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Singapore International Airline 2006 Case Study

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Updated: Jun 30th, 2022

Background of the Company

Singapore Airlines Limited (SIA) started its journey as Malayan Airways in 1937 and its fleet had grown significantly by 1955; in addition, this company went public in 1957 and changed its name to Malayan-Singapore Airlines (MSA) in 1966. It shifted headquarters, exhausted its fleet, and began to introduce service in new routes; however, SIA formed in 1972 (the government hold 57% stock) while MSA ceased its operation because of political deviation between Malaysia and Singapore. At the initial stage, it had no domestic routes to serve though it operated in international routes; however, it experienced intense competition though it operated the largest Boeing 737s and 707s to its fleet.

Market Conditions

According to the given case study, Singapore Airlines was one of the most successful airlines in the globe in 2004; however, it was popular to the business travellers on long flights due to the best customer service and performance of the employees. However, it had flown about 16 million travellers in 2004 and won many “best of” awards for the outstanding performance though it faced severe challenges as well.

However, it carried 15944 thousands passengers in 2004/05 and 13278 thousand in 2003/04; in addition, it had 104,662.3 million available seat-km and 77593.7 million revenue passenger kilometres in 2004/05. According to the given case study, it was the sixth largest airline in the globe considering international travelers-km carrying individuals; however, the given case study mentioned that SIA would have been even bigger. On the other hand, Skytrax had ranked this company in fourth position and it reported that the competitors changed and upgraded their market position.

Pricing Strategy

It asked higher price for the service because it spent at least 10% higher than industry averages; however, It had increased ticket surcharges thrice in 2005, which assisted maintain the highest point among the competitors; therefore, it gained yield or sales revenue per travellers/ km flown increased by 6.20% to 10.30 Singapore cents. On the other hand, net profit of SIA had decreased by 7.9% in the first quarter of 2005 since low cost service providers designed cheap pricing strategy while it asked ten percent higher than industry averages.

SWOT Analysis

Strengths

  • It had the second largest capitalization;
  • It has long experience to hold market leading position as it originally established in 1937;
  • In addition, it has enough financial capabilities to reach organisational goals;
  • Number of passengers is one of the key success factors;
  • Innovation, genuine quality and outstanding customer service;
  • Product/service differentiation strategy and it introduced hot meals, free alcoholic and non alcoholic beverages;
  • The employees particularly girls of Singapore are the main strengths of SIA;
  • It operated youngest fleet of aircraft and replaced older aircrafts;
  • Consistency had been the hallmark of SIA’s management;

Weaknesses

  • It had to layoff 1.5% employees to overcome financial risks;
  • At the same time, it was difficult to control costs due to increase of fuel price; in addition, it spent $9.4 million for wine spirits;

Opportunities

It planned to spend $100 million to develop cabin for the long-haul route and it had an unequalled reputation for service and luxury; therefore, it had opportunity to attract additional customers particularly business travellers;

Threats

  • In 2003, this company had experienced hard economic crisis due to global decline; moreover, in 1998, it faced challenges because of Asian crisis;
  • Because of intense competition, it was difficult to getting access to airports and securing flights or landing rights;
  • In addition, it was very hard task to attract customers;
  • To maintain luxury in crisis period adversely affected financial statement;
  • It faced a threat from low cost airlines though the CEO Chew Choong Seng ensured that the passengers kept flying SIA in spite of intense competition;

Impact of globalization on decision-making process

The strategic decision of the company based on the globalisation impact, and the CEO Cheong Choong had considered different routes, for instance, in 1990s, the services were extended to Africa when it introduced flights in South Africa, the CEO shifted capacity routes with the area to flourishing long-haul routes to the US, Australia and Europe. Furthermore, it was subjected to heavy competition since its inception for which it competed with international airline for routes; however, in 2004, it introduced first non-stop air service (the longest commercial flight in the aviation history) between Singapore and the US. On the other hand, he cancelled a $3.10 billion order to McDonnell Douglas, as that project had no prospect for the development the performance in long-haul performance; however, he opted for Airbus A 340-300.

Forecasting/management tools to achieve goals

At the time of Asian economic crisis, the CEO Cheong Choong had controlled the company efficiently, for instance, he developed new alliances, and invested $300 million to upgrade its services for which Fortune Magazine selected him as Business of the Year for 1998. Vedpuriswar and Thadamalla pointed out in the case study that the management of this company had considered high price for the services though SIA faced challenges from low cost service providers; therefore, this decision was ineffective in some extent while net profit decreased because of this decision.

Internal and external (government) constraints and overcome

The internal and external government had passed bilateral air service agreement (included both liberal and restrictive) in 1944 to allow travellers and cargo to be carried in particular destinations; however, the CEO Cheong had pushed the internal government to enter a bilateral open-skies contract with the US in 1997. However, this company envisaged financial risks because of the post 9/11 situation while the US government had changed policy for the aviation industry, for instance, access to the route of trans-Atlantic sector had stopped by the government for which Virgin Atlantic (49% acquired by SIA) struggled to restructure its business.

Risk and mitigation process

The case of Vedpuriswar and Thadamalla stated that Cheong Choong controlled this company for 19 years and Chew Soon Seng became new CEO of SIA in mid 2003, but he worked for the company from 1972. However, the new CEO had faced severe challenges while numbers of travellers decreased due to SARS epidemic (Severe Acute Respiratory Syndrome) and high fuel price; on the other hand, global financial downturn hit the airlines industry and SIA experienced highest lose in the history of last 31 years.

According to the given case study, the new CEO had capability to understand the situation and handle risks, for instance, he decided to cut the job of 500 employees and 22% salary of senior managers though the employees were reluctant for such unfriendly behaviour. In addition, the new CEO decided to acquire 8.3% equity stake in Air New Zealand to develop Australasia market though this was not a fruitful decision for this company; however, the alignment of this company with other companies was effective in some extent like acquisition of 49% of Virgin Atlantic.

From 2003, the purchasing power of the people decreased and business travellers increased to use low cost airways both new entrants and existing Airlines, for example, Emirates Airlines expended business in new hub and targeted the front cabin travellers flying between Asia and Europe.

Airline Industry

In 1994, there were only 10 million passengers travelled by air each year, which increased significantly over time, for example, more than 1.5 billion passengers travelled by air in 2003 though this industry had gone through a major shakeout during 2011 to 2004. On the other hand, low cost carriers influenced customers’ behaviour for which business travellers along with leisure travellers switched off the company; however, it was difficult to enter merger and acquisition agreement due to the provisions of bilateral air service agreement.

The industry struggled in general to create economic value; however, Chew stated that the tumultuous economic cycles (for instance, GDS, oil companies, hotels, airport franchises, etc.) and catastrophes adversely affected the market demand. Chew further stated that the future of airline industry is prospective, but it has to overcome the constituent; however, Vedpuriswar and Thadamalla mentioned that SIA had addressed the risk factors and handle successfully.

Financial statement analysis

According to the income statement of SIA, the sales revenues of this company was $12012.9 million in 2004/05 whereas it was $9761.9 million, $10515 million and $9382.8 million in the fiscal year 2003-04, 2002-03, 2001-02 accordingly; however, this indicates that sales revenue increased $2630.1 from 2001-02 to 2004-05. At the same time, total expenditure was too high from its inception as it ensured quality service; however, total cost was $10657.4 million, $9081.5 million and $9797.9 million in the fiscal year 2004/05, 2003-04, and 2002-03 accordingly; these figures show that total expenditure amplified by $1575.9 million from 2003/04 to 2004/05 (Exhibit 1).

On the other hand, operating profit was $1355.5 million in 2004/05, which was $680.4 million in 2003/04; however, this figure increased significantly by $675.1 million from the previous year; here, it is important to note that net income increased by $540 at this period due to increase operating profits (Exhibit 1).

Financial ratio analysis

Exhibit 2 demonstrates working capital of SIA as it indicates efficiency and short-term financial health; however, the working capital was $1042.3 million in 2004/05 and $62 million in 2003/04; as a result, it had enough short-term assets to cover its short-term debt in 2004/05, but this position was completely different in previous year. On the other hand, SIA had not enough short-term assets to cover its short-term debt in 2002-03; however, it had faced financial problem to invest for new project in 2001 while its current liabilities was greater than current assets (Exhibit 2).

The given case study provided information regarding current assets and liabilities from where exhibit 3 calculated current ratio (ability to pay debt); however, exhibit 3 shows that current ratio was 1.51 in fiscal year 2003/04 where as it was 1.27 in 2004/5; however, this ratio was 1.04 and 1.51 in 2002-03 and 2001-02 accordingly. At the same time, the figures of current ratio pointed out that SIA had ability to pay 1.51 times its current liabilities in 2004/05 and it had capacity to pay $1.27 times its current liabilities in 2003/04, which specified that SIA had more power in 2003/04 (Exhibit 3).

The analysis of Return on total assets of the Singapore Airlines presented the ratio of its earnings before interest and taxes in comparison with total assets, which were 6.3613802, 4.248624, 5.550459, and 3.399819 for the analyzed four years; here the increasing ROTA indicates that the company is quite efficient to utilizing its assets with a rising profitability (exhibit 4).

Gross profit margin of the Singapore Airlines represents the ratio of gross profit and its net sales revenue, which were 11.283703 in 2004-05, 6.96995 in 2003-04, 6.819781 in 2002-03, and 9.854201 in 2001-02, and it represent that profitability ratio as well as financial health of SIA is gradually improving and determines proportion of sales revenue has converted into gross profit. (Exhibit 5)

Here the net profit margin of SIA represent the percentage of income outstanding later than total operating costs, interest, taxes and dividends paid deducted from its total sales revenue, which were 11.57% in 2004-05, 8.70% in 2003-04, 10.13% in 2002-03, and 6.73% in 2001-02, the shareholders of SIA would be interested to the net profit margin as it is increasing. Analysing about net profit margin of the four year, the investors of SIA would find that the company has increased its net profit margin from 2.5% to 3.5% in every year, by using this data the investors would be capable to compare SIA with other companies in the airlines industry (exhibit 6).

Here the total assets turnover of Singapore Airlines is the ratio of its total sale and total assets including current and fixed assets and it represents the capability of SIA to utilize its resources and capabilities to boost sales successfully, which were 0.5500513 in 2004-05, 0.488339 in 2003-04, 0.548113 in 2002-03, and 0.504984 in 2001-02 (Exhibit 7). Among the four years analysis in 2003-04, the total assets turnover of SIA was lowest, it indicates that there are some difficulties in the asset class integrating with total assets, its inventory, receivable account, or including fixed assets; other than these areas the difficulties could arise from current or fixed area.

The Return on Shareholders Fund (ROSF) of the Singapore Airlines were 11.171509 in 2004-05, 7.414165 in 2003-04, 9.943224 in 2002-03, and 6.415412 in 2001-02 which are calculated by the ratio of net profit after taxation along with preference dividend and total ordinary share capital with reserve and then multiplying with 100 for SIA (exhibit 8). The Return on Shareholders Funds (ROSF) of Singapore Airlines are the most significant ratio that investors needed to analyze to measure the historical profit trend of the company for an assessed period, here the highest ROSF was in 2004-03 and it indicates that here are more profits are available for shareholders of the Singapore Airlines.

The ROE of the Singapore Airlines indicates ratio of net income of the company and its shareholders equity, which were 8.90308689 in 2004-05, 5.905627 in 2003-04, 7.743775 in 2002-03, and 4.73833 in 2001-02, the presented ROE indicated the profitability of SIA by pointing how much profit has produced during the framed time by using money of shareholders (Exhibit 9). For the investors of the Singapore Airlines, ROE of the company is a very significant factor that they always take into account to compare its profitability with other players in the industry.

Here, the four years comparison of debt to equity ratio of Singapore Airlines illustrates it was 0.40 in 2004/05, 0.39 in 2003/04, 0.39 in 2002/03, and 0.39 in 2001/2; these figures show that SIA was able to generate enough cash to satisfy its debt obligations (exhibit 10).

Conclusion

From the above discussion, it can be said that SIA had strong financial position in the fiscal year 2004/05 in spite of SARS epidemic, Asian financial crisis in 1998, global economic downturn 2003, high fuel price, competition from low cost airlines, and so on. The high working capital balance in 2004-5 indicates SIA’s short-term solvency and the company is capable of paying its current liabilities, while negative working capital in 2001-02 indicates its managerial competence in its business operation by means of lower inventories along with accounts receivable, although negative working capital is a symptom of bankruptcy or serious financial trouble.

Exhibit 1.

Key Variables 2004-05 ($m) 2003-04 ($m) 2002-03 ($m) 2001-02 ($m)
Sales Revenue 12012.9 9761.9 10515 9382.8
Total Expenditure 10657.4 9081.5 9797.9 8458.2
Operating profit 1355.5 680.4 717.1 924.6
Shareholder’s fund 12436.1 11455.1 10708.8 9846.6
Total Liabilities 6234.9 5,609 5,434 5,249
Total assets 21839.6 19990 19184 18580.4
Net Profit 1389.3 849.3 1064.8 631.7

Exhibit 2.

2004-05 2003-04 2002-03 2001-02
Working capital = current assets – current liabilities 1042.3 62 147.7 -822
current assets 4943.9 3,464 3971.2 2,444
current liabilities 3901.6 3,402 3823.5 3,266

Exhibit 3.

2004-05 2003-04 2002-03 2001-02
Current ratio = current assets / current liabilities 1.2671468 1.505703 1.03863 1.505703
total current assets 4943.9 3,464 3971.2 2,444
current liabilities 3901.6 3,402 3823.5 3,266

Exhibit 4.

2004-05 2003-04 2002-03 2001-02
Return on total assets = net income / total assets 6.3613802 4.248624 5.550459 3.399819
net income 1389.3 849.3 1064.8 631.7
total assets 21839.6 19990 19184 18580.4

Exhibit 5.

2004-05 2003-04 2002-03 2001-02
Gross profit margin = gross profit / sales 11.283703 6.96995 6.819781 9.854201
gross profit 1355.5 680.4 717.1 924.6
sales 12012.9 9761.9 10515 9382.8

Exhibit 6.

2004-05 2003-04 2002-03 2001-02
Net Profit Margin = Net income / Sales 11.5650676 8.700151 10.12649 6.732532
net income 1389.3 849.3 1064.8 631.7
sales 12012.9 9761.9 10515 9382.8

Exhibit 7.

2004-05 2003-04 2002-03 2001-02
Total assets turnover = sales / total assets 0.5500513 0.488339 0.548113 0.504984
sales 12012.9 9761.9 10515 9382.8
total assets 21839.6 19990 19184 18580.4

Exhibit 8.

2004-05 2003-04 2002-03 2001-02
Return on shareholders Fund (ROSF) =Net profit (after interest and tax) / Share holder’s 11.171509 7.414165 9.943224 6.415412
net income 1389.3 849.3 1064.8 631.7
Shareholder’s fund 12436.1 11455.1 10708.8 9846.6

Exhibit 9.

2004-05 2003-04 2002-03 2001-02
Return on Equity (ROE) = Net Income/Shareholders’ equity x 100 8.903087 5.905627 7.743775 4.73833
Net Income 1389.3 849.3 1064.8 631.7
Shareholder’s equity 15604.7 14381.2 13750.4 13331.7
total assets 21839.6 19990 19184 18580.4
Total Liabilities 6234.9 5,609 5,434 5,249

Exhibit 10.

2004-05 2003-04 2002-03 2001-02
Debt to Equity Ratio = Total Liabilities / Total Stockholders’ Equity 0.3995527 0.390009 0.395159 0.393701
Total Liabilities 6234.9 5,609 5,434 5,249
Shareholder’s equity 15604.7 14381.2 13750.4 13331.7
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