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History and Analysis of Singapore International Airlines

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Published: Wed, 07 Feb 2018

Introduction

SIA traced its roots to an organization called Malayan Airways that offered its first commercial passenger service in May 1947. Today, SIA is Singapore’s best-known company, and rated consistently as Asia’s “most admired company”(Asian Business, 1997,p. 24). Its smiling, willowy cabin attendant, outfitted in tight batik sarong kebaya designed by renowned fashion house Pierre Balmain, and marketed as the Singapore Girl, is now a well-known international service icon. In 1994, the year she celebrated her 21st birthday, the Singapore Girl became the first commercial figure to be displayed at the famed Madame Tussaud’s Museum in London. Madame Tussaud’s had unveiled the waxwork of the SIA’s global marketing icon that year to reflect the ever-growing popularity of international travel. SIA is widely reckoned by those in the airline industry, travellers as well as its competitors, as one of the very best airlines in the world, judging from the numerous industry awards it has won. According to the Business Traveller – Asia Pacific, SIA has become “the standard by which all other international airlines are judged” (Business Traveller – Asia Pacific, 1997a, p. 3). SIA also consistently leads the industry in profitability and rides through “rough and turbulent” times much better than most of its rivals. It has had an impressive and continuous profit streak since it took to the skies some 25 years ago; a track record almost unheard of in the brutally cyclical airline industry (Asian Business Review, 1996, p. 34). On 1 May 1997, SIA turned 50 and celebrated its Golden Jubilee Anniversary in grand style. It was a far cry from its humble beginnings in 1947 when it started life as part of Malayan Airways.

The International Airline Industry

The airline industry had traditionally remained fragmented primarily due to the limiting effects of national and international regulations. Enforced in the form of landing rights and associated competitive constraints, even large airline companies had only been able to develop dominance over their own regional markets at best. With the exception of the United States, dominant national flag carriers, typically owned by the national governments, had remained the only international representatives of their countries. However, the competitive dynamics in this industry had started to change dramatically in recent years. Deregulation, privatization, and the advent of new technologies have started to reshape the industry on a global level. The United States deregulated its airlines in 1978 and had since witnessed heightened competition and aggressive jockeying for market position. Europe entered the throes of a similar escalation of competition following the creation of the European Union and the disbanding of country-specific barriers to free market competition among air carriers. In Asia, deregulation occurred in fits and starts with some major regions allowing greater access to foreign carriers. For example, India, a regional market of some significance, announced that it would privatize its state-owned airline company. It had already allowed its traditionally domestic airline to compete against its international air carrier in many of the regional markets comprising neighboring countries. Japan made major strides in deregulation after selling off its shares in the then state-owned Japan Airlines and permitted All Nippon Airways to serve international markets. In Latin America, many of the smaller national flag carriers were privatized.

Countries such as Mexico and Argentina infused significant levels of market competition in their airline industries by removing anti-competitive barriers and privatizing their national airlines Mexicana and Aerolineas Argentinas. The trend seemed certain to gain further momentum and open skies might be closer to reality than ever before. The major European nations were already in discussions with the United States to implement an open Trans-Atlantic market area where landing rights would be determined by free market forces rather than regulatory policy. Open skies agreements are bilateral agreements between countries that agree to provide landing and take-off facilities for air carriers originating in any of the partner countries. Such an agreement does not have the typical restrictions related to landing rights that are determined on a city-pair basis. For example, Singapore and the U.S. had signed an open skies agreement under which a Singapore carrier could travel to any destination city in the U.S. and vice versa.

The twin trends of privatization and deregulation resulted in an increasingly global approach to strategic positioning in this industry. Although most large carriers still retained their regional dominance, many forged alliances with other leading carriers to offer seamless services across wider geographic areas. These alliances made most of the larger airline companies’ de facto global organizations. With increasing geographic reach and decreasing regulatory barriers, many of the regions were witnessing acute competition often in the form of fare wars. Consumers in general became much more price sensitive than ever before. In attempting to keep up with the competition, many carriers upgraded their service offerings contributing to declining yields in a price-conscious market. Chronic excess capacity worldwide only exacerbated this situation. Not surprisingly, there was a decline in passenger revenue yield in all geographic regions and the airlines were fighting an uphill battle to extract higher levels of efficiencies from their operating structures. For example, passenger yield dropped by 1.9% and 2.5% in 1998 and 1999, respectively, in Europe and 0.8% and 1.5% in North America during the same period. The drop was far more geographic region-wise summary of key trends in passenger traffic, growth potential, and major players follows. (Source: Annual Reports and HSBC Research.)

Asia-Pacific Region

By 1999, traffic in the Asian region had become quite important to the overall success of the air transportation industry. Collectively, this region represented 24% of worldwide revenue passenger kilometers. The ICAO estimated that the Asia-Pacific region had grown annually by 9.7% over the last ten years. This upward trend was expected to continue albeit at slightly lower levels, moderating between 6%-7% until 2001. Trans-Pacific traffic was expected to grow at 6.6% and intra-Asia-Pacific traffic by 5%. Some analysts predicted that Asia would play a key role in over half of the top twenty international markets ranked in terms of revenue passenger miles by 2002

The aviation market in Asia, while similar to Europe of the pre-EU era, did indeed have some dominant players. Japan Airlines and Singapore Airlines were the clear leaders and together accounted for 40% of the market share. The second tier included Cathay Pacific, Thai, and Korean Air, which comprised 33% of the market. Asian carriers in general had significantly lower operating costs compared to their American and European counterparts. For example, in 1998, according to Warburg, Dillon & Read, personnel costs for North American carriers accounted for approximately 32% of total revenues. For European carriers, it was 21%. However, for the Asia-Pacific carriers, it was only 17%. Most of the Asian carriers also had much higher labor productivity levels and lower unit labor costs than airlines in North America or Europe. This location-specific advantage was a primary reason why carriers from other regions were setting up significant hub operations in the Asia-Pacific region. While the yields for many carriers such as China Airlines, Korean Air, Thai, and Malaysian, the second and third tier competitors, were much lower than international levels, the top tier carriers such as Japan Airlines, and Singapore Airlines had yields consistent with their North American and European counterparts. The avenues for differentiating airline services in this region were shrinking. The elite carriers who had built a reputation for superlative service such as Singapore Airlines were now facing stiff competition from carriers such as Thai Airways and Cathay Pacific who had geared to deliver similar services. Thus, differentiation was becoming much more demanding and difficult to sustain

Singapore International Airlines: Country and Company

History and Culture of Singapore

Singapore had witnessed bountiful growth and become the envy of many neighboring countries as it entered the new 21st century. Its per capita GNP increased by a phenomenal 75% between 1990 and 1999 and currently stood at S$39,724. This meteoric rise could be directly traced to Mr. Lee Kuan Yew, the most powerful Prime Minister in Singapore’s history. He was able to tap the patriotic spirit of his people when he announced his intent to develop Singapore to rival Switzerland in terms of standard of living. His emphasis on superior education standards, a controlled labor environment, significant outlays for training and development, all helped to enhance the quality of human capital. At the end of 1999, Singapore boasted a literacy rate of 93%, among the highest in the region. Singapore’s Confucian work ethic dovetailed very well with his ambitions. It emphasized responsibilities over rights and placed enormous value on attributes such as hospitality, caring and service. As a result of these efforts, Singapore, today ranked among the best countries in terms of human capital and was often rated among the world’s friendliest places to do business. Rising standards of living meant higher wages .Coupled with the small size of the local population and a very low unemployment rate (3.2% in 1998), the availability of labor was seen as a potential stumbling block in the drive toward further growth. Many of the larger companies already depended on a sizable number of expatriates from neighboring countries as well as the West to staff positions.

A staunch believer in free trade and internally driven growth, Mr. Yew made it clear from the start that the “world does not owe Singapore a living.” For example, in the air transportation sector, Mr. Yew’s government declared that SIA, although the national carrier, would not receive any subsidies, protection, financial assistance, or economic benefits from the government. It would have to sink or swim based on its own resources and ingenuity. Singapore literally adopted a free skies approach whereby foreign flag carriers from other countries were welcome to serve the city-state without any restrictions. This meant heightened competition for SIA right from the start. However, the free market philosophy also resulted in sharper rates of market growth. For example, roughly 35% of the equity base of Singapore was foreign in origin, and foreign investors owned 17% of all companies in the country, both testaments to the successful programs that attracted foreign capital and commerce to the island nation.

The tourism industry played a very significant role in the overall development of the country. Handicapped by the small size and the lack of natural resources, Singapore had to rely on service industries such as tourism and finance to generate growth. It had always enjoyed an enviable status as an important geographic hub dating back to the pre-British Colonization era. During its history as a British colony, Singapore provided an important stop-off point for travelers from Europe and Britain to the outlying colonies of Australia and New Zealand. Building on this historical reputation, Singapore evolved into an important Asian tourist hub

The common origin and shared history of SIA and MAS

In 1947, Malayan Airways was established and operated services between Kuala Lumpur, Singapore, Ipoh and Penang, using its fleet of twin-engined Airspeed Consuls. In May that year, when Malayan Airways first took to the skies, there were only five passengers onboard its twin-engined Airspeed Consul. With the flight crew having to attend to the flying of the plane, passengers had to help themselves with the only refreshment available onboard then – a flask of iced water. In 1963, it was renamed Malaysian Airways Limited. In 1966, both the Malaysian and Singapore Governments acquired joint majority control. The following year, it was renamed Malaysia-Singapore Airlines (MSA) Limited. On 26 January 1971, both the Malaysian and Singapore Governments agreed to set up separate national airlines, and on 1 October 1972, Malaysia-Singapore Airlines ceased operations. In its place, Singapore Airlines (SIA) and Malaysian Airlines System (MAS) took to the skies.

SIA’s initial growth and expansion

The split of MSA on 1 October 1972 saw MAS taking over all the domestic routes while SIA took over the international network and all the Boeing jets in the MSA fleet .SIA was government-owned, and the Singapore Government viewed the airline as an investment in a portfolio held by the republic. Although SIA was a state-owned enterprise, it paid taxes, like any other company in Singapore, and was expected to be competitive and profitable. Without any domestic routes to monopolise, SIA had to strategise to survive.

Soon after the split, SIA embarked on an aggressive growth and aircraft and equipment acquisition programme. It acquired Boeing 747 Jumbo Jets, which went into service in 1973. In that same year, subsidiary Singapore Airport Terminal Services Ltd (SATS) was set up to provide ground services. In 1977, in conjunction with BA, it introduced the supersonic Concorde on the London- Bahrain-Singapore route. The maiden flight was on 10 December 1977. After three flights, however, disputes over airspace delayed regular Concorde service until early 1979. On 1 November 1980, the SIA/BA joint Concorde service between Singapore, Bahrain and London was, however, terminated.

SIA began cargo service from Singapore to San Francisco via Hong Kong, Guam and Honolulu in 1978. Passenger service on the route commenced the following year. In 1979, SIA took the unprecedented action of trading in the B-747s purchased just a few years earlier for more advanced, fuel-efficient versions of the same aircraft while simultaneously expanding the fleet in a record-setting S$2.1 billion order with Boeing Aircraft.

By 1979, it became the ninth largest airline in the world, up from the 57th position prior to the parting of ways with MAS, achieved on the back of a continuous average annual growth rate of 46 percent over its initial seven-year period (Harvard Business School, 1989b).

SIA shares were listed on the Singapore Stock Exchange on 18 December 1985, and a new corporate identity was unveiled on 28 April 1987. On 14 December 1989, SIA concluded a major world-wide alliance with SwissAir and Delta Airlines, covering wide-ranging co-operation and eventual exchange of equity. An MOU with Cathay Pacific Airways and Malaysia Airlines was signed on 22 December 1992 to form a joint venture to develop and operate a frequent flyer programme. Passages,the frequent flyer programme, was officially launched on 1 July 1993.

On 22 June 1994, SIA placed a US$10.3 billion order for 22 Megatop 747s and 30 Airbus 340-300E aircraft. The following year, on 14 November 1995, it ordered 77 B777 aircraft powered by Rolls-Royce Trent engines worth US$12.7 billion, including spares and spare engines.

SIA turned 50 on 1 May 1997. It had by then grown into a diversified group, totally transformed from its humble beginnings 50 years ago. On 7 May 1997, less than a week following its 50th birthday, it took delivery of its first Jubilee B777-200, which touched down at Changi Airport. Symbolically, this ushered in another new and challenging era for SIA.

The power of an idea: a most successful product/service differentiation strategy

Within a year of the launch of SIA following the split of MSA on 1 October 1972, SIA began looking for new ways to differentiate itself. In 1973, SIA had in its service, some of the world’s most modern aircraft. Its maintenance operations were generally recognised to be on a par with those of the world’s major airlines. All its pilots and engineers were proficient and experienced, as there were no restraints from the unions on hiring Western crew members if SIA thought they were better.

The product/service differentiation strategy that SIA finally decided upon was based on in-flight service. The strategy, as summarised by its then SIA’s advertising manager, who later became its manager of in-flight services, was:

What we needed was a “unique selling proposition”. Happily, we found it. Or perhaps I should say we found her, because the Singapore Girl has become synonymous with Singapore Airlines.

SIA is an Asian airline, and Asia has a long tradition of gentle, courteous service. The Asian woman does not feel she is demeaning herself by fulfilling the role of the gracious, charming and helpful hostess. What we hope to do is translate that tradition of service into an in-flight reality (Harvard Business School, 1989b).

SIA was thus strategically positioned in the premium service, quality and value market segment of the international airline industry. SIA capitalised on Oriental charm with stewardesses of Chinese, Malay, Indian, and Eurasian ethnic backgrounds. By 1997, this resource pool within Singapore had, however, expanded to include Malaysia, Indonesia, India, Taiwan, China, Japan and Korea. In 1997, a third of its 5,800-strong cabin crew were non- Singaporeans (The Sunday Times, 1997a, p. 3)

SIA stewardesses were costumed in a specially designed version of the graceful Malay sarong kebaya, designed by renowned fashion house, Pierre Balmain. Passengers were treated to some of the best food on any airline, which is served with “lots of warm smiles, warm towels, and attention to details”. It provided first-class, business-class and economy-class passengers with cocktails, fine wines, and in-flight motion pictures at no extra charge. Since its inception, SIA has always subscribed to a policy that “once a passenger pays for his or her ticket, there should be no more charges on the aeroplane”. SIA now spend S$20 million a year on wines, with about 60 to 80 bottles of wine consumed per flight. International consultants who specialise in French, American and Australian wines are contracted to do wine-tasting twice a year for SIA, and they advise the airline on what to buy for its first, business and economy class passengers (Straits Times, 1997a, p. 22). According to SIA, the airline even receives letters from passengers asking for the names of wines that they took on SIA flights, with some asking where they can buy them (Straits Times, 1997a, p. 22).

Service became the raison d’etre for SIA, and at the heart of its service reputation was the Singapore Girl. Slogans like “A standard of service that even other airlines talk about” and “SIA: you are a great way to fly” were used regularly in its marketing. SIA has always been of the view that the key to its success was its “value or quality for the money”. SIA’s corporate philosophy of the airline industry since the late 1980s is best summed up by:

The airline industry is, by its very nature, a service industry. In a free market, the success or failure of an individual airline is largely dictated by the quality of the service it provides (Joseph Pillay, Chairman SIA, Harvard Business School, 1989b).

Most had to confront the apparent contradiction between cutting costs and prices, on the one hand, and maintaining customer focus and delivering customer service, on the other. It was a challenge many found most difficult.

Into the 1990s SIA had developed a very strong market position. While keeping an eye on costs, its “quality and service-enhancement strategy” allowed it to command a relative market price premium position through “premium service, value and quality”. Its enviable position can be summed up as follows:

If others resort to cutting fares, we can certainly do the same and we have a far better financial strength to cut fares and last longer than anyone else. But we ask ourselves first whether it is necessary to do that . . . So far, we have no need to do that (S. Dhanabalan, Chairman SIA, 1997, The Sunday Times, 1997b, p. 32).

On competition, S. Dhanabalan reiterated SIA’s long-standing strategy: “Strong competition is not new to SIA. Every now and then, some airline, in an attempt to gain market share, will resort to senseless heavy discounting. It is a short term phenomenon. We take such competition in our stride” (The Sunday Times, 1997b, p. 32)

The Singapore Girl, the idealised version of the SIA cabin attendant, was the centrepiece in SIA’s marketing strategy. Very high-quality photography was used in SIA’s advertisements, and the Singapore Girl was always the central feature of the advertisements. The advertisements portrayed her in a number of settings and used a variety of themes to good effect.

The Singapore Girl strategy proved to be a powerful idea and turned out to be a phenomenal success. International Research Associates (INRA), a firm which conducted surveys (covering the area of advertising recall) in the Asia Pacific area triennially, found that SIA’s advertising enjoyed steady increases in unaided recall in the three successive INRA surveys in advertisement recall it conducted in 1973, 1976 and 1979. The SIA advertisement recall was 21 percent in 1973. It rose up to 32 percent in 1976, and shot up to 50 percent in.The average advertising recall of about 40 airlines studied over the same time period was only 9.6 percent (Harvard Business School, 1989b). SIA’s market research up to 1997 continues to attest to this:

Around the world the Singapore Girl remains a very positive marketing icon. She evokes the very best in Asian charm and hospitality (Director, Market Research, SIA, The Sunday Times, 1997a, p. 3).

Although there were initial protests in some Western quarters in what was perceived to be sexist overtones in the advertisements, not everyone took offence at the advertising image. In a 1979 Fortune magazine article, “Flying high with the Singapore Girls”, it was noted that “far from being repelled by the notion of becoming a `girl’, about 7,000 young Singaporean women applied last year for 347 openings in the hostess ranks of SIA” (Harvard Business School, 1989b). In the West, its acceptability in recent years had changed quite appreciably. In 1997, it was noted that:

Her popularity in the West is such that it would be quite risky for SIA to attempt to change the image at a time when people there are getting used to her (Analyst, Goldman Sachs, The Sunday Times, 1997a, p. 3).

Customer focus, innovation, creative service and service excellence

On an SIA flight in 1996, a Chinese couple travelling in first-class with their children and nanny had refused the food served. When asked, the man of the family replied: “We are just not used to these and would prefer a bowl of instant noodles.” Since then, every SIA flight carries a supply of instant noodles for those customers who find in-flight cuisine not quite to their taste (Asian Business, 1996, p. 40). In addition, first-class and business-class passengers flying out of Singapore can now pre-order certain Singapore local fare prior to their flight to be served to them onboard. These are just some examples that illustrate the constant drive by SIA to introduce new ideas to improve customer service, in its customer focus to win customer satisfaction and even delight.

There is of course nothing high-tech or sophisticated about instant noodles nor Singapore local fare, but these examples highlight the creative customer service even in simple things that has won SIA wide praise (Asian Business,1996, p. 40). This has become a hallmark of SIA’s service excellence. In 1972, SIA was the first airline to introduce free food and alcoholic drinks on its flights.

SIA has recognised that in this highly competitive market, any advantage gained by one airline over others will be short-lived, and ideas that are new will become commonplace in a matter of months. However, it noted that the important thing is to always stay in the forefront both in service and in technology (Asian Business, 1996, p. 40).

This strategy of SIA focuses primarily not on reducing costs, but on enhancing quality or service and preventing customer problems from arising. SIA has succeeded most uniquely with this type of strategy in the airline industry, a strategy commonly employed in service businesses that command premium prices with high margins, businesses in which there is a high degree of repeat business, with word-of-mouth praise by customers as a most important marketing channel.

It has been argued by some that an organisation should be conservative in its promises regarding service excellence to prevent customer expectations becoming too high. High expectations, so that argument goes, increase the potential for customer dissatisfaction. Such prescriptions, however, serve only companies with modest ambitions. In SIA’s case, it was very different. It had a bold strategic vision and aspiration of being a top airline, not just any ordinary good airline. Through its careful market positioning and delivering its service promise, SIA could be said to be the very first airline in the international airline industry to have succeeded in developing such a powerful and enduring image of quality service that has resulted in its acquiring a sustainable competitive advantage. Its ability to sustain this advantage, even as its competitors seek to develop comparable service capability, had been buttressed by the fact that it was the first to earn and attain the quality-service position and image in the market and in customers’ minds.

High service quality standards need to be developed systematically over time. Although sustaining a competitive advantage based on service quality is possible, this requires unrelenting effort on the part of an organisation to continually improve its service. This was achieved in SIA’s case.

As part of SIA’s strategy to differentiate itself on the basis of superior customer service, it was able successfully to generate a vision of service excellence throughout the organisation. Such an organisation-wide energizing vision of service excellence is a powerful source of competitive advantage in top class service organisations. Such strength can be the bedrock of a quality and service-based sustainable competitive advantage. A service organisation that does not have such a shared vision and culture of service excellence will have a tough task acquiring it, as it cannot be bought. It must be built, as in SIA’s case.

In SIA’s case, setting exceptionally high customer service standards generated a positive spirit and culture that had many follow-on results. Customer servicewent beyond the mechanics involved in efficiently providing a service onboard. Pride, zeal, and motivation were some of the positive service hallmarks that flowed from the shared vision and culture of service excellence, and the results were impressive. Unlike robots or machines, where differences in performance are largely rooted in technical specifications, human beings are subject to major performance variation. The SIA’s vision and culture that hold exceptionally high customer service standards as a strategic objective to be attained were a most important factor accounting for its exceptional performance.

To support this service excellence strategy, SIA adopts a most rigorous quality control system and process for staff recruitment and selection, as well as a rigorous training and service policy (Asian Business Review, 1996, p. 34). For example, SIA has one flight attendant for every 22 seats, the highest in the world and well above the industry average. Cabin crew must be under 26 and are employed on a five-year contract after making it through a very selective three-stage interview process that includes a social function

Previously, all cabin crew would complete a six-month training course before they could be allowed to serve a customer. However, this has now been compressed into an intensive four-month course, which is still considered to be the longest and most comprehensive programme of any major airline. In comparison, Cathay Pacific, for instance, conducts only a seven-week intensive training programme on technical, safety and interpersonal skills.

The aim of SIA’s training is to provide gracious service reflecting warmth and friendliness, while maintaining an image of authority and confidence in the passengers’ minds. Each month, thousands of young ladies would apply for the airline’s rigorous course that emphasizes safety training and encompasses beauty tips, discussions of gourmet food and fine wines, and the art of conversation.

SIA is also at the forefront of service innovation through technology. For instance, it introduced Electronic Ticketing for flights from Singapore to Kuala Lumpur and Penang (and vice versa) on 1 October 1997. About two weeks earlier, on a flight from Singapore to Tokyo on 15 September 1997, it had launched a revolutionary innovation in in-flight entertainment with the introduction of the WISEMEN system, offering passengers full control over their viewing and listening options. With WISEMEN, passengers will be able to choose from 15 movies, 20 short features and about 50 CDs. This is over and above the current SIA’s in-flight entertainment system, Krisworld, which already had 22 video channels, 12 audio channels and ten games channels. Internet check-in for First Class, Raffles Class and PPS Club Members flying out of Singapore was introduced on 20 November 1996.

SIA’s profitability track record

Just as well-known as its product/service differentiation strategy, as well as its creative service and service excellence, but certainly less familiar, is SIA’s profitability track record. Since its inception in 1972 some 25 years ago, SIA has had an uninterrupted profit track record. Asian Business Review, in an article piece on Asia’s Great Companies, noted that its financial track record is almost unheard of in the brutally cyclical airline industry, and touted it as the “World’s most profitable airline” (Asian Business Review, 1996, p. 34).

Its profitability track record is even more astounding considering that it is the national airline of a small country that is essentially just a city, of only 647 square kilometres and 3.6 million populations, with no domestic routes to monopolise. Yet, despite this it has managed to consistently deliver profits in one of the world’s most cyclical industries. SIA has an established practice of keeping its fleet young and modern (Singapore Airlines, 1997b, p. 5). This, made possible by the airline’s strong cash flow position, has allowed it to maintain a fuel-efficient fleet that averages just over five years of age without resorting to heavy borrowing or costly leasing deals.

The fleets of most other international carriers are more than twice as old as SIA’s. SIA’s fleet is in fact the youngest in the world, not taking into account the couple of small regional airlines that have just started up.

For SIA, this strategy which entails heavy capital costs, however, translates to significant savings through minimising aircraft downtime and minimizing maintenance costs. Newer aircraft are also faster and more fuel efficient, and are perceived by passengers to be safer. For instance, the B747-400 is 10 percent more fuel efficient than its predecessor. For SIA, this means a significant saving as about 15 percent of the company’s expenditure is on fuel (Asian Business Review, 1996, p. 34).

Most airlines use a combination of different financing schemes for their aircraft with the core fleet usually on long-term leases to minimise interest costs. SIA


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