Singapore Airlines’ Balancing Act
There’s something about Singapore Airlines. Over the past four decades, it has earned a stellar reputation in the fiercely competitive commercial aviation business by providing customers with high-quality service and dominating the business-travel segments. SIA has won the World’s Best Airline award from Condé Nast Traveler 21 out of the 22 times it has been awarded and Skytrax’s Airline of the Year award three times over the past decade.
What’s not so well known is that despite the quality of its services, SIA is also one of the industry’s most cost-effective operators. From 2001 to 2009, its costs per available seat kilometer (ASK) were just 4.58 cents. According to a 2007 International Air Transport Association study, costs for full-service European airlines were 8 to 16 cents, for U.S. airlines 7 to 8 cents, and for Asian airlines 5 to 7 cents. In fact, SIA had lower costs than most European and American budget carriers, which ranged from 4 to 8 cents and 5 to 6 cents respectively.
It’s intriguing that SIA has combined the supposedly incompatible strategies of differentiation—which it pursues through service excellence and continuous innovation—and cost leadership. Few enterprises have executed a dual strategy profitably; indeed, management experts such as Michael Porter argue that it’s impossible to do so for a sustained period since dual strategies entail contradictory investments and organizational processes. Yet pursuing dual strategies is becoming an imperative. The demand for value-for-money products and services has shot up since the recent recession, particularly in developed countries, so even producers of premium offerings have to figure out how to grab opportunities in the middle and the low end of the market. Moreover, multinational corporations face competition from rivals—many of them from emerging markets—that use new technologies and business models to provide good-enough offerings at attractive prices. Incumbents can fight back by cutting prices or further differentiating products and services, but it’s often a losing battle. Price wars typically hurt leaders more than they do challengers, and relentless differentiation is tough to sustain. Adopting a dual strategy is often the only choice.
Our research suggests that dual strategies are embraced more readily in Asian countries. Many Western executives believe that, for instance, cost leadership and differentiation, globalization and localization, and size and agility are fundamentally contradictory and can’t be reconciled. But SIA and other companies such as Banyan Tree, Haier, Samsung, and Toyota operate as though the dualities are opposites that make up a whole; that is, they complement, instead of contradicting, each other. This way of thinking is embedded in Eastern thought; the concept of yin and yang in Taoist philosophy, for instance, encapsulates the idea. To be sure, pursuing two strategies will result in organizational paradoxes, but executives in Asian markets tend to realize that opposing insights present the full picture and develop policies to manage both of them.
No company executes a dual strategy better than SIA. The airline has delivered healthy financial returns since its founding, in 1972, never posting an annual loss. It has almost no debt, and except for its initial capitalization, it has funded growth through retained earnings while consistently paying dividends.
We’ve been studying SIA for the past nine years and have found that it executes a dual strategy by managing four paradoxes: providing service excellence cost-effectively; innovating in both a centralized and a decentralized manner; being a technology leader and a follower; and achieving standardization and personalization in its processes. SIA’s self-reinforcing system is difficult to imitate, yielding sustainable competitive advantage. As we shall see in the following pages, the dual strategy has become part of the airline’s organizational DNA over the years.
Achieving Service Excellence Cost-Effectively
SIA has two main assets—planes and people—and it manages them so that its service is better than rivals’ and its costs are lower. Unlike other airlines, SIA ensures that its fleet is always young. For instance, in 2009, its aircraft were 74 months old, on average—less than half the industry average of 160 months. This triggers a virtuous cycle: Because mechanical failures are rare, fewer takeoffs are delayed, more arrivals are on time, and fewer flights are canceled. New planes are more fuel efficient and need less repair and maintenance: In 2008, repairs accounted for 4% of SIA’s total costs compared with 5.9% for United Air Lines and 4.8% for American Airlines. SIA’s aircraft spend less time in hangars—which means more time in the air: 13 hours, on average, per day versus the industry average of 11.3 hours. And, of course, customers like newer planes better.
Service is mostly about people, so SIA invests heavily in training employees. It schools its fresh recruits for four months—twice as long as the industry average of eight weeks—and spends around $70 million a year to put each of its 14,500 employees through 110 hours of retraining annually. The training includes courses on deportment, etiquette, wine appreciation, and cultural sensitivity. SIA’s cabin crews are trained to interact with Japanese, Chinese, and American passengers in different ways. Trainees learn to appreciate subtle issues, such as communicating at eye level rather than “talking down” to passengers. The superior service that results not only delights customers but also reduces costs by minimizing customer turnover.
Comments