1 International Organisation for Standardisation 22% of US$4.95 billion revenues.
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© 1995 Melvin Lim
EXECUTIVE SUMMARY
As a former British Colony that gained full independence in 1965, Singapore was essentially forced to make do with its limited resources. This developed into a national obsession with achieving excellence without compromise and has been responsible for its many successes. This attitude of control and determination was critical in the creation of the culture within Singapore Airlines (SIA).
From the first unveiling of its official colours in 1972, SIA's primary objective was that of creating a world class airline, able to compete against the best in the world, without government subsidy or interference. This international focus, along with its goal of being distinctive, resulted in the creation of a company-wide commitment to the success of the airline. The following report is written with the specific time frame in mind. As some information is gleaned from deductive reasoning, a fair amount of leeway should be made as to the accuracy of the absolute figures. These would, naturally, be available to the management of the company. The recommendations with regard to the use of technology as well as the additional recommendation for the sub-segmentation of its customer base are, due to the esoteric nature of industry knowledge, only general directions. It is merely intended that the report presents an objective analysis of the situation. Wednesday, October 11, 1995
The single biggest challenge facing Singapore Airlines is that of maintaining its place as the world's best airline as well as the most profitable. Having garnered a host of accolades for its outstanding level of service, whether or not it can hold on to its enviable position remains to be seen.
Melvin Lim
The single biggest challenge facing Singapore Airlines is that of maintaining its place as the world's best airline as well as the most profitable(Utal et. al.; 1990, pp 98: Tanzer; 1990, pp 152). Having garnered a host of accolades for its outstanding level of service, whether or not it can hold on to its enviable position remains to be seen.
It is important to note that unlike many other companies, SIA is in the business of selling a service. In such an industry, the absence of any tangible product at the end of a transaction underlines the need to distinguish themselves in the minds of their customers.
SIA'S "PRODUCT"
According to Kotler (1994, pp 464), "Service. . . is essentially intangible and does not result in the ownership of anything." Thus, whilst the provision of airline service does at some point involve some element of tangibility in the form of food presentation and quality, and environmental factors, it is largely an intangible and heavily reliant upon the quality of the service as perceived by the customer, as a distinguishing factor.
In addition, the inseparability of consumption from production leads to its perishable nature; and the heterogeneity of the service experience (Berry, Parasuraman & Ziethaml; 1988, pp 13). In the commercial airline industry, this means that any unfilled seat on a regularly scheduled flight represents an opportunity cost to the operator. As for the quality of the in-flight service, as with all services, because inter-personal interactions between customer and service providers are required for the creation of that service, a great deal of variability is involved. Actual quality of service, in this case, may not be as important as the customer perception of the quality of that service (Berry, et. al; 1988).
In addressing the central question of how SIA is to retain its competitive position in the industry, it is necessary to examine its "product" mix and their respective markets.
SIA's product offering is divided into three main lines. The First Class seat represents the ultimate in air-borne luxury with corresponding prices. SIA allocates no more than 5% of its seats to this class due to its limited market. The next category is the Business (or Raffles) class seat. Passengers in this category enjoy fully reclining seats, excellent food served on custom designed china. Raffles class passengers also enjoy the use of a personal LCD colour television for a choice of in-flight entertainment. The allocation for this class makes up approximately 10% of the average load.
The most substantial category in the product mix is the Economy (or "Tourist") class, which accounts for close to 85% of the seat allocation. Whilst SIA has one of the most modern fleets in the industry, and has service levels that other airlines emulate, the emergence of other regional airlines with aspirations of displacing SIA from its prized leadership position poses some threat to the company.
Based on comparisons of SIA's performance with other international airlines, 1991 was a good year. SIA finished up the year in question in the sixth position in terms of passenger numbers, tenth in passenger kilometres, and first in absolute profit (See Table 1). This is in line with the unequivocal goal that has driven the company since its inception.
| Rank | Category | Numbers |
|---|---|---|
| 10 | Number of Passengers carried | 7,093,000 |
| 6 | Sceduled Passenger Kilometres | 31,544,000,000 |
| 1 | Operating Profits (in US$) | $774,000,000 |
However, with the growing competition in the industry, SIA needs to consider avenues to not only protect its penetrated market from competitive erosion, but also to expand it where possible. Due to the premiums paid by the Business Class passenger, the company has directed its thoughts towards this market with one caveat: that there should be "no compromise of commitment to quality . . . .if a trade off is necessary, it should be in favour of the customer."
Another additional tool in the arsenal is the fact that SIA is an industry leader in the use of technology as a competitive tool. It is the view of the management that this will have an increased role as a differentiator.
From the results of the surveys conducted, it appears that there are some wants of Business class travellers that are not currently catered to by the superlative in-flight service already provided by SIA. These are summarised as follows:
Business Centres and Services Technology can play an important role in meeting these needs. The slated introduction of satellite telephone facilities on-board brings with it the opportunity to meet the business needs of these passengers. Fax machines, photocopiers and computer workstations are a logical extension. With the exception of secretarial services, it is entirely possible that the use of technology will enable business travellers access to full office facilities in the air.
In addition, whilst other customer wants (such as showers) may not be logistically or economically efficient, it is not beyond the scope of the imagination to provide minor personal grooming conveniences such as facilities for ironing or changing. This would be especially beneficial to travellers with time constraints.
The fact that all meals originating from Singapore are prepared by ISO1 certified SATS Catering Private Limited, SIA's catering affiliate, are planned by nutritionists, and rigorously tested for suitability to the unique requirements of air travel escapes the general public. It is largely used as a tool directed towards marketing its (SATS Catering's) services to other airlines.
The services of SATS catering could also be applied towards addressing passengers' expressed preference to have smaller meals at greater intervals. These issues could be better communicated to the passengers simply through the changing of menus in the Business class to include the nutritional content of the meals.
Results of the Business class passenger survey also pointed to waiting time and entertainment as factors affecting passenger satisfaction. Whilst a large number of delays associated with air travel are beyond the control of the airline, such as delays due to inclement weather, some of the customer aggravation is due to the lack of information (Katz, Larson & Larson; 1991, pp 44-53).
Technology could be used to address this, and other issues during the flight as, apart from announcements over the public address systems, reports could be inserted into the entertainment system accessed by Raffles class passengers. This, along with options for interactive video entertainment in the form of computer games, on-line shopping (as opposed to catalogue shopping for duty free items), even mechanisms for ordering meals and beverages are not beyond the reach of present technology.
Through its advertising agency in Singapore SIA has a centrally coordinated advertising program that in 1991, had a budget of US$99 million2. As indicated, the focus of the various advertising campaigns was varied according to the specific cultures of the countries they were run in.
Related to this is the issue of consumer "attitudes", as opposed to "satisfaction" which is more as a consequence of a transaction or service encounter (Oliver; 1981, pp 25-48). Whilst image-reinforcing advertising may be important in supporting overall consumer attitudes concerning service quality, SIA has largely avoided communicating any discrete benefits available on its planes in any of its advertising. This may be an area that bears some exploration, especially in Asian cultures which, as indicated in the information provided, is more inclined to view technological benefits favourably.
Another area for concern is that primary data suggests that passenger dissatisfaction, whilst promptly addressed, has tended to originate from passengers of certain nationalities. This suggests a proclivity exhibited by certain cultures for external expression. This is an important consideration as studies by the White House Office of Consumer Affairs have indicated that complaints received are only the tip of the iceberg; a company could stand to lose up to 96% of its unhappy customers (Johnson, Jones and Schilling; 1992, pp 985).
Consistency of in-flight service quality with ground service quality Another issue of some import is the lack of direct control over the quality of ground services offered by SIA's contractors in countries, and specifically at airports, around the world. The real issue is the communication, despite cultural differences, of the need for and the maintenance of a consistent level of service quality.
A good number of the passenger preferences, as revealed in the survey, can be addressed through the use of technology. Here, Singapore Airlines is already a leader, and already has the necessary expertise in the sourcing and application of technology. It should be noted however, that the competitive advantages brought about by such technological innovations are inherently temporal as they quickly erode as a result of competitive emulation. Nevertheless, constant and continuous innovation is critical in maintaining a competitive advantage (Stalk; 1989, pp 61-68). Hence, SIA should continue to apply technology towards enhancing its on-board "servicescape" (Bitner; 1992, pp 57-71).
SIA's advertising strategy has been very successful in establishing the "Singapore Girl" as the personification of its service quality. However, the culture of service that exists in the region could very well negate any advantage that SIA's service level might have. Whilst the dual focus of the advertising to date has been effective in communicating the company's values, it may be constructive to re-examine this in the light of the growing Asian market and their apparent affinity for "technologcal" advertisements. Since most of the airline's seats are sold through Ticket Agents, another tool is the use of promotional programs run for the benefit of these organisations and their staff. It stands to reason that there is a potentially significant advantage to be gained from winning the "mindshare" of this group. Such programs could take the form of sales incentives, prizes and the like. And because of the constant communication and feedback involved in the nature of the business, SIA is in an ideal position to monitor the progress of such programs.
The use of supplementary advertising and sales promotions should be planned such that the appropriate mix can be applied to different markets. It should be emphasised that at no point should the primary advertising strategy of emphasis on image be supplanted. Instead, the additional advertising strategy should be designed to reduce consumer "search costs" by highlighting the available benefits (Fisher; 1991, pp 19-28).
Also, such programs should be planned for locations with the highest potential. From the data provided, it is evident that "long-haul" flights are the most profitable (See Table 2), and logically also the most likely for an increased number of Business Class prospects. Consequently, SIA should target such programs accordingly.
| Time | %of Revenue | % of Flights | Revenue |
|---|---|---|---|
| Up to 3 hrs | 25% | 60% | $1,237,500,000 |
| 4 to 8 hrs | 25% | 18% | $1,237,500,000 |
| Over 9 hrs | 50% | 22% | $2,475,000,000 |
The situation with ground services in Singapore is well handled by SIA's subsidiary, SATS Passenger Services (Singapore) Private Limited. However, as stipulated, SIA has to rely on contractors to provide similar services elsewhere in the world. In order to maintain a uniform standard of service throughout the world, SIA could have these clearly laid out in the form of Service Blueprints (Bitner & Crosby; 1989), adapted for the different conditions that exist but with adherence to a certain minimum standard.
In addition, such Service Blueprints will enable a consistent approach to the resolution of service problems and complaints such as lost luggage, or seat allocations. In fact, research has shown that, properly handled, recovery from lapses in service quality can actually build increased consumer confidence (Bitner, Booms and Tetreault; 1990, pp 71-94: Hart, Heskett & Sasser; 1990, pp 147-156).
Upholding these standards becomes an additional issue. Through Internal Marketing (Kotler; 1994, pp 469), customer surveys and the use of standardised mechanisms such as the Service Blueprint, SIA will be able to attain some degree of consistency in ground services in the area of ticketing, reservations and airport services. This is not to suggest the removal of all autonomous decision-making from personnel; rather, it should be viewed as a mechanism for the communication of acceptable standards of service
Apart from the use of technology, it would also be useful for the airline to consider further segmenting it's largest target market - the Economy Class Traveller. Sub-Segmentation or Niching will enable the airline to manage, and maximise the yield from its customers by meeting customers' needs (Kimes; 1989, pp 348-363), and will allow the airline to charge a premium in the process.
According to one general method of segmentation (see Appendix 1), SIA could, through the re- examination of the preferences of its largest customer segment, actually create an additional sub-segment or niche. The growing affluence of Singaporeans (over a third of whom choose to fly SIA) and the region, plus the recognition of the growing need for comfortable, yet economical travel especially on long-haul flights may well generate a need for an additional class of travel. The veracity of this premise could be ascertained by conducting passenger surveys of the Economy class travellers on long flights (see Appendix 2).
This interim class could be positioned between the Business and Economy classes (see Appendix 3), with some key differentiators (Appendix 4). Priced at a slight premium over the Economy fare, it could be introduced on Long Haul flights before eventual adoption on shorter routes.
Due to the capacity-constraints inherent in the airline business (Kimes, 1989, pp 348-363), and the positioning of the proposed "Temasek" Class, it is natural that cannibalisation of existing segments should be a concern. The pricing structure of the existing fares should be taken into consideration when determining the fare for the new class. Also, the differentiators should be carefully selected so as not to infringe upon the exclusivity and luxury of the Business Class, whilst maintaining sufficient tangible benefits above and beyond those available in Economy.
The introduction of the new features to be included in the "Temasek" Class will enable the airline to realise sufficient economies, through scale and experience, to eventually transfer some, if not all of these benefits to the Economy class. The rationale for this would be the erosion of the competitive advantage generated by the "Temasek" class through emulation by other airlines. Nevertheless, the continuous and continual innovation in the level and quality of its service to its customers is the airline's only sustainable competitive advantage (Ohmae; 1988, pp 149-156.).
The emulation of SIA's service features by other airlines can even be used to its advantage through the judicious use of advertising (Cravens & Lamb; 1989, pp 3-10). The response lag (Bharadwaj et. al.; 1993, pp 83-99) will enable SIA to introduce newer and improved benefits in its service, whilst creating the necessary conditions for it to fully reap the rewards of the lifetime value of its customers as a result of increased loyalty (Reicheld and Sasser; 1990, pp 105-111).
Whilst other means of relationship marketing (Morgan and Hunt; 1994, pp 20-38) such as the American Airline innovation of "Frequent Flyer points" is prevalent in other parts of the world, it could be a premature move in that such programs could quickly degenerate into discounting mechanisms whilst generating accounting liabilities (Kearney; 1991, pp 49-54).
In conclusion, SIA needs to act to maintain its competitive edge in a growing market and needs to change the basis of competition through the introduction of a new and unique class of "product".
Figure 1 (Omitted). Framework for Market Segmentation, Targeting and Positioning. (Pearce, M.R.)
The proposed Customer Survey will take the form of a written questionnaire to be administered to passengers in the Economy class. Initial data sources will be restricted to passenger on long-haul flights. Another important parameter will be the age of the respondent. It is envisaged that the lower parameter will be age 21. The rationale for this arbitrary age is that the respondent should be in a position to determine decisions as to flight category as well as accommodate cost differences.
Questions would be phrased to reflect attitudes and perceptions, as well as collect relevant primary data, in the following key categories:
Age, gender, income group, occupation, nationality, seat purchase channel (through agent, over the counter, in-house buying center etc.), Prices etc.
Questions in this category would be phrased to reveal details of the service encounter, both in-flight and on-ground
In this area, questions would center around the customer expectations of the in-flight service as well as propensity or inclinations to upgrade their seating category and price elasticities.
Staff would have to be trained in the proper method of selecting respondents and administering the survey. A secondary benefit that can be attained from the survey is the collection of feedback from normally reticent passengers, not given to complaints.
Feedback could also be obtained as to the overall attitude held by individual customers and key choice determinants and motivators. It is envisaged that the survey will be administered in several major languages.
| Passenger Distribution | Percentage | Total |
|---|---|---|
| First Class | 5% | 354,650 |
| Business Class | 10% | 709,300 |
| Economy | 85% | 6,029,050 |
| Total | 100% | 7,093,000 |
| Loading in Economy (Highest) | 80% | |
| Therefore, seats carried in 1990 | 8,866,250 |
| Estimated Potential Seating Capacity | Ratio | Seat Potential | Lost |
|---|---|---|---|
| First Class | 5% | 443,313 | 88,663 |
| Business Class | 10% | 886,625 | 177,325 |
| Economy | 85% | 7,536,313 | 1,507,263 |
| Average Passenger Revenue | $697.87 | ||
| Therefore, Lost Potential Revenue | $1,237,500,000 |
The rationale for the selection of the Economy class for sub-segmentation is evident from fact that it represents 85% of the airline's seating capacity. Due to the pricing differentials however, the revenue representation of this class is therefore not proportionate to its load weighting. As a result, it stands to reason that a further segmentation of this class into price/attribute sensitive passengers would yield additional revenues even if there were NO additional passengers as a result. That is, if the result of the segmentation produced no added market share, the premium accruing from the passengers purchasing "Temasek" Class seats would add to the total revenue of the airline.
As it stands, the table demonstrates the substantial opportunity cost of the unfilled seats, most of which would accrue from the Economy class due to the relative numbers. The perishability of the service dictates that a certain amount is lost regardless. However, by the same token, any seat that can be filled represents almost pure profit since the Marginal Cost is almost non-existent. Consequently, the implementation of this new class, especially in the yet to be delivered planes represents virtually no added costs since all of its aircraft are custom-built (see Appendix 4), but promises added revenue and customer loyalty.
It is proposed that the new class be named "Temasek", the historical name for Singapore. This would be entirely congruent with the use of "Raffles" to denote the airline's Business class due to its historical significance.
It is proposed that the "Temasek" Class would have significant advantages over the Economy class in terms of passenger comfort, especially on long flights due to:
There could also be additional cost savings in the form of reduced personnel requirements, or improved efficiencies due to the fact that there would be no additional staff required to serve this class. In fact, the numbers could actually be reduced due to the reduced density of seating, leading to other possible economies (eg. fuel etc.)
1 International Organisation for Standardisation 22% of US$4.95 billion revenues.
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© 1995 Melvin Lim