Managing costs

IT IS breakfast time on a Singapore Airlines (SIA) flight to London. Instead of giving all business class passengers jam as part of the table setting, cabin crew now ask if they want the spread, and in what flavour.

It is a simple step that achieves two things. One, giving customers what they want and, two, avoiding waste.

In its heyday in the 1970s and 1980s, when SIA was the undisputed ruler of the skies and cost pressures were less intense, there was less pressure to reduce waste, say staff who spoke in strict confidence.

There is other evidence of a heightened new sense of cost-consciousness at SIA.

Cost pressures, for example, have contributed to painful network cuts such as the recent decision to pull the plug on its prestigious, non-stop, 18-hour flight to New York and 15-hour Singapore-Los Angeles service.

Insiders say SIA held on for as long as it could, battling the 2008 global financial crisis, which hit the premium market hard, and skyrocketing fuel prices that made operating the flights on the fuel-guzzling Airbus 340-500 more and more untenable.

The dilemma demonstrates that SIA is "constantly struggling and walking a fine line between the need to trim costs and still be the best or one of the best", says Professor Jochen Wirtz, 50, who co-authored a book on the carrier called Flying High In A Competitive Industry: Secrets Of The World's Leading Airline.

"Sometimes they get it wrong but when that happens, they also get feedback from customers very quickly," he adds.

The big challenge for SIA is managing costs at a time when cut-throat competition is depressing profits and yields, says the founding director of the UCLA-NUS Executive MBA programme.

In the nine months from April to December, SIA posted a net profit of $311 million, down 17 per cent from $374 million a year earlier. In the full financial year to end-March 2012, it made $336 million, against $1.09 billion in the previous 12 months and $216 million in financial year 2009/2010.

People have high expectations of SIA, so there is no room for complacency, says the carrier's spokesman Nicholas Ionides.

The airline must continue to enhance its products and services, and push for innovation. Otherwise, others will step in and take advantage, and customer loyalty will be lost, he says.

From about 110 in-flight movies four years ago, customers now pick from 239 on aircraft fitted with the new eX3 entertainment system.

Capital expenditure over the next five years will hit $14.25 billion, he adds.

At the same time, significant challenges - for instance, high fuel prices and competition from other carriers - require SIA to be stringent in managing costs.

Mr Ionides says: "We believe there is always more costs that can be taken out, although we also know that it is a fine balance, because if the customer sees deterioration in your product and service offerings, it will naturally have an effect on loyalty.

"When you succeed in cutting costs in areas that don't directly affect your customer, then you have hit that sweet spot. That fine balance is what we strive to achieve."

Indeed, SIA must invest relentlessly in its product as well as in talented and motivated staff to differentiate itself in the highly competitive industry, says Mr Michael Tan, the airline's former senior executive vice-president (commercial).

"Getting good service has become the new norm to the discerning customer. One has to create a corporate culture of delivering service beyond the expectations of the customer."

Mr Tan adds: "However, doing it well seven times out of 10 is not good enough. It has to be 10 upon 10; in other words, all the time."

Forging partnerships

FOR decades, SIA seemed to exist above the fray - preferring to go it alone and tending not to strike up many alliances.

In the last two years, however, it has sealed codeshare deals with six different airlines. It also now has 23 partner carriers including Scandinavian Airlines, Brussels Airlines, Ethiopian Airlines and Transaero Airlines.

In this way, SIA and its regional arm SilkAir - which fly directly to about 100 destinations in more than 35 countries - have expanded their reach to more than 190 destinations in close to 50 countries without having to commit aircraft and other resources.

The latest handshake is with Virgin Australia, of which SIA now owns 10 per cent, with plans to double this. SIA and SilkAir together carry about 20 million passengers a year - nearly four times the population of Singapore - says Mr Ionides.

The airline's push for partnerships reflects yet another changing mindset, says UOB Kay Hian's aviation analyst K. Ajith. "Ten or 15 years ago, there was no need for SIA to actively forge such strategic partnerships. It was doing well on its own. But the world has changed and to the airline's credit, it has moved with the times."

Top-down management changing

CHANGE has also happened on top, namely the leadership style of the chief executive Goh Choon Phong.

"I think it's fair to say that unlike the earlier CEOs who ran the airline very much from the top down, Mr Goh is more approachable and adopts a more consultative style," says a mid-management employee who has been with the company for about 10 years.

"Perhaps it's partly his personality and also necessary in the new environment."

But Mr Goh and his predecessors actually have more in common: they are all capable and know the business inside out, say staff and others who have dealt with him.

The Massachusetts Institute of Technology alumnus, who holds a master's in computer science and electrical engineering as well as three bachelor of science degrees, took over in January 2011 after Mr Chew Choon Seng retired.

Prof Wirtz says intensifying competition has necessitated the flourishing of more ideas, not fewer. "In response, SIA is putting a lot more responsibility on individuals and teams to come up with smart ideas to drive productivity. This culture has become very strong," he notes.

This is a marked departure from SIA's traditional top-down management structure, insiders and observers say. For decades, the carrier has been steered by strong charismatic CEOs like Mr Chew and, before that, Dr Cheong Choon Kong; supported by a core team of senior executives, all of whom grew up with the airline.

Founding chairman J. Y. Pillay, credited by some as the man who made the airline the world's best, says: "SIA is a very tightly knit, very homogeneous company - which means they sometimes have problems absorbing transplanted organs. This is slowly changing."

Adapting to change

"SIA is at a major crossroads," says Mr Jonathan Galaviz, the US-based managing director of research and consulting firm Galaviz & Company. But the airline is not doing enough to secure its future, he adds.

To cash in on the growing low- cost market and booming Asian traffic, SIA took a stake in Tiger Airways a decade ago. And in June last year, it launched Scoot, a wholly-owned budget airline that operates long-haul flights.

Mr Pillay, who is now Tiger's chairman, says: "Setting up Scoot was a very bold decision that surprised and impressed me. Choon Phong must have been working furiously after he took over to get Scoot going."

But these efforts have failed to yield any strategic advantage for the company, Mr Galaviz says. SIA needs to do more, for example, by establishing a secondary hub in the Middle East to give Emirates and other carriers in the region a run for their money, he says.

Change is not a bad word, says Mr Pillay. "Some old-timers have a tendency to think that that is how the company was managed and run, and change must be for the worse. I question that. Not every change subtracts from the whole. The whole point of change is to respond to external stimuli. We are sometimes frozen in our mental and emotional outlook."

While SIA has changed, some observers think it is not changing fast enough to keep up with the evolution of the industry. Gone are the days when travellers, even on company expense, would pay an arm and a leg for a business class seat.

Says Mr Shukor Yusof, an aviation expert from Standard & Poor's Equity Research: "SIA faces real issues. You can't depend on Europe like before. You don't have China like Cathay Pacific does and you don't have the vast resources that Middle Eastern carriers do. So what do you do?"

Mr Brendan Sobie, a Singapore-based analyst at the Centre for Asia Pacific Aviation, is more forgiving. SIA deserves credit for changing course and pursuing a new strategy that includes a bigger focus on Asia's regional market and more involvement in the budget sector, he says.

Yes, SIA is less profitable than before and its outlook might look less bright, but given tough conditions, it has done fairly well, says Mr Sobie.

"We should give the current management team some time before calling for more changes and a wholesale restructuring."