NICHOLAS IONIDES SINGAPORE
Singapore Airlines emerged relatively unscathed from Asia's economic turmoil. Now the group's executive team, led by Dr Cheong, aim to ensure that growth gets back on track, with alliances which will increase the carrier's reach around the world.
The executive team at Singapore Airlines (SIA) would seem to have little enough cause for concern as they steer the carrier into the next century. For years the group has ranked among the world's most profitable airlines - a record which remained intact even during Asia's recent economic turmoil. Yet any rival tempted to look for signs of complacency is likely to be disappointed. SIA executives do indeed detect a problem: that the carrier's traditionally phenomenal growth rates are showing signs of flagging. And for an airline that has grown so rapidly for so long, the prospect of a slowdown can weigh anxiously on the mind.
So while earlier this year, SIA was again able to reveal that its 1998/9 group profits had again kept aboveS$1 billion ($615 million), the airline board was quick to temper the announcement with a caution that the group must now look further afield if its growth is to continue apace.
SIA's deputy chairman and chief executive Dr Cheong Choong Kong cautions that the risk of slowdown should not be overstated. The carrier still expects to see growth and profitably growth at that - operating margins are projected to expand at 6-8% over the next five years. But Cheong acknowledges that the issue is one that SIA, along with other of Singapore's major corporations, needs to address: "We are plateauing and we are getting diminishing returns. So to break away from that quandary we have to own parts of businesses outside Singapore, where the costs are lower and where the prospects of growth are higher."
Global expansion
Such is the airline's long-term goal: to become a truly global company by expanding abroad. A key step towards this is membership in the Star Alliance, which SIA has finally agreed to join after two years of playing hard to get. Another step is to buy into other airlines.
But that second area has been troublesome for SIA. Numerous high-profile attempts in recent years to buy stakes in other carriers have ended in collapse, whether by choice or by circumstances beyond its control. Australia's Qantas Airways and Ansett are but two examples, as are South African Airways and Taiwan's China Airlines.
Cheong says SIA will not be deterred, however, and notes that the carrier's engineering and airport services units already have a number of joint ventures and investments outside the city state of a population of just 3 million. While he will not discuss specific cases regarding airline investments, he says there are other prospects in sight.
"We're talking mainly about Asia, and of course it's no secret that we were also talking about Australasia. That's where the focus is," Cheong says of investment plans. "However, if an opportunity presents itself outside of this area of interest we won't reject it outright."
Cheong also says SIA will not venture beyond the industry, as it aims to maintain a focus on the business it knows best. In the shorter term, international expansion will be pursued through the Star Alliance. Amid the late-1997 failure of an eight-year-old tripartite alliance with Delta Air Lines and Swissair, SIA became cautious about multilateral partnerships. It now welcomes Star with open arms.
"You can never be too strong," says Cheong. "In terms of networks, there are other airlines that are bigger than us. An airline, no matter how big, can never be in every place in the world."
Access to a global network is not the only reason for seeking membership of an alliance, says Cheong, adding that another is revenue generation. But while many alliance partners talk enthusiastically of major cost savings from joint purchasing, Cheong says SIA does not expect significant gains in this area for years.
"Most alliances, not just Star, are driven by revenue considerations," he says. "The cost aspect is secondary, and revenue considerations include things like schedule meshing and affiliation between the frequent-flier programmes, which allow the partner airlines to better market their product and their service. The cost side such as joint purchasing and sharing of facilities and avoiding duplication and so forth are not unimportant but are of secondary importance."
While SIA has confirmed its intention to join Star, questions remain over how it will be able to work with fellow members Air New Zealand (ANZ) and Thai Airways International. Relations with the former have been strained since it blocked SIA's tentative deal to take a 50% stake in Ansett, another Star member, from media giant News Corp. News Corp withdrew its stake from sale after ANZ, which owns the other half, refused to give up its pre-emptive right to match any formal SIA offer. Cheong, clearly frustrated with being asked about Ansett and ANZ, pointedly refuses to discuss the issue, saying simply that relations with ANZ are "okay".
As for nearby competitor Thai, a founding Star member, some have suggested it may eventually have to leave the grouping as a result of SIA's entry - despite the fact that SIA has expressed interest in taking a stake in its new Thai partner. Cheong says the rivals can work together, however.
Executive vice-president, commercial, Michael Tan, echoes this view, adding that alliances cannot just be a question of eliminating competition. "I don't think any alliance members believe there will be just co-operation. There must be competition too. They can and they will exist side by side. An alliance is not to reduce competition - that would be wrong. It would be bad for consumers," he says.
Focusing on the core business
SIA has run its business in a way of its own that many have tried unsuccessfully to emulate. It pumps large amounts of cash into marketing, advertising and improving its in-flight product, but at the same time keeps tight control of costs. These seemingly conflicting efforts have helped it in part get past the worst of the Asian economic downturn with only minor troubles.
Some would also argue that SIA survived the worst of the downturn that began in mid-1997 because it watches the market intensely for the slightest changes, prepared for good and bad news. Cheong does not deny the carrier's preparedness for change, but says SIA has no crystal ball.
"I don't think we can claim to be any more prescient than others. After the devaluation of the Thai baht in July 1997, things happened pretty quickly. The dominoes started falling very fast. So I don't think anybody can claim to have prior knowledge of just how bad it was going to be," he says, adding: "We moved quite quickly in redeploying our resources, particularly our fleet. We took some out of the Asian region and deployed them to Europe and to Australia. We did not escape unscathed but we were less affected. But you saw double-digit drops in our operating profit. Load factors tumbled."
Operating conditions are fast improving, with economies in both north and south east Asia finally on the upturn. Load factors and passenger yields, which hit bottom last year and helped bring down full-year operating profit by 27%, are recovering. SIA's group net profit remained flat for the year. However, the results for the second half of the 1998/9 financial year heralded a definite turnaround, although rising fuel prices are a concern, says executive vice-president, administration, Chew Choon Seng.
"This year fuel prices have gone up by double digits. Year-on-year fuel prices are 25-30% higher than they were," Chew says. "We are hedged to a certain extent and that provides some relief over the immediate 12-18 months ahead, but ultimately if high prices are sustained then there will have to be some flow-through to prices we charge in the market. However, fuel price is something that is more or less a level playing field item. It is not unique to us."
Unlike with fixed-cost items such as fuel, SIA's fleet is a key area in which it takes a vastly different approach to most others. SIA changes aircraft continually and maintains a passenger fleet averaging five years in age. It also depreciates aircraft over just 10 years to a residual value of 20%, despite the fact that the worldwide trend is towards longer depreciation periods of 20 years or more. Referred to by some in the industry as an aircraft trader, an old joke has it that SIA only keeps aircraft until their seats are warm. Cheong believes that this strategy has served the airline well.
"Your young fleet allows you to improve your reliability - they are easier to maintain and give you fewer problems," he says. "It significantly lowers maintenance cost, operations costs and fuel costs. And if you change more often you are sometimes able to change an entire fleet type. You can upgrade to higher technology, which lowers cost further and raises passenger appeal. And the higher price you originally pay also means when eventually you sell those aircraft, there is a higher residual value, so it comes back to your profit.
"We realise that there is a risk involved, because as your fleet gets larger and larger you have huge investment in aircraft assets," he says. But instead of slowing the pace of fleet renewal to reduce the risk, SIA has been selling and leasing back the aircraft. "All the advantages that come with a youthful fleet are still there, but we reduce the risk of ownership."
Tight focus
Cheong acknowledges that for many it would be difficult to follow directly in SIA's footsteps. "We have been able to do that because we don't have to go out and borrow. We have the cash at our disposal. If you want to adopt the philosophy that we have and own brand new aircraft and keep changing your fleet, then you may have to increase your gearing."
Chew says SIA's envious cash situation is largely to do with its "very tight focus" on the core aviation business. "We have not ventured into hotels, car rentals, real estate development. Our earnings have always gone back into new equipment, training of people, maintenance facilities and airport facilities."
SIA's youthful aircraft have proven important marketing tools, but continual fleet renewal has also allowed it on many occasions to dictate the terms with aircraft manufacturers. In 1995, for example, it purchased up to 77 Boeing 777s. At the time, SIA quietly won agreement from the airframe manufacturer to trade in its entire Airbus A340-300 fleet at guaranteed prices if it so chose. In June this year, when converting 10 777 options into firm orders, SIA exercised that right and Boeing has agreed to purchase its 17 A340-300s - including two that have yet to be delivered - if SIA is not able to sell them on its own.
The unprecedented trade-in deal is not the only one SIA has managed to squeeze out of a manufacturer. It regularly negotiates "walk-away" clauses that most other airlines are not able to secure, whereby it can tear up a purchase agreement if an aircraft type does not meet promised performance targets. SIA has already exercised such a clause with the former McDonnell Douglas and has the same type of arrangement with Airbus covering the ultra-long-haul A340-500. The carrier ordered five and optioned five more last year and its executive vice-president, technical, Chew Leng Seng, says SIA will indeed walk away from the deal if necessary.
"I think we are one of the tougher airlines," Chew says. "Our view is if there is something that is so critical to our operation then it has to be stated very clearly right from the onset. And it should be part of the contract so that both parties know what they are in for. It is fair to them and to ourselves."
While the company is happy with its long-haul fleet, it is concerned about regional aircraft, which include several A310s coming up to 10 years old. The problem is there is no alternative aircraft that suits the carrier's needs for intra-Asian routes.
"There is no A310 equivalent that is double-aisle, twin-aisle, and with modern technology," says Cheong. "We may have to use the 777 on some denser routes where the A310s are applied on at the moment, but we still have to replace the A310s on the other routes."
Chew Leng Seng says Airbus and Boeing have offered their respective A330 and 767 models, but even the "shrink" variants that are either on the market or under study are too large and too heavy. One approach would be to go with the narrowbody Airbus A321, although Chew says "the smaller aircraft, the single-aisle aircraft, are not too popular with our Asian passengers".
Beyond the 747
While SIA continues unsuccessfully to push the two manufacturers for a new regional widebody, it is confident that ultra-large aircraft types -Êthe Airbus A3XX or Boeing's successor to the 747-400 - will become available in the near future.
"That aircraft size would be of interest to us. It could replace the 747-400s on some very dense routes, especially places where we cannot increase frequency because of traffic rights restrictions, or where you just don't want to increase frequency," says Cheong. "We are flying three times a day to London - how many more frequencies can you add on to a very distant destination? There is limited capacity at airports - that problem is going to stay with us. Capacity increases will have to come in the form of larger aircraft."
The company will also benefit from the deployment of the ultra-long-haul A340-500, which from 2002 will be operated to Los Angeles and San Francisco, and possibly two years later to New York - all non-stop from Singapore. These are new routes made available under the open skies bilateral signed with the USA close to three years ago.
SIA is a great believer in liberalisation. Cheong says liberalised bilaterals with the USA and European countries have enabled it to switch capacity to healthier markets with relative ease in the past two tough years. "I think the airline industry should be no different from any other business. It doesn't need restrictions on ownership and on many aspects of operations."
SIA, majority owned by passive shareholder Temasek Holdings, an investment arm of the Singapore Government, has recently lifted restrictions on foreign ownership. Previously forbidden to hold more than 27.5%, non-Singaporeans can now, in theory at least, hold 100% of SIA. Protective measures have been built into the change which would see new classes of shares issued to protect any air services agreement that requires substantial ownership and control by Singaporean nationals. However, "even if our foreign ownership should exceed 50% or even go up to 95%, as long as nobody challenges us we don't have to issue those shares. We will only do it if somebody is threatening our bilateral."
Cash mountain
SIA merged its local and foreign shares on the Singaporean stock exchange when removing the ownership cap. It also launched a massive buy-back under which it will repurchase S$1 billion of shares over one year. Cheong says the main reason that the "coffers are bulging more than usual" is due to the sale and lease-back of 10 747-400s over the past two years.
"Because we expect to continue to make profits over the next few years, the cash amount will continue to grow. Therefore, even after paying S$1 billion to buy back our shares, there will still be more than sufficient funds to meet other needs. We have more cash than we need," Cheong adds. The group's reserve stood at S$2.4 billion at the end of the last fiscal year.
Given the way that some of SIA's regional competitors have suffered over the past two years, an abundant cash reserve is yet another problem over which many of its rivals would love to be able to worry.
Summing up
Dr Cheong Choong Kong, Deputy chairman, chief executive of Singapore Airlines
Born in Malaysia in 1941, Choeng Choong Kong graduated in mathematics at the University of Adelaide and gained a PhD in mathematics at the Australian National University in Canberra. He worked as an associated professor at the University of Malaya between 1968 and 1974 and later held the post of chairman of the Singapore Broadcasting Association and its successor, the Singapore International Media. By the end of his tenure in the media business in 1995, Cheong had already been working at Singapore Airlines for 21 years. Serving in the personnel, marketing, planning and information technology departments, in 1984 he was promoted to managing director. He was appointed deputy chairman and chief executive on 1 August, 1996. Cheong is a film buff and last year even made a guest appearance in the Singaporean movie Tiger's Whip.Source: Airline Business
