singapore international airlines- strategy with smile.pdf

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This document is authorized for use only by Arvind Kumar Jain at University of Petroleum & Energy Studies untilSeptember 2014. Copying or posting is an infringement of copyright. [email protected] or

617.783.7860.

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Copyright © 2001 Thunderbird, The American Graduate School of International Management. All rights reserved.This case was prepared by Professor Kannan Ramaswamy, with research assistance from Mr. Manesh Modi, MIM2000,

for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

Singapore International Airlines:

Strategy with a Smile

Mr. Cheong Choong Kong, the CEO of Singapore International Airlines (SIA) put away his papers asthe SIA Megatop circled to land at Changi International Airport in Singapore. He could see the mag-nificent lights of the city as it prepared for the much-awaited arrival of the new millennium just two weeks away. Singapore had promised a spectacular show because it would be among the first countries to welcome the New Year. Mr. Kong was returning from meetings in London with Mr. Richard Branson,CEO of Virgin Atlantic Airways. The two companies had been exploring the potential for a formalequity alliance. While he was happy with the performance of the company under his leadership, heknew that much remained to be done. The next sequence of strategic moves would be crucial in cement-ing SIA’s meteoric rise.

SIA had managed to weather the storms of declining traffic and yields especially in the Asianregion. The regional economies had been showing signs of a nascent recovery. However, the economicrecovery was by no means complete. For example, Japan was still 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 trend, growing along withthe prosperity of Singapore itself. Specialized labor was difficult to find locally, and when availableproved to be much more expensive than before. This could not have happened at a worse time since themain competitors were showing signs of cost-based competition and the customer was increasingly attracted to low fares. This posed a dilemma for SIA, which had traditionally relied on Singaporeanpersonnel 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 soonbecome the norm. Every major air carrier now offered a choice of meals in economy class, innovativeentertainment options in the cabins, and all the trappings of luxury that used to be the sole domain of SIA. Of particular concern was the increasing competition from international carriers headquartered inneighboring countries such as Thai Airways, Cathay Pacific, Malaysian, and Qantas. These carriers hadlearnt to duplicate some of the key features of SIA’s competitive strategy from recruitment to in-flightservice 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 the 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 hadrecently joined the well-acclaimed Star Alliance. It was also pursuing numerous other partnerships withother 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 theUnited States, it raised concerns among SIA’s loyal clientele. There was some apprehension about theability of the other partners to be able to live up to the standards that SIA had set. Should there be

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significant differences in service quality across network partners, some feared that SIA’s sterling reputa-tion and brand image in the airline industry could be tarnished. There was indeed a lot riding on thepartnerships that SIA had entered or might enter in the near future.

The International Airline Industry

The airline industry had traditionally remained fragmented primarily due to 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 to develop dominance over their ownregional 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 this industry had started to change dramatically in recent years. Deregulation, privatization, and the advent of new technologies have started to reshapethe 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-specificbarriers to free market competition among air carriers. In Asia, deregulation occurred in fits and starts

with some major regions allowing greater access to foreign carriers. For example, India, a regional mar-ket of some significance, announced that it would privatize its state-owned airline company. It hadalready allowed its traditionally domestic airline to compete against its international air carrier in many of the regional markets comprising neighboring countries. Japan made major strides in deregulationafter selling off its shares in the then state-owned Japan Airlines and permitted All Nippon Airways toserve international markets. In Latin America, many of the smaller national flag carriers were privatized.Countries such as Mexico and Argentina infused significant levels of market competition in their airlineindustries by removing anti-competitive barriers and privatizing their 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 toimplement an open Trans-Atlantic market area where landing rights would be determined by free mar-ket forces rather than regulatory policy. Open skies agreements are bilateral agreements between coun-tries that agree to provide landing and take-off facilities for air carriers originating in any of the partnercountries. Such an agreement does not have the typical restrictions related to landing rights that aredetermined 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 trends of privatization and deregulation resulted in an increasingly global approach tostrategic 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 airline 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 pricesensitive than ever before. In attempting to keep up with the competition, many carriers upgraded theirservice 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 theairlines 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 carriers 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


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significant in the Asia-Pacific region where the yields fell by 3.9% and 4.1% in 1998 and 1999. A geographic region-wise summary of key trends in passenger traffic, growth potential, and major playersfollows.

North America

The North American region in general and the United States in particular is by far the most significantarena 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 passengerkilometers between 1997 and 1999 (see Exhibit III). American Airlines, Delta Airlines, and United Airlines, who collectively accounted for roughly 58% of total U.S. airline revenues in 1999, dominatedthis market. Northwest Airlines, U.S. Airways, and Continental formed the second tier of the majorsaccounting for approximately 29% of total revenues for U.S. carriers. Although most of these largecarriers 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 criticalsince U.S. airline companies witnessed a 16% decline in profitability in 1998 alone. A large part of thedecline was blamed on operational inefficiencies and increases in input costs. For example, personnelcosts had increased by 3% between 1997 and 1999. Increases in oil prices, it was feared, would furthererode 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 accountedfor 26% of total revenue passenger kilometers worldwide placing it second to the North Americanmarket. Much of the region remained fragmented in terms of market dominance although a smallgroup 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 total 1999 revenue passengerkilometers in the region while KLM, Iberia, Swissair, SAS, and Sabena formed the second tier with a little over 37%. With the enactment of the EU (European Union) standards, all regulatory barriers hadvirtually evaporated between member countries. As a consequence, the market shares of national carriersin their own home markets fell by close to 15% on average between 1993 and 1998. The move to fare-based competition was still in its infancy. It was estimated that only 2% of Europe’s travelers chose to fly on low-cost carriers as opposed to 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 tenyears. This upward trend was expected to continue albeit at slightly lower levels, moderating between6%-7% until 2001. Trans-Pacific traffic was expected to grow at 6.6% and intra-Asia-Pacific traffic by

5%. Some analysts predicted that Asia would play a key role in over half of the top twenty internationalmarkets ranked in terms of revenue passenger miles by 2002 (see Exhibit IV).

The aviation market in Asia, while similar to Europe of the pre-EU era, did indeed have somedominant players. Japan Airlines and Singapore Airlines were the clear leaders and together accountedfor 40% of the market share. The second tier included Cathay Pacific, Thai, and Korean Air, whichcomprised 33% of the market.1 Asian carriers in general had significantly lower operating costs com-pared to their American and European counterparts. For example, in 1998, according to Warburg,

1 World Airlines in Review, Interavia Business & Technology , June 1999.


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Dillon & Read, personnel costs for North American carriers accounted for approximately 32% of totalrevenues. For European carriers, it was 21%. 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 thanairlines in North America or Europe (see Exhibit V). This location-specific advantage was a primary reason why carriers from other regions were setting up significant hub operations in the Asia-Pacificregion. While the yields for many carriers such as China Airlines, Korean Air, Thai, and Malaysian, the

second and third tier competitors, were much lower than international levels, the top tier carriers such as Japan Airlines, and Singapore Airlines had yields consistent with their North American and Europeancounterparts. The avenues for differentiating airline services in this region were shrinking. The elitecarriers who had built a reputation for superlative service such as Singapore Airlines were now facing stiff competition from carriers such as Thai Airways and Cathay Pacific who had geared to deliversimilar services. Thus, differentiation was becoming much more demanding and difficult to sustain.

The Rise of Alliances

By the late 1990s alliances between air carriers in different parts of the world had become the normrather than the exception. The initial drive to find alliance partners could be traced to the historicstrategic moves by KLM and Northwest in 1992 to partner and begin offering code share services. Thisarrangement 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 carriers 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 traffic,increase profitability, help leverage scale economies in operations, and differentiate services in the mindsof 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 broughttheir own set of thorny issues. There were invariably questions relating to level of service across carriers,safety records of the partners, and willingness to cede control to an alliance. The key issue seemed to bethe 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-shareholdingsbetween carriers as privatization accelerated. It was feared that this could create a parallel network thatmight undercut alliances. Since individual airlines were typically allowed to negotiate side deals withother carriers on their own irrespective of their alliance membership, the likelihood of inter-network 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 itentered the new 21st century. Its per capita GNP increased by a phenomenal 75% between 1990 and1999 and currently stood at S$39,724.2 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 spirit of hispeople 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. It emphasized responsibilities over rights and placedenormous value on attributes such as hospitality, caring and service. As a result of these efforts, Singapore

2 Government of Singapore, Department of Statistics, www.singstat.gov.


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today ranked among the best countries in terms of human capital and was often rated among the world’sfriendliest places to do business. Rising standards of living meant higher wages (see Exhibit VII). Coupled with the small size of the local population and a very low unemployment rate (3.2% in 1998), theavailability of labor was seen as a potential stumbling block in the drive toward further growth. Many of the larger companies already depended on a sizable number of expatriates from neighboring countries as well as the West to staff positions.

A staunch believer in free trade and internally driven growth, Mr. Yew made it clear from the startthat the “world does not owe Singapore a living.” For example, in the air transportation sector, Mr. Yew’sgovernment declared that SIA, although the national carrier, would not receive any subsidies, protec-tion, financial assistance, or economic benefits from the government. It would have to sink or swimbased 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 testamentsto 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 natural 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 animportant 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 tothe outlying colonies of Australia and New Zealand. Building on this historical reputation, Singaporeevolved into an important Asian tourist hub (see Exhibit VIII).

Singapore International Airlines: The Company

SIA traced its roots to an organization called Malayan Airways that offered its first commercial passen-ger 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 quitebeneficial to the fledgling company. The crews garnered significant flight experience operating overrough geographical terrain in Southeast Asia. Their safety records were impeccable. This association alsoprovided 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 overseasoffices, its headquarters building in Singapore, and a fairly new computer reservation system. SIA wasready 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 area of only 240square miles, smaller than New York City! In early 1999 SIA reached 95 destinations in 43 countries in Asia, Europe, North America, Middle East, Southwest Pacific, and Africa (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 itsprofitability history. It was one of the few Asian airlines that had continuously posted profits evenduring lean years such as the 1990s economic downturns in Asia. Its return on equity (ROE) averagedroughly 10% over the five-year period prior to 1999, while its return on sales was around 14% during the same period. These profitability metrics were far more superior to those posted by SIA’s rivals, and insome cases as high as twice or thrice what the rivals were earning. SIA had positioned itself to execute a strategy of differentiation, predicated on offering its passengers a level of service that was seldom sur-passed at the price levels that SIA offered.


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On the Ground

SIA’s legendary commitment to superior service began on the ground. It built a network of wholly owned subsidiaries and joint ventures to provide operational support in areas such as catering, terminalmanagement, 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 areas.

The Singapore Airlines Terminal Services (SATS) subsidiary was one of the largest in the group. Itoffered 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 includedBritish 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 ChiMinh City, Macau, Chennai, Male, Manila, Osaka, and Taipei.

The Changi International Airport was indeed a crown jewel for SIA. Given its status as a nationalflag carrier, it occupied pride of place at Changi, an airport that it also managed. The airport itself wasrated 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 of its subsidiary network, especially SATS. Changi wasalso the headquarters of SIA’s Engineering Company, a subsidiary that provided aircraft maintenanceand engine overhaul services. As a testament to its engineering prowess, many global carriers engagedSIA 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 bothSATS and SIA Engineering would be taken public in the near future to give them the independence andthe incentive to grow faster internationally. It was unclear whether this move would dampen the controlthat SIA held in these subsidiaries and how it might impact the superior ground operations that thesedivisions 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. Onlineticketing 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 largenumber of travelers. It embraced technology in a variety of forms, allowing check-in via e-mail, tele-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”3 amidst the hustle and bustle of theairport. It featured an environment with plush armchairs, 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. It was one of the largestand most luxurious airport lounges in the world.

Fleet acquisition and management : Singapore Airlines came a very long way from its origins as a company that had a fleet of just 10 aircraft serving a network of 22 cities. By late 1999 it operated a fleetof 96 aircraft, almost all of them capable of long-haul, large-capacity flights. It had 37 aircraft on firm

order mostly with Boeing and another 36 on options to acquire should the need arise. It had planned itsfleet acquisitions judiciously such that its fleet was only five years old on average.4 It was the world’slargest operator of the Boeing 747-400 Megatops, a roomy aircraft capable of long distance flights. Among the largest air carriers in the world, Delta Airlines came closest to SIA in terms of fleet age withan average of roughly eight years. Most of the other carriers had large segments of their fleets in the 14+years range.5 Continuously maintaining youth in its flight operations was no small achievement. It was

3 BBC program.4 Fleet data and age obtained from www.singaporeair.com.5 Airline Analyzer , Warburg, Dillon, Read, August 1999.


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a facet of competition that SIA took very seriously. It maintained an office in Seattle, Washington, justto liaise with Boeing designers and oversee the development of new additions to the SIA fleet. Neweraircraft 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 of its strong signaling value. It implicitly tells the potentialcustomer that s/he can expect top-of-the-line technology, comfortable seating, and a safe trip, all of which are critical aspects around which differentiation can be built. Keeping up with the changes intechnology allowed SIA to design aircraft interiors that encompassed the latest amenities. For example,SIA was among the first to 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 tenNintendo game channels at every seat, with a Dolby surround sound system that was specially designedfor 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 at the push of a button. 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 “turn-down” service where the bed linen was replaced on long trips. The famous Frenchfashion house Givenchy designed all the service-ware. SIA tried to 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 carrier, SIA hadgathered several firsts along the way. In 1991, it was the first transcontinental carrier to introduce in-flight telephones using advanced communications technology. It was the first with the Dolby surroundsound and personal video screens in coach. It was the first to offer fax services in the air. The list goes on.Plans were under way to upgrade the communications package to allow Internet access while in the air.It would shortly debut an on-demand entertainment system called WISEMEN in its First and Rafflesclass cabins.

The Softer Side of SIA

The company firmly believed that its employees were the primary drivers of the success that it enjoyedin the marketplace. Through a deft mixture of organizational culture, indoctrination, and ritual, SIA was able to meld the human assets 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-try. The company established an expansive SIA Training Center in Singapore that served as the focalpoint for training programs targeted at cabin crew, commercial staff, f light crew, and flight operationspersonnel.

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 aninternship) program that attracted generalists, or a specialist program geared to functional experts inareas 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 to employee training and development was reflected in the fact that it spent roughly 14 times asmuch per employee as the average Singapore company. The company instituted a system of provencontrols and mentoring guidelines that helped the employees develop their potential to contribute tothe 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 to manage withoutsignificantly trimming its workforce because many of its employees willingly turned down their annual wage increments while improving operational efficiency at the same time.


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The pool of talent with respect to pilots was indeed global in complexion. At last count SIA hadpilots from over fifty countries flying its fleet. Many of these pilots were expatriates drawn by the allureof 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 asan incubator for developing Singaporean pilots to 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 to go through mandatory biennial proficiency checks. It was generally believed that the training programs in this regard were quite well administered as reflectedin the very high levels of safety that the company was able to achieve. It was the long-term intent toinduct more Singapore nationals into the cockpit, a daunting proposition especially since the number of local pilots available was quite low. This was augmented by graduates of the Singapore Armed Forces(SAF) which trained pilots for defense purposes. After completion of the mandatory employment withSAF, some of the trained personnel took up jobs with SIA. The company employed roughly 1,500 flightcrew 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 basepay.

The complement of cabin crew, numbering roughly 6,000, were chosen through a very rigorous

selection process. SIA considered them to be the “brand ambassadors” who should reflect the highstandards 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, andIndonesia), they were mostly Singaporean. Of late, this recruitment strategy had posed a stumbling block since the pool of available talent within Singapore was insufficient to draw from. Given the factthat SIA had some of the lowest labor costs among leading carriers, this home-based cost advantage hadproven to be a critical ingredient in the success of the company. Any fall-off in the availability of localtalent could adversely impact operating costs, especially if it necessitated the recruitment of expatriatepersonnel. Such a move would also raise questions about how globalizing its workforce would fit in withits historic branding approach, the Singapore Girl . When SIA was formed, it had to compete againstother airlines 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 Girl as the embodiment of caring, comfortable, hospitable service. It also played well to the oriental mystique that was then preva-

lent 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 processand 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 attitudesand service-oriented behaviors transcended mere internalization of a set of physical practices, and do’sand don’ts by the cabin crew. The arduous training process was to be repeated periodically throughpreplanned refresher courses so that the crew 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 thepart of management and staff to help each employee perform at his/her best potential. Various practicessuch as detailed performance reviews and feedback at all levels, career counseling, and performance-based reward systems were designed toward this end. SIA’s 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-respectedtravel magazine, SIA was ranked overall as the Best International Airline. This was the 10th time that SIA was chosen for the prestigious honor in eleven years that the award had been given. The respondentsrated SIA’s cabin service as the best in the world, a testament to the company’s emphasis on excellence inthis arena. Such awards were nothing new for SIA which had garnered over a hundred from augustorganizations such as Zagat, Condé Nast, Business Traveller, OAG Worldwide, ASEAN (Association of


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South East Asian Nations) Tourism Association, and Asia Money. In January of 1999 alone, the com-pany won an astounding 23 awards.

Competing in the New Millennium

By the late 1990s, competition in the airline 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 pagefrom the SIA playbook in offering premium services at consistently low fares. Those in Europe andNorth 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 powerfulnetwork 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 themembers to offer code-sharing services, fine tune traffic flows to increase revenues and efficiency, andcombine 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 UnitedStates. 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 toencompass a considerably larger number of primary and secondary cities. A similar argument could be

made with respect to leveraging the new relationship with Varig to fly to more destinations in South America, a region that was not well represented in SIA’s route structure. However, despite the obviousadvantages, the alliance network did bring with it some concerns.

Thai Airlines, the nearest geographical neighbor for SIA in the alliance, announced its intent tostep down from the Star Alliance since it believed that the relationship would not serve its best interestsafter SIA was allowed to join. This could indicate some simmering rivalry in the region where Thai wastaking active steps to upgrade its service levels and had reached a position where its service would berated quite highly. From the perspective of loyal SIA passengers, it remained to be seen whether theother network carriers would be able to rise to the levels of SIA’s hallmark service standards. Shouldthere be shortfalls, it is quite likely that the brand image that SIA has so carefully nourished could betarnished, 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 suchthat the identity of the network would transcend the individual identities of the members. The loss of control over some key decisions such as scheduling and flight frequency could also pose challenges inthe future. It also raised critical questions about the imitability of core competences. Would the partnerfirms be able to learn more about the critical aspects of SIA’s recipe for sustainable competitive advan-tage? An alliance is usually not designed to last forever and hence should the partners learn first-handabout SIA’s operations, it might be disadvantageous to SIA should the alliance be dissolved.

In balancing growth potential against the ability to control 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 wouldhave the benefit of the additional alliance with Ansett as well. It was expected that these moves wouldstrengthen SIA’s 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 asa further step toward achieving global status. His team discussed an investment proposal under whichSIA would acquire 49% of Virgin Atlantic 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’s salesrevenues.6 In return, SIA would gain access to the lucrative trans-Atlantic sector between the U.S. andU.K., thus entering an arena that SIA could not enter previously given the roadblocks imposed by theBritish Government. It would also obtain landing slots at Heathrow. The route structures of the two

6 HSBC report, Feb. 7, 2000.


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companies were quite complementary with very little overlap (see Exhibits IX and X). This wouldindicate 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 bothorganizations adopted an almost obsessive attention to customer service and had similar operating philosophies, it was believed that they would function well as partners. However, Virgin appeared to bethe 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 to acquire, control of Virgin Atlantic, and how the new relationship could impact existing rela-tionships that SIA had built with other carriers. For example, Virgin declared that it would soon launcha 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 competitorto Virgin. Further, Virgin had repeatedly said that it would not join the Star Alliance. This couldpotentially pit SIA against Star Alliance members. For example, SIA might want to funnel passengers toVirgin on its North Atlantic routes instead of United, a Star Alliance partner. Decisions such as thiscould muddy the alliance network that SIA currently belongs to. In essence, joining forces with Virginmight 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 mapof 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 immediateaction. 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 devicescould SIA 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 itsglobal objectives while holding steady with its recruitment approach that focused primarily onSingaporeans and Malaysian personnel? Should SIA begin a full-blown strategy analysis based on Internettechnologies 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 wantedto get a few winks before the Board meeting tomorrow. It was the best of times for SIA on some fronts,but there was uncertainty 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 airline to become a globalplayer, commanding the respect of the world’s largest carriers.


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Exhibit I U.S. Open Skies Agreements as of 1999

Americas Asia/Pacific Europe Middle East Aruba Brunei Austria JordanCanada Malaysia Belgium United Arab EmiratedChile New Zealand Czech Republic Bahrain

Costa Rica Pakistan Denmark El Salvador Singapore FinlandGuatemala Taiwan Germany Honduras South Korea IcelandDutch Antilles Uzbekistan Italy Nicaragua Luxembourg Panama NetherlandsPeru Norway

Romania SwedenSwitzerland

Source: U.S. Department of State


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E x h i b i t I I

K e y F i n a n c i a

l a n d O p e r a t i n g S t a t i s t i c s f o r G l o b a l A i r P a

s s e n g e r C a r r i e r s

A s i a -

P a c i f i c

I n d i c a t o r

C a t h a y P a c i f i c

M a l a y s i a

A i r l i n e s

Q a n t a s

S i n g a p o r e

T h a i

1 9 9 7

1 9 9 8

1 9 9 9

1 9 9 7

1 9 9

8

1 9 9 9

1 9 9 7

1 9 9 8

1 9 9 9

1 9 9 7

1 9 9 8

1 9 9 9

1 9 9 7

1 9 9 8

1 9 9 9

C a p a c i t y

F l e e t S t r e n g t h ( N s . )

6 2

7 2

6 5

-

9 9

1 0 3

9 7

9 8

9 8

8 0

8 6

9 6

7 4

7 7

7 9

A v a i l a b l e A T K

1 0 4 0 0

1 0 8 5 7

1 1 1 8 3

6 1 4 9

6 4 1 1

6 6 4 9

1 0 8 8 7

1 1 1 5 1

1 1 1 4 4

1 3 5 0 1

1 4 5 3 4

1 5 6 5 2

6 4 7 3

6 8 3 8

7 3 1 0

P a s s e n g e r A S K

5 7 1 0 4

6 0 2 9 5

6 0 2 9 5

4 0 0 9 7

4 2 2 9 4

4 5 4 4 2

8 1 4 4 0

8 1 5 3 7

8 1 7 6 5

7 3 5 0 7

7 7 2 1 9

8 3 1 9 2

4 5 3 5 3

4 8 5 5 7

5 1 9 0 7

A c t u a l T r a f f i c

O v e r a l l R T K

7 3 3 1

7 2 1 3

7 9 1 6

3 7 0 7

3 8 8 8

4 0 3 1

7 0 5 2

7 0 5 5

7 1 2 9

9 5 1 2

1 0 0 3 8

1 0 7 6 6

4 4 6 6

4 5 8 5

5 1 0 3

P a s s e n g e r R P K

3 8 9 6 2

4 0 6 7 9

4 2 7 1 3

2 7 9 0 4

2 8 6 9 8

3 0 5 9 3

5 9 1 9 9

5 8 6 1 9

5 9 8 6 3

5 4 6 9 2

5 4 4 4 1

6 0 3 0 0

3 1 2 8 8

3 2 9 6 9

3 7 5 8 5

L o a d F a c t o r s

O v e r a l l ( O L F )

7 0 %

6 6 %

7 1 %

6 0 %

6 1 %

6 1 %

6 4 . 8 %

6 3 . 3 %

6 4 %

7 0 %

6 9 %

6 9 %

6 9 %

6 7 %

7 0 %

P a s s e n g e r ( P L F )

6 8 %

6 7 %

7 1 %

7 0 %

6 8 %

6 7 %

7 2 . 7 %

7 1 . 9 %

7 3 . 2 %

7 4 %

7 1 %

7 2 %

6 9 %

6 8 %

7 2 %

B r e a k - e v e n L o a d

6 5 %

6 6 %

6 6 %

5 9 %

6 2 %

6 4 %

5 7 . 3 %

5 5 . 5 %

5 5 . 3 %

6 6 %

6 5 %

6 7 %

6 5 %

5 9 %

5 9 %

Y i e l d

O v e r a l l ( ¢ / R T K )

4 9 . 9

4 3 . 4

4 2 . 2

5 5 . 9

4 8

. 4

4 0 . 9

8 7

7 8 . 6

7 4 . 3

4 7 . 2

4 3 . 4

3 7 . 8

6 9 . 4

5 4 . 8

5 5 . 5

P a s s e n g e r ( ¢ / R P K )

7 . 1 8

5 . 8 3

5 . 7 4

6 . 5

5

. 6

4 . 5

7 . 9

7 . 2

6 . 7

6 . 4

6 . 1

5 . 1

7 . 0

5 . 5

5 . 3

C a r g o ( ¢ / F T K )

2 2 . 6

2 1 . 3

2 2 . 2

1 5 . 5

1 3

. 5

1 2 . 2

0

2 . 4

1 9 . 5

2 2 . 1

2 0 . 6

1 9 . 4

2 8 . 5

2 5 . 5

2 8 . 3

O p e r a t i n g C o s t s

S t a f f ( ¢ / A T K )

8 . 9

8 . 2

7 . 4

5 . 5

5

. 4

4 . 6

1 5 . 0

1 3 . 4

1 2 . 4

5 . 7

5 . 2

4 . 3

8 . 6

5 . 6

6 . 0

F u e l ( ¢ / A T K )

5 . 5

4 . 0

4 . 1

5 . 6

4 . 9

3 . 8

6 . 4

5 . 4

4 . 3

5 . 3

4 . 7

3 . 6

7 . 6

6 . 0

6 . 0

M ’ n t n a n c e ( ¢ / A T K )

3 . 9

2 . 9

2 . 6

2 . 7

2

. 3

2 . 6

2 . 5

2 . 1

1 . 9

2 . 7

2 . 0

2 . 3

T o t . O p e r . C o s t s / A T K

3 2 . 7

2 8 . 6

2 7 . 7

3 2 . 8

2 9

. 9

2 6 . 0

4 9 . 8

4 3 . 7

4 1 . 1

3 1 . 1

2 8 . 2

2 5 . 4

4 5 . 2

3 2 . 1

3 2 . 6

F i n a n c i a l s

S a l e s ( l o c a l c u r r . - m )

3 0 6 4 7

2 6 6 9 5

2 8 4 7 9

6 5 6 4

7 1 5 4

7 5 3 6

7 8 3 4

8 1 3 2

8 4 4 9

7 2 2 2

7 7 2 4

7 7 9 5

8 4 6 8 7 1 0 5 4 9 3 1 0 8 2 3 5

O p e r . I n c o m e

4 8 1 2

3 1 4 4

5 3 1 8

1 5 7 3

1 5 7 9

1 4 0 6

8 2 0

9 5 5

1 0 8 2

1 7 9 5

1 8 8 8

1 7 6 7

1 8 0 0 1

2 1 2 3 4

2 1 9 1 0

O p e r . M a r g i n %

1 5 . 7

1 1 . 8

1 8 . 7

2 3 . 9

2 2

. 0

1 9 . 1

1 0 . 5

1 1 . 7

1 2 . 8

2 4 . 8

2 4 . 4

2 2 . 6

2 1 . 2

2 0 . 1

2 0 . 2

S a l e s / e m p l . ( $ ’ 0 0 0 )

2 5 1

2 3 4

2 6 6

1 1 2 . 4

1 0 9

. 9

9 6 . 7

2 0 4

1 9 2

1 8 8

3 9 1

3 6 9

3 3 9

1 2 7

1 0 2

1 1 6

D e f i n i t i o n s o f t e r m s i n A p p e n d i x .

S o u r c e : A n n u a l R e p o r t s a

n d H S B C R e s e a r c h .


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E x h i b i t I I

K e y F i n a n c i a l a n d O p e r a t i n g S t a t i s t i c s f o r G l o b a l A i r P a s

s e n g e r C a r r i e r s ( c o n t

. )

E u r o p e

I n d i c a t o r

B r i t i s h A i r w a y s

L u f t h a

n s a

K L M

A i r F r a n c e

S

w i s s a i r

1 9 9 9

2 0 0 0

2 0 0 1 E

1 9 9 8

1 9 9 9

2 0 0 0 E

1 9 9 7

1 9 9 8

1 9 9 9

1 9 9 7

1 9 9 8

1 9 9 9

1 9 9 7

1 9 9 8

1 9 9 9

A v a i l a b l e A T K ( b n )

2

5 . 1 1

2 5 . 8 4

2 5 . 5 8

2 0 . 1 3

2 1 . 8 4

2 3 . 2 1

1 2 . 3 3

1 2 . 8 3

1 3 . 1 2

5 . 6 8

6 . 2 1

6 . 9 0

P a s s e n g e r A S K ( b n )

1 6

7 . 2 7

1 6 8 . 3 6

1 6 6 . 6 8

9 4 . 7 5

1 0 1 . 1

1 0 2 . 3

P a s s e n g e r l o a d f a c t o r

7 0

. 7 %

6 9 . 8 %

7 1 . 2 %

7 0 . 4 %

7 1 . 1 %

7 1 . 3 %

7 7 . 8 %

7 5 . 1 %

7 6 . 7 %

7 5 . 5

7 5 . 2

7 6 . 1

7 1 . 9

7 1 . 0

7 1 . 8

Y i e l d ( ¢ / R T K )

4

9 . 2 8

4 7 . 0 1

4 9 . 2 1

1 . 4 0

1 . 3 4

1 . 3 9

1 0 5 . 3

1 0 3 . 3

1 0 3 . 8

0 . 6 5

0 . 8 0

0 . 2 2

O p e r a t i n g C o s t s

S t a f f

2 3 5 6

2 4 8 1

2 4 9 1

5 6 0 8

6 3 2 2

6 7 6 4

3 3 1 8

3 5 4 4

3 6 9 3

9 5 9

9 5 5

1 1 0 7

F u e l

7 0 5

8 0 4

9 8 4

1 6 9 0

1 7 7 6

2 4 3 7

1 3 3 2

1 1 7 0

1 4 3 1

3 6 6

2 9 4

3 5 5

M ’ n t n a n c e

6 6 0

6 6 1

6 4 0

4 6 3

1 4 8 7

1 5 3 3

5 3 7

5 4 1

T o t . O p e r a t i n g c o s t s

8 4 5 0

8 8 5 6

9 2 2 7

2 1 0 2 7

2 3 9 2 7

2 6 1 3 9

1 1 4 3 0

1 1 4 7 7

1 2 0 6 8

5 3 5 5

5 9 9 1

5 9 0 5

F i n a n c i a l s

S a l e s ( l o c a l c u r r . - m ) 8 9 3 2

8 0 9 2

8 5 5 6

2 5 6 1 5

2 7 7 8 9

3 0 6 6 2

1 3 3 6 4

1 3 3 2 6

1 3 8 7 5

5 8 8 3 0

5 6 6 9 2

6 7 7 2 9

5 6 1 9

5 9 2 5

6 4 1 4

O p r . I n c o m e ( m )

1 2 5 1

9 2 2

1 0 8 7

4 5 8 8

3 8 6 2

4 5 2 4

1 9 3 4

1 8 4 9

1 8 0 7

2 5 4 7

1 7 5 5

2 3 5 5

2 6 4

3 5 4

1 0 8

O p r . M a r g i n %

1 4 . 0

1 1 . 3

1 2 . 7

1 7 . 9

1 3 . 9

1 4 . 8

1 4 . 5

1 3 . 9

1 3 . 0

4 . 3

2 . 9

3 . 5

4 . 6

6 . 0

1 . 7

S o u r c e : A n n u a l r e p o r t s , S . G . S e c u r i t i e s R e s e a r c h , A B N A m r o


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E x h i b i t I I

K e y F i n a n c i a l a n d O p e r a t i n g S t a t i s t i c s f o r G l o b a l A i r P a s s

e n g e r C a r r i e r s ( c o n t

. )

U S A

I n d i c a t o r

U n i t e d

A m e r i c a n

D e l t a

N o r t h w e s t

U . S .

A i r w a y s

1 9 9 9

1 9 9 8

1 9 9 7

1 9 9 9

1 9 9 8

1 9 9 7

1 9 9 9

1 9 9 8

1 9 9

7

1 9 9 9

1 9 9 8

1 9 9 7

1 9 9 7

1 9 9 8

1 9 9 9

C a p a c i t y

P a s s e n g e r A S M ( b n )

1 7 6 . 8

1 7 4 . 0

1 6 9 . 1

1 6 1 . 2 1 1

5 5 . 2 9 1 5 3 . 9 1

1 4 4 . 0 1 4 0 . 1 4

1 3 6 . 8

9 9 . 4 4

9 1 . 3 1

9 6 . 9 6

5 9 . 2 5

5 6 . 8 6

5 8 . 5

A c t u a l T r a f f i c

P a s s e n g e r R S M ( b n )

1 2 1 . 4

1 2 4 . 6

1 2 5 . 4

1 1 2 . 0 6 1

0 8 . 9 5 1 0 7 . 0 2

1 0 4 . 5 7 1 0 1 . 1 3

9 7 . 7

5

7 4 . 1 6

6 6 . 7 3

7 2 . 0 3

4 1 . 4 7

4 1 . 2 5

4 1 . 5 7

P a s s e n g e r

L o a d F a c t o r

7 1 . 8 %

7 1 . 6 %

7 1 . 0 %

6 9 . 5 %

7 0 . 2 %

6 9 . 5 %

7 2 . 6 %

7 2 . 2 %

7 1 . 4 %

7 4 . 6 %

7 3 . 1 %

7 4 . 3 %

7 0 . 1 %

7 2 . 7 %

7 1 . 3 %

P a s s e n g e r y i e l d ( ¢ / R P M )

1 2 . 6

1 2 . 4

1 2 . 5

1 3 . 1 2

1 3 . 4 9

1 3 . 3 7

1 2 . 8 3

1 2 . 8 5

1 2 . 7

9

1 1 . 5 8

1 1 . 2 6

1 2 . 1 1

1 6 . 5 1

1 7 . 0 2

1 7 . 1 0

O p e r a t i n g C o s t s ( m )

S t a f f

5 0 1 8

5 3 4 1

5 6 7 0

6 1 2 0

5 7 9 3

5 5 1 1

4 9 9 3

4 8 5 0

4 5 3

4

3 3 9 3

3 2 6 1

3 0 2 4

3 3 8 0

3 1 0 1

3 1 7 9

F u e l

2 0 6

1 7 8 8

1 7 7 6

1 9 2 3

1 6 0 4

1 6 9 6

1 3 6 0

1 5 0 7

1 7 2

2

1 1 9 1

1 0 9 7

1 3 9 4

8 0 5

6 2 3

7 2 7

M ’ n t n a n c e

6 8 9

6 2 4

6 0 3

1 0 0 3

9 3 5

8 6 2

5 6 1

4 9 5

4 3

4

6 3 5

7 6 1

6 2 0

4 9 8

4 4 8

4 5 1

T o t . O p e r a t i n g c o s t s

1 6 1 1 9

1 6 0 8 3

1 6 6 3 6

1 6 5 7 4

1 5 5 2 8

1 5 3 6 2

1 2 8 4 1

1 2 4 4 4

1 2 0 6

3

9 5 6 2

9 2 3 6

9 0 6 9

8 4 5 9

7 6 7 4

7 9 3 0

F i n a n c i a l s

S a l e s ( l o c a l c u r r . - m )

1 7 3 7 8

1 7 5 6 1

1 8 0 2 7

1 7 7 3 0 1 7 5 1 6

1 6 9 5 7

1 4 7 1 1

1 4 1 3 8

1 3 5 9

4

1 0 2 7 6

9 0 4 5

1 0 2 2 6

8 5 9 5

8 6 8 8

8 5 1 4

O p r . I n c o m e ( m )

1 2 5 9

1 4 7 8

1 3 9 1

1 1 5 6

1 9 6 8

1 5 9 5

1 8 7 0

1 6 9 4

1 5 3

1

7 1 4

- 1 9 1

1 1 5 7

1 3 6

1 0 1 4

5 8 4

O p r . M a r g i n %

7 . 2

8 . 4

7 . 7

6 . 5

1 1 . 2

9 . 4

1 2 . 7

1 1 . 6 9

1 1 . 3

3

6 . 9

- 2 . 1

1 1 . 3

1 . 5

1 1 . 6

6 . 8 5


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Exhibit III Projected Airline Passenger Traffic Growth

Region 1987 1997 1998 1999 2000 2001 Africa 35.9 56.2 55.2 57.4 60.3 63.5 Asia/Pacific 253.5 639.5 630.1 657.2 696.0 744.0Europe 494.2 655.2 691.5 721.9 763.1 808.9

Middle East 44.6 76.7 77.7 80.5 84.4 89.3North America 684.6 1020.4 1042.1 1082.7 1123.9 1175.6Latin America 76.7 125.1 133.8 139.3 147.2 156.8

World 1589.5 2573.1 2630.4 2739.1 2874.8 3038.0

Revenue Passenger Kilometers—billions

Source: International Civil Aviation Organization.

Exhibit IV Top 20 International Markets Projected Growth in RPMs by Region

Rank R egion 1998-2002E 1998-2007E1 Africa-South America 8.3% 8.2%2 Northeast Asia – Southwest Asia 8.2% 8.2%3 Africa – Southwest Asia 7.8% 7.8%4 Central America – South America 7.7% 7.5%5 CIS region – International 7.5% 7.3%6 Europe – South America 7.4% 7.9%7 Europe – Northeast Asia 7.3% 7.7%8 Oceania – South America 7.2% 7.1%9 China – Southwest Asia 7.1% 7.2%10 Middle East – Northeast Asia 6.9% 7.6%11 Europe – Southwest Asia 6.7% 6.8%12 North America – South America 6.6% 6.7%

13 Africa – North America 6.6% 6.9%14 North America – Southeast Asia 6.5% 6.9%15 China – Europe 6.4% 6.8%16 Africa – Middle East 6.2% 6.1%17 China – Northeast Asia 6.0% 6.6%18 Southeast Asia – Southwest Asia 5.9% 6.3%19 Northeast Asia – Southeast Asia 5.7% 6.5%20 North America – Northeast Asia 5.7% 6.2%

Source: U.S. Dot Form 41, Boeing Corp.


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Exhibit V Annual Staff Cost Per Employee in the Global Airline Industry

Region/Airline 1999 U.S. $Europe

Swissair 47,000KLM 56,000

Air France 58,000Lufthansa 58,000British Airways 59,000SAS 60,000

North America Air Canada 46,000 American 50,000Continental 58,000United 60,000Northwest 61,000Delta 68,000U.S. Airways 75,000

Asia-Pacific Malaysian Airlines 18,000

Thai Airways 24,000 Air New Zealand 36,000Korean 38,000Singapore Airlines 46,000Qantas 50,000Cathay 67,000

All Nippon Airways 96,000 JAL 104,000

Note: Data drawn from bar charts deemed approximate.

Source: Warburg, Dillon Read, Airline Analyser, Aug. 1999.

Exhibit VI Major Partners in Global Airline Alliances (1999)

Star W ings Oneworld Delta Air Canada KLM American Delta

Lufthansa Northwest British Airways AustrianSAS Alitalia Canadian Sabena Thai Continental Cathay Pacific SwissairUnited Qantas Air FranceVarig Finnair

Air New Zealand Iberia Ansett Australia Lan Chile All Nippon Airways

Source: Merrill Lynch


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Exhibit VII Global Comparison of Wages

Country 1989 1991 1993 1995 1997Malaysia 16.47 189.26 223.22 263.75 293.50India 18.85 22.85 21.92 27.52 26.64Singapore 717.46 895.96 1049.62 1246.03 1436.08

Thailand 76.60 94.29 105.80 127.69 151.75U.S.A 1676.80 1788.80 1878.40 1979.20 2107.20U.K. 1391.78 1677.35 1881.76 2000.50 2194.38Germany 1053.33 1060.99 1087.79

Note: All wages are expressed in non-inflation adjusted 2000 U.S. $ per month of employment. They areaverage wages across all forms of non-agricultural activities. Service wages are typically higher than averagesshown.

Source: International Labor Organisation, Laborsta Database.

Exhibit VIII

Tourist Arrivals and Outbound Departures to and from Singapore

1993 1997 1998Tourist Arrivals 6,425,800 7,198,000 6,241,000Outbound departures 1,587,416 2,391,149 2,197,759Tourists per capita 1.92 1.76Departures per capita 0.64 0.61

Source: Government of Singapore, Department of Statistics.

Primary Regions of Origin of Singapore Bound Tourists, 1998

R egion/Country Number ASEAN 1,878,600 Japan 843,700 Australia 427,200Taiwan 362,400U.K. 357,900

Source: Government of Singapore, Department of Statistics


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Exhibit X Route Structure for Virgin Airways

Exhibit IX Route Structure for Singapore Airlines


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Appendix

Available Ton Kilometer (ATK) A measure of capacity expressed in terms of aircraft payload multipliedby 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 traffic carriage measured by the revenue generating weight(in tons) of load carried multiplied by kilometers flown

Revenue Passenger Kilometers (RPK) A passenger traffic measure expressed as the total number of passengerscarried multiplied by kilometers flown

Passenger Load Factor (PLF) Passenger Load Factor in RPKs is expressed as a percentage of ASKs which indicates utilization of seat capacity (RPK/ASK)

Cargo Load Factor (CLF) Cargo load in RTKs expressed as a percentage of ATKs which indicatesutilization of total capacity

Overall Load Factor (OLF) Total passenger and cargo load expressed as a percentage of total pas-

senger and cargo capacity (ATKs) which indicates utilization of totalcapacity

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 profit level

Yield Amount of revenue generated by each unit of load expressed in centsper RTK for cargo or cents per RPK for passengers

Unit Cost Expenditure required to produce a unit of capacity expressed in centsper ATK for cargo or cents per ASK for passengers

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