SHEDDING THE PAST TO RE-SHAPE THE FUTURE

As rival flag carriers in Malaysia and Thailand attempt turnarounds in the glare of global publicity, their neighbour to the south, Singapore Airlines, has been conducting a re-engineering of its own, while deliberately travelling below the media radar. The carrier has been re-made into a diversified group that includes a joint venture airline in India, majority equity in three budget airlines, offshore hubs to generate traffic flows and a brief to build new businesses wherever opportunities arise. SIA’s CEO, Goh Choon Phong, explains his strategy to secure the SIA Group’s future to chief correspondent, Tom Ballantyne, in Singapore.

July 1st 2015

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When Goh Choon Phong, then 49, took charge of Singapore Airlines (SIA) on January 1, 2011, few in the industry anticipated the radical path he would take at an airline that had become an industry institution. Read More »

A 21-year veteran of the carrier, Goh came into the business soon after he graduated with a Master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology in the U.S. Immediately before he succeeded Chew Choon Seng in the top job, he was executive vice president marketing and the regions. He was assumed to be steeped in the culture of SIA.

'It is not a walk in the park. It’s a challenging market, but it has huge potential. We believe that with our skill set and with Tata’s understanding of the Indian market, this is a hugely advantageous combination for Vistara'

Goh Choon Phong Singapore Airlines CEO

But perhaps it was this experience that made Goh and his team recognize the old ways of running an international airline were not going to work for much longer. A different future had to be was mapped out for SIA, including the once unthinkable step for the premium carrier – buying into the low-cost sector.

Goh said there was a realization at Singapore Airlines House that the airline environment had radically changed. Aggressive budget operators were growing at a phenomenal speed, particularly in Southeast Asia, the centrifugal market for SIA and SilkAir.

As well, Gulf airlines were putting ever more capacity into the region and successfully taking market share from the region’s carriers. It didn’t help that they were also wooing passengers away from the long established Kangaroo route from Australia to Europe via Singapore.

“When we saw that happening we thought it was something fundamentally different. It wasn’t going to be a phenomenon with a short life. It was actually going to last for quite a long time. It was structural to us. We began to look at it and ask: ‘what is it we have to do’?” he said.

The answer was a strategy based on four pillars: a renewed focus on product, services and network; the building a portfolio of airline brands that covered all market sectors; establishment of offshore hubs to tap into new traffic flows and a focus on new, third party companies, that would generate new revenue streams.

Goh and his lieutenants have since added the launch of a joint venture full service carrier in India, the development of third party ventures such as flight training, and an increasingly successful effort to leverage operating costs, frequent flyer partnerships and customer management systems across all four of the group’s airlines, their global partners and its related businesses.

Four years down the track, all four strategy tenets are well advanced, as is the difficult task of changing the staff mindset at an airline that was pretty much set in its ways. “When you are as successful as SIA, doing what we have done before, it is actually very challenging to say let’s try new things,” said Goh.

“We had to be ahead of the curve when it came to making all these changes. Our people had to realize this and accept that none of this change was going to be an immediate fix.”

But change has come and today SIA is performing far better than many of its regional competitors in a tough operating environment. In the year to March 31, its net profit improved by 2.34%, to $277 million, from $270.7 million a year earlier. Revenue increased 2.1% to $11.7 billion.

Operating a fleet of 108 wide-body jets, SIA has 110 aircraft on order, including 70 A350-900s that will begin arriving early next year and will replace 25 B777-200s. Also on order are 30 B787-10s, which will be delivered to SIA in 2018-2019. The airline flies 19 A380s and has five of the type scheduled for delivery in the same years as the B787-10s.

Probably SIA’s most unexpected strategic decision was its expansion into the LCC sector, initially with an investment in budget carrier, Tiger Airways (now Tigerair). It was followed by the launch of the airline’s wholly-owned long-haul budget carrier, Scoot, in 2012. Along with its existing regional full-service subsidiary, Silk Air, they make up the group’s four brand portfolio that covers all market sectors.

“Realizing the LCCs were here to stay and that the growth was there, we felt we should participate in that growth. We believe we have the right skill set to do so,” said Goh. “It’s not that we are unwilling to take risks. Setting up an LCC sector for our business was one part of that.”

Scoot is in the process of switching from older B777-200s to B787s. “So far, it has been very well received and it is progressing in its business plan,” said Goh.

Scoot also is part of Bangkok-based NokScoot, a joint venture with Thailand’s Nok Air, in Bangkok. “Really, it is a complimentary hub because Bangkok has a lot of appeal to budget travelers. Singapore usually attracts people with a little bit more to spend. But between the two, you allow them to actually cross with each other. With both of them you can go to many other places. NokScoot is a way to grow outside Singapore,” said Goh.

Taking on Tigerair, which lost $198.9 million in the year to March 31, added another pillar to the strategy. “At one stage, we did not participate that much in Tiger’s management. It was left very much to run on its own,” Goh said.

“Now, Tiger is viewed as an integral part of the group, particularly for Scoot, because if you want to have medium or long-haul growth you need the regional feed. Tiger is the vehicle to provide that.”

SIA has moved to repair Tiger’s battered financial performance. “Tiger had a few misadventures,” said Goh. “We have gone in and helped it to consolidate and strengthen itself.”

A 20-year veteran of SIA, Lee Lik Hsin, has taken leave of absence from the parent carrier to run the LCC. “With his wealth of experience, Tiger’s performance has gone up over the last couple of quarters,” Goh said.

“It will continue to do so as Scoot and Tigerair become more integrated and can leverage some of the synergies I mentioned, both across the group, as well as the connectivity with Scoot.”

For Goh, it’s not just about having four different brands. It’s about having them work together to the advantage of the whole group. Scoot and Tigerair have anti-trust immunity, which allows them to operate together on pricing, network planning, marketing and sales. They now have joint flights between Bangkok and Hong Kong.

Singapore Airlines CEO, Goh Choon Phong: “Realizing the LCCs were here to stay and that the growth was there, we felt we should participate in that growth.”

“There’s a lot more that’s going to happen by feeding each other. It’s the tip of the iceberg. Then, across the four airlines in the group, there are synergies to be tapped in operations and in purchasing and backroom support,” he said.

“Fuel is one of the areas we are looking at to see where we can synergize its cost across the whole portfolio of airlines. Even insurance. We can tap its synergies with both costs and revenue. It all contributes to reducing group expenditure and increasing competitiveness.”

SilkAir , which has been growing at double digit rates in the last few years, also is changing. “For a time, SilkAir was run very much independently, but with a realization that the landscape was shifting, we needed to strengthen that [arrangement[ and therefore strengthen the Southeast Asian network,” said Goh.

“Between ourselves and SilkAir we set up a common revenue management section. It makes no difference whether it is SilkAir flights or SIA flights because the same revenue management unit looks at how to connect passengers from one airline to the other,” said Goh. Schedule planning has been improved to ensure better connectivity between SIA and SilkAir.

Goh is well aware that each brand can’t be considered in isolation. Individual travelers could sometimes travel on a budget carrier or opt for a full service airline, depending on the purpose of their travel.

“There is a blurring,” he said. “One of the things we have done is operate a common FFP (frequent flyer program) for all four airlines. So Scoot and Tiger passengers can make use of KrisFlyer (SIA’s FFP). We have a common database of all customers who travel on any of the four airlines.

“This information allows us to offer targeted travel, promotional benefits to travelers depending on where they want to travel and how - whether it’s a budget or a full-service flight, they can choose one of the four. We are barely scratching the surface. In recent years, we have been building up our data base to increase opportunities for our customers and our [frequent flyer] members to accrue and burn points.

“The other part is the non-air component. Traditionally, we worked with credit card companies, banks and the like. Now, we are pushing on to other retail options such as health products, supermarkets and pharmacies, to offer a wider spectrum of redemption. We will continue to do this, not just in Singapore but beyond.”

In a first for the industry, SIA has introduced a mileage conversion system between its KrisFlyer program and Velocity, the frequent flyer programme of Virgin Australia. SIA has 22.1% equity in the Australian airline. The partnership is a departure from the conventional approach of focusing solely on core businesses.

A recent example is the establishment of a flight crew training centre with Airbus, in which SIA holds 45%. It will provide flight training on full-flight simulators for all in-production Airbus aircraft types.

“It has only just been set up, but requests are already coming in,” said Goh. “We are interested in looking at other new adjacent business, with or without partners. We want to diversify our revenue sources. All these things are quite a departure from what we use to do.”

The group’s most recent project, the Indian joint venture with India’s Tata group, full service airline Vistara, also was regarded as high risk, given the state of the sub-continent’s market.

“We are not risk averse,” Goh insisted. “We take the risk after we have evaluated it and decided it would be the right thing to do.” Talks with Tata about setting up a full service carrier started in late 2011, but it was New Delhi’s decision to allow liberalization and foreign participation in airlines that opened the door to Vistara’s launch in January this year.

“To me, this is as good a time as you could ever get,” said Goh. “Firstly, it is a time when fuel prices are relatively low. Secondly, the Modi government has been very pro-business and is creating a lot of excitement and growth in the Indian economy itself.”

He said India’s move towards the abolition of the 5/20 rule, which demands Indian airlines must operate for five years and have a minimum fleet of 20 aircraft before they can fly internationally, also is important.

“The 5/20 rule, from our perspective, doesn’t quite make sense, especially for Indian carriers. Why would you limit your own carriers on a 5/20 rule when anyone else outside of India could operate the day after it is created on the same route? Together, with our partners at Tata and Vistara management we have been conveying these views to the authorities in India.”

Goh does not want to subordinate Vistara’s interests to SIA. “Vistara must grow in the manner that is best suited to itself. It must tap the growth potential of India and, internationally, to elsewhere in the world,” he said.

“There will be synergies between Vistara and SIA on India-Singapore routes . SIA can provide important international feed into Vistara while it is not being allowed to operate internationally.

“It is not a walk in the park. It’s a challenging market, but it has huge potential. We believe that with our skill set and with Tata’s understanding of the Indian market, this is a hugely advantageous combination for Vistara.”

And India won’t be the last foreign venture for the group. Goh confirmed that discussions with Korean carrier, Jeju Air, about investing in the carrier are continuing.

“How that pans out and how it would fit into our overall strategy is not finalized. If this becomes a reality, we will talk more about it. It is premature to comment now. We will remain open to JVs or investments elsewhere. We will look at investments if they fit with our strategic plan.”

Goh places a strong focus on network connectivity through partnerships with other airlines. It has strong penetration in the South West Pacific as a result of its co-operation with fellow Star Alliance member, Air New Zealand, and non-alliance partner, Virgin Australia.

One market that is challenging is the U.S., where SIA recently terminated its non-stop service to New York because the A340 it flew on the route was not economically viable. SIA flies daily through Seoul to San Francisco and daily from Hong Kong to San Francisco using B777-300ERs. It operates A380s daily through Tokyo to Los Angeles and to New York via Frankfurt. It also flies five times a week to Houston via Moscow, again with a B777.

Above all, however, Goh is determined SIA will maintain its well-earned reputation for product leadership and service excellence, despite the tough competition, especially from the Gulf carriers.

“Product leadership wise we have announced that premium economy will be introduced on SIA later this year,” he said. “We believe it is the right time to do it given the feedback we have had. The market is mature [enough] and we think our premium economy is better than any others in the market - which we always do when we introduce products.”

An upgrade of the airline’s first and business class cabins, to cost $325 million, is underway on the B777-300ER fleet. Lounges also are being revamped. Beyond that, planning has commenced on a new “ground-up” design for first and business class on the five new A380s that will begin arriving at SIA in two years. “It is based on a new concept. We have gone through some preliminary conceptualization and it looks very exciting. So no, we are not sitting still.”

Also groundbreaking is a new system, Customer Experience Management (CEM), that SIA has been developing since 2011, which is a step change in customer service.

“The idea is to have a system to help our front line people interact with customers, to actually highlight pertinent information about individuals so they know the customers’ profile and preferences and can deliver that service in a much more personalized way. Our staff certainly gives customers a personal service, but until now there has not been a system to do it with consistency,” Goh said.

Crews on board SIA have iPad minis to update them about customers preferences whether a passenger is in the air or on the ground.

“We reached phase one at the end of last year. Phase two will be sometime next year when we will build in more work flow rules so there are prompts and triggers to alert staff on certain possible service actions,” explained Goh.

“Ultimately, we will make the experience so comfortable for each and every customer because we are treating them individually in the way they would like. They will feel like they are at home, with everything in the right place.

“It is what SIA has been doing, pushing the boundaries and taking it a step beyond what we have been doing until now.”

It has been four years of hard work to bring about change and Goh is acutely aware there is still a long way to go. “If you look at this part of the world, it is still flush with capacity, whether it’s the LCCs or the Gulf carriers and so forth,” he said.

“It has been very challenging for everyone. Look at how few airlines actually manage to make some money. But importantly, while we are managing these nearer term challenges, we have our minds set on how to position the airline for the future.

“None of it is short term. All of it is about how you position the airline for ten years or twenty years ahead and how you actually produce other engines of growth that will allow us to be stronger.”