its parent company Temasek Group owns 54.5% of the company shares. The group recorded revenues of S$12,707.3 million during the financial year ended, as on march 31, 2010 with a 20.56% decrease from the previous year. Its operating profit was S$63.2 million during the 2010 fiscal year ended which was represents a 93.0% change from the previous year also. Profit attributable to equity share holders of the company was at S$216 million with a 79.7% decrease from the 2009 financial year ended.(Singapore airlines, 2010). The decrease was as a result of low demand for airline and cargo operations as a result of the economic crisis.

The primary objective of this report is to analyse the airline industry, its major market players, and alliances, examine the key driving forces of change and assess the present state of the sector in relation with Singapore airline limited. Finally this report will also concentrate on the analysis of Singapore airline limited financial statements and compare its records with one of its main competitors.

1. BACKGROUND TO THE AIRLINE INDUSTRY

The airline industry had total revenue of $1380.5 in 2009 which represents an annual growth rate of 2.5% between 2005 and 2009. The airline industry volume also increased its growth between 2005 and 2009 by 2.56% to get a total of $2,002.9 million passengers in 2009(DATAMONITOR, online). The global airline industry reduced in 2009 due to the global recession but from forecasts it will develop strong growth by 5% before 2014(DATAMONITOR, online). Some of the major passenger airlines include Cathay pacific, the emirates, U.S airways, Japan airlines; air France-Klm and south west airlines e.t.c. Cathay pacific won the 2009 airline of the year title in the famous world awards replacing Singapore airlines.

FIG 1. GLOBAL AIRLINE INDUSTRY VALUE (DATAMONITOR, 2010)

1.1 AIRLINE INDUSTRY MERGERS AND ALLIANCES

Deresky (2006), defined strategic alliances as partnership between two or more firms that decide they can better pursue their mutual goals by combining their resources as well as their existing distinctive competitive advantages . Airline industry mergers are formed in response to the dynamic economic conditions of the aviation industry and determine cooperate aims of competitive ratios (ECONOMIC WATCH, online). This involves leasing of airplanes and

purchasing airplanes as well. For instance the case of Air France takeover of Klm in 2004 by acquiring 89% of its shares has enhanced the number of flights and offers various flight options to select from.

In addition to mergers, airlines are forming alliances with one another in order to achieve network size economies through code sharing as well as scale economies in the purchase of fuel and aircraft, combining forces to make purchases serves to increase the industry players bargaining power and therefore reduce supplier power. There are 3 major passenger alliances in the airline industry which are SKY TEAM founded in 2000, ONE WORLD founded in 1999 and STAR ALLIANCE founded in 1997 with 27 members and a market share of 29.3% of whom Singapore airlines joined the group in 2000 in order to broaden its flights network and to increase its competitive advantage. Thus, this has increased SIA s global presence through code sharing as their star alliance network covers 1,160 destinations in 181 countries.

2. DRIVING FORCES FOR CHANGE/ LIMITATION

Key driving forces for change within an industry are external factors which cause change to the system of interest to stakeholders in that they are considered to be beyond the control of these stakeholders. Driving forces can include changes in social, technological, environmental, economic and political factors. An examination of the factors influencing an industry is a general way to begin the industry analysis and such a study is used to develop the competitive advantage of the organization to enable it defeat its rivals. (lynch, 2006:93). This is always done by the porters five forces framework analysis. The external environment has an enormous impact on the airline industry. There has been unstable time for the airline industry. It has been confronted with a market decline in international tourism in the aftermath of September 2011 terrorist attack in the united states and more recently traffic loss attributable to the war in Iraq and several terrorist activities.

2.1 Porter’s 5 Forces frame work on Airline industry

Threat of New Entrants. You’ll need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the

industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher. Distribution is not easy for new entrants as there is need for establishment of online booking system, and relationships with the sales intermediaries.

Power of Suppliers. The airline supply business is mainly dominated by Boeing and Airbus which has high power. Supplier power in this industry is so much that airlines have to go into contract with the suppliers of the aircraft. Constant increase in oil price also tends to boost the supplier power of the industry. In 2010 year ended, Singapore airlines reported that 33% of its cost was fuel (DATAMONITOR 2010). Another factor that boosts the supplier power has to do with the maintenance of the aircraft as a result of cost of funding staffs, mechanics for routine check on aircraft.

Power of Buyers. The bargaining power of buyers in the airline industry is on the high side. There are over a hundred of airlines companies which operate in the Asian region and as a result of this, there are numerous choices for the individual to choose from and at most times would go for the low carriers.

Availability of Substitutes. For regional airlines, the threat might be a little higher than international carriers. When determining this you should consider time, money, personal preference and convenience in the air travel industry.

Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.

3. SINGAPORE AIRLINES STRATEGIC POSITION.

As Porter (1986, cited in Philips and Fox, 2003) stressed that, Competing internationally is a necessity rather than a matter of discretion for many firms , this states that the success of almost every international company will depend on how effectively they can compete on an international scale. This section aims to identify the current strategic posture used by Singapore

airlines limited successfully, within the era of globalisation. In the airline environment, Singapore airline has always outperformed its competitors. It has never posted a loss on annual basis, has achieved substantial and superior returns compared to its industry and has received hundreds of achievements awards for its service quality. This success has been achieved by the company through the dual process of differentiation through service excellence and innovation coupled with cost leadership among its peers. Singapore airline has achieved sustainable competitive advantage and has consistently out performed its competitors through out its three and half decade history. The key success to this may be said to be the fact that it manages to navigate through two poles which most companies think are distinct.

At cooperate level, Singapore airlines works with diversification. The airline group has 36 direct subsidiaries and associated companies which includes Singapore airline terminal, Singapore engineering company and Singapore airlines cargo.(Singapore airlines,2008). Its airline subsidiaries which include 100% ownership of Silk air, 49% of Tiger airways and 49% of Virgin Atlantic is said to cover the customer areas within the industry in terms of domestic and international distance. As part of its international strategy, SIA in 2000 joined the star alliance which has been noted earlier in the report.

Strategies of differentiation and cost leadership have necessitated different and incompatible investments and organizational models. A strategy of differentiation implies high quality offering and significant investment in innovation, staff development and branding which results to high cost. SIA achieves these but with a low cost. The table below outlines many of elements in relation to the dual strategy of integrating elements of differentiation and cost leadership in SIA.

Table 1

Elements of differentiation and cost leadership strategies at SIA

Differentiation

Positioning of service excellence and superior quality, brad equity(marketing strategy)

Developing the Singapore girl( hr development policies)

In-flight experience(young fleet, entertainment system, gourmet cuisine-operations strategy)

Cultural values and practice of constant innovation and learning.

Changi airport one of the worlds best(related infrastructure)

Premium pricing in Singapore and in business/first class and higher load factor as differentiation indicators. Cost Leadership

Young fleet (fuel efficiency, lower maintenance costs, effective fuel hedging, paying cash for planes.

Labour costs compared to major competitors (16.6% vs. 30%); continuous drive for productivity, cost reduction programmes.

Related diversification through efficient subsidiaries that contribute to bottom line.

Cultural values; cost consciousness, obsession with reducing wastage.

Innovations not only to increase differentiation but also efficiency.

Changi airport as one of the most efficient(related infrastructure)

L.heracleous, J.Witz. Journal of air transport management (2009)

Singapore Airlines Ltd maintained its leading position in air through stellar marketing campaigns, cutting capacity while increasing passenger load and by constantly innovating in offering the latest technology for its new products and services in-flight

4. SINGAPORE AIRLINES FINANCIAL ANALYSIS IN THE LAST 5 YEARS.

Singapore airline over the past 5 years has experienced growth until the 2008 economic crisis which decreased its revenue growth by 20.56%. In terms of return on assets, the airline company experienced a downturn last year. Despite this they still show a decent ability to generate profit from each asset controlled. The 2010 ROA figure which is 1.13 is lower due to the previous years economic crisis. This is also the case of ROIC which stood at 1.71 at the end of the FY 2010(Thomson one banker), showing that the allocation of resources and investments has justified Singapore airlines. From the view point of last five years; the company has experienced growth. From the gross profit margin point-of-view the company has experienced a slight increase to 14.75 over last year s 12.83.

Fig 2.shows Singapore airline s financial performance.

Source: Reuters (2010)

4.1 QUICK AND CURRENT RATIO OF SIA OVER THE PAST 5 YEARS

SIA over the past 5 years has made an increase in its acid ration other than in 2009 when it dropped due to the global economic crisis. in the year ended march 2010, they were able to operate a ration of 1:33 which makes it able to meet current obligations using liquid assets. on the other hand, the current ratio of 1.45 as at march 2010, is acceptable.

From the financial analysis it is clear to see that even though the Singapore airlines enjoyed constant growth almost in every aspect in the analysis, the year 2009 was very difficult as earlier noted due to the financial crisis but records from the FY ended march 2010 shows its on the recovery.

4.2 COMPARISON OF SIA FINANCIALS TO CATHAY PACIFIC AIRWAYS

Following the financial analysis of Singapore airlines highlighted above, a brief comparison of its finances with Cathay pacific Airways with regards to Sales, Return on Assets and Return on invested capital. SIA recorded a net sale increase of 0.15% in 2009 and 20.56% decline in 2010 where as Cathay Pacific Airways recorded a net sales decline of 22.63% in 2009 financial year. On Returns on Invested Capital, SIA recorded a 1.71% growth rate in 2010 over the 6.69% growth rate in 2009 whereas Cathay Pacific recorded 7.31% growth on Return on Invested Capital. (Thomson One Banker, 2010). This record perhaps shows the effect of SIA s business strategy and its effects on competitive advantage in the airline industry.

5 SINGAPORE AIRLINES AND ITS SOCIAL RESPONSIBILITY

This is concerned with company ethics and social responsibility. Singapore airlines took many activities to maintain company ethics. For instance it is the first airline in the world to fly the new Airbus A380 which is preparing for the first commercial flight of the double Decker jumbo jet from Singapore to Sidney and return. It took place in October 2007 and in a first time move, all proceeds from the sale of tickets on the first flight was donated to charity organisations.

Singapore Airlines Ltd considers environmental awareness to be very important, and in 2009 introduced initiatives to reduce 550, 000 tons of carbon emissions (Singapore Airlines,2010)

The company s efforts included studies on the effectiveness of carbon offsets, the maintenance of a young and modern fleet of aircraft which was environmentally efficient and the establishment of a Fuel Conservation Committee that looked into fuel efficiency, waste management and water-saving devices. SIA also took delivery of 12 new aircraft which are quieter and boast substantially lower fuel burn per-seat-kilometre and lower carbon emissions.

CONCLUSION

In response to the adverse business conditions within airlines, SIA planned to reduce capacity by 11% to match demand, translating to suspensions of flights on a range of routes such as to Amritsar, and use of smaller aircraft on others. Secondly, it reduced fuel surcharges on short and medium-haul segments by around 5% to 21%, with highest reduction for short haul segments in economy class, which was the most active segment in the downturn. Thirdly, it negotiated a delay of delivery for eight A380 aircraft on firm order with Airbus. Fourthly, it drastically reduced airfares and engaged in various promotional activities. This has continually kept it in top priority among its peers in the airline industry and perhaps there has been a positive forecast of the company s growth in few years time.

Fig 3 shows an estimated forecast of the Singapore Airline from 2010 to 2013

Source: Thomson one banker(2010)

BIBLIOGRAPGY AND REFERENCES