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Pestel and Five Forces analysis of Singapore Airline

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Published: Mon, 5 Dec 2016

Singapore Airlines is the national carrier of Singapore, which has an international presence, but a focus on the Asian and Australasian markets. Founded in

1972, the Airline has grown and consolidated its position over the last forty years to become one of the world’s largest and most successful

airlines, with an expansive and relatively young fleet of planes (Singapore Airlines, 2014). According to its published mission statement, “Singapore

Airlines is a global company dedicated to providing air transportation services of the highest quality and to maximising returns for the benefit of its

shareholders and employees.” (Singapore airlines, 2014). But just how well placed is the company to achieving its objectives? The purpose of this paper is

to evaluate the business environment, the resources held by the company and the threats and opportunities facing it in the globalised marketplace. The

tools used to undertake these analyses are a SWOT analysis, PESTLE analysis and Porter’s Five Forces analysis.

SWOT analysis

A SWOT framework is used to evaluate the internal and external forces affecting the company.

Strengths

  • A major strength of the company is its size, brand image, and positioning strategy. In 2010, the airline was named by the International Transport

    Association (ITA) as the second largest in the world in terms of market value (Heracleous and Wirtz, 2012). Famously, and in an achievement

    unmatched by any other sector counterpart, Singapore Airlines has reported a profit for every year since it was established in 1972 (Heracleous and

    Wirtz, 2014). In 2013, the company reported an annual profit of 378.9 million Singaporean dollars (equivalent to just over £186 million GBP)

    (Singapore Airlines, 2013).

  • However, the strength of the company should not be measured only in terms of capitalisation. Singapore Airlines has been described as the

    best-known brand in the airline industry, and as a standard for other airlines seeking to develop their product and their brand (Heracleous and

    Wirtz, 2012). The company has managed to secure its position as the industry’s leading brand through the utilisation of a ‘first

    mover’ business model (Markides and Sosa, 2013). By, for example, being the first airline to offer free refreshments and a choice of meals to

    economy class passengers in the 1970s, through to being the first airline to take delivery of the new A380 passenger plane in the 2000s, Singapore

    Airlines has always ensured that it is one step ahead of its competitors (Singapore Airlines, 2014).

Weaknesses

  • While the strengths outlined above are certainly unmatched by any other in the industry, the company does still have some weaknesses. Analysts have

    noted that the company’s investment in low cost, short-haul carrier Tigerair is dragging the company down in terms of profitability (Air

    Transport World, 2014). In 2014, Singapore Airlines boosted its stake in the company by 7.3 per cent to 40 per cent, but the company has been

    consistently unprofitable since 2012. In an effort to boost its performance, that company has attempted to establish a presence in markets other

    than Singapore (particularly in Thailand and the Philippines) but these efforts at market penetration have, to date been unsuccessful. This is a

    considerable weakness for Singapore Airlines, for low cost carriers in the South East Asian markets have recently been experiencing a boom (Pearson

    and Merkert, 2014).

  • Another weakness is the inability of the airline to recruit additional passengers on its home turf. Although overall passenger numbers have been

    growing, since 2000, Singapore Airlines has only managed to grow passenger numbers on the mainland (Singapore and Malaysia) by 2 per cent annually

    (Heracleous, Wirtz and Pangarkar, 2006; Heracleous and Wirtz, 2012). This is because the home market is already mature, and, given increased levels

    of movement between Singapore and other nations near the peninsula, short-haul routes have experienced the greatest levels of growth.

  • With few opportunities for growth in the home market, analysts have pointed to the North American market for growth opportunities for the airline.

    A weakness therefore is that rather than seeking opportunities to expand into this market, Singapore Airlines instead seems to be shrinking from

    it. Previously, the company served such important North American hubs as Vancouver, Las Vegas and Chicago (Chan, 2000), but today, it serves only

    four US cities: San Francisco, Los Angeles, Houston and New York (Pearson and Merkert, 2014). In 2013 alone, the airline’s seat capacity in

    the North American market dropped by some 16 per cent (Centre for Aviation, 2013). As a result, while the airline is still the largest in Europe,

    in North America it now lags behind eight other competitors.

Opportunities

  • There are considerable opportunities for development in the future. Singapore Airlines is a member of the Star Alliance, the world’s largest

    and most successful airline strategic alliance, which gives it access to the resources of 24 partners (Heracleous et al, 2006). Since only 11 of

    these partners thus far fly to Singapore, there are opportunities for further and deeper partnerships. To some extent, the company is already

    capitalising on these opportunities. Since the firm’s Chief Executive Officer (CEO), Goh Choon Phong took the helm of the airline in 2010,

    the company has forged 8 new codeshare partnerships with competitor airlines (Riwo-Abudho, Njanja, and Ochieng, 2013).

  • Although the airline is struggling in the North American and Southeast Asian markets, opportunities can be found elsewhere. Unique opportunities

    for growth exist in the Indian market. Singapore Airlines has entered into a joint venture with Indian transportation giant Tata Sons, which will

    culminate in a new full-service airline Vistara, that is expected to be fully operational by October 2014 (the Times of India, 2014).

Threats

  • Singapore Airlines is the world’s largest and most profitable airline carrier, but this does not mean that it is immune from threats. Chief

    of these is perhaps the rapid growth of several Middle Eastern airlines, such as Etihad and Emirates, many of which have adopted similar business

    models and market positioning strategies as Singapore Airlines (Bloomberg BusinessWeek, 2012).

  • Outside of the Middle East, other airlines have also begun to compete with the carrier in its traditional marker space, the premium passenger. At

    the start of the century, Singapore Airlines was the clear market leader in business class products (Chan, 2000), but in recent years similar cabin

    products have been introduced by European carriers like British Airways (Bloomberg BusinessWeek, 2012). This means that the offerings of Singapore

    Airlines, which once would have been considered innovative or avant-garde, are increasingly in danger of appearing outmoded.

PESTLE analysis

The PESTLE framework is used to understand the political, economic, social, technological, legal and environmental forces affecting an industry and its

incumbent organisations.

Political

National political frameworks have a major impact on the operations of the airline industry. This is because almost all countries have a ‘national

carrier’ – an airline that carries the country’s flag, is headquartered in the capital city, and represents that country (Riwo-Abudho et

al, 2013). Given that these carriers are seen as representing the nation, they tend to receive a great deal of support from government, and globally, many

remain government-owned. Withdrawal of such support, for whatever reason, can be disastrous for national carriers, as Italy’s national carrier

Alitalia found in the 2000s (Beria, Niemeier, and Fröhlich, 2011).

Economic

Since airlines operate across national economic boundaries, and given their level of resource intensity, they are subject to the vagaries of national, and

the international economy. One major economic threat to Singapore Airlines’ process is the growth in fuel costs. Political unrest in the Middle East,

exemplified by the so-called ‘Arab Spring’ of 2011 has helped to bring oil prices to unprecedented levels (Hakimian 2011), which is directly,

and negatively impacting airlines’ fuel costs. Some airlines have opted to pass these increased costs on to customers, but given that Singapore

Airlines already utilises a premium pricing strategy, there may be limits to the extent to which it can adopt such a strategy.

Social

Social trends are also impacting heavily on the operations of airline businesses. Travel, particularly to faraway destinations and to tropical locations,

has long been the provision of the more wealthy in society (Schafer and Victor, 1997). An increase in disposable income since the 1980s has enabled the

types of travel that was previously out of reach of the less wealthy individuals in society to become affordable. At the same time, there seems to have

been a shift in consumer preferences away from premium types of travel to the low cost travel formats, as evidenced by the huge increase in the number of

low cost carriers. Even airlines with premium positioning strategies like Singapore Airlines have found that they have little choice but to enter this

market. This might explain the company’s recent decision to increase its share holdings of Southeast Asian low cost carrier Tigerair, in spite of its

recent lack of profitability (Air Transport World, 2014).

Technological

In a saturated market like long haul passenger air travel, and particularly in the premium market position, technological innovations are often the arena

in which competition is played out (Chan, 2000). Airline suppliers expend considerable levels of research and development (R & D) in creating new

fleets and cabin products in order to boost sales, and customers enjoy using new technology on airlines not only for reasons of comfort, but because new

fleets evoke in passengers a sense of security (Heracleous et al, 2006). Technological developments have had a huge impact on Singapore Airlines. The

carrier has one of the youngest fleets in the industry, and prides itself on being the first to adopt new innovations, such as headsets, reclining seats

and seatback entertainment systems (Singapore airlines, 2014).

Legal

Changes to the regulatory framework can have major impacts on airlines, particularly those that are national carriers. Different governments bring with

them different political outlooks and strategies, many of which will significantly impact the aviation industry. For instance, following the terrorist

events of September 11, 2001, there were major regulatory changes impacting the way in which passengers must be screened for air travel (Heracleous, and

Wirtz, 2014).

Environmental

There is increased concern among airline passengers for environmentally friendly services. This preference is likely to grow in the future due to national

carbon reduction targets and increasing energy prices (Heracleous, and Wirtz, 2014). Some airlines have already begun to tackle the ‘green

issue’; integrating it into their corporate social responsibility (CSR) policies and marketing plans, but Singapore Airlines has thus far been slow

to respond to this demand from consumers.

Porter’s Five Forces analysis

Michael Porter (1985) identified five factors, which he argued impacted the performance of companies within market boundaries: the threat of new entrants

to the market; the threat of substitute products or services; the bargaining power of suppliers; the bargaining power of buyers and the intensity of the

rivalry in the market. It is common for strategists to analyze these factors in order to predict the likely success of a company in a market. Below, these

factors are applied to the airline industry.

The threat of new entrants

This aspect of the Five Forces refers to the extent to which new competition can be accommodated within the industry. In relation to the long-haul

passenger airline business (which currently dominates Singapore Airline’s market activity), the threat of new entrants is weak. Long haul air travel

is a fairly saturated industry with just one or two national carriers representing each economy, most of which receive some backing (pecuniary or

otherwise) from the nation’s government (Fu and Oum, 2014). This means that traffic growth generally comes from the growth of a national carrier,

rather than the entry to the market of new rivals. Evidence of the saturation of the long haul airline passenger industry can be seen in the congestion of

the skies and airports, particularly large regional hubs (Wirtz and Johnston, 2003; Heracleous et al, 2006), and there is impetus from regulatory and

governing bodies as well as passengers to reduce current congestion levels. In any case, there are huge capital outlays and long lead times to recoup

investment in the airline industry, which explains the high failure rates of many nascent airlines. Despite the weak threat of new entrants to the full,

long-haul airline passenger sector, the short-haul sector has witnessed the entry of several new entrants in recent years. Good examples in the Southeast

Asian markets in which Singapore Airlines operate are Air Asia and Jet Star (Stockport, 2012).

The intensity of rivalry

Porter (1985) conceptualised rivalry within an industry as existing on a continuum from low to high. He argued that where rivalry is intense, businesses

must continually scan the market for changes in the needs and demands of customers and respond accordingly. There is some intense rivalry within the

airline industry, but it occurs on a route-by-route basis (Heracleous et al, 2006). Where routes are well serviced by several different airlines (good

examples are London to New York or Paris to Frankfurt), rivalry can be very intense. In order to capture market share on such routes, airlines must adopt

price-cutting strategies or ensure that the quality of their service is very high. For instance, Cook et al (2012) have noted that on well-serviced routes,

lack of punctuality can have deleterious effects on carriers. On the other hand, there still remain many routes that are monopolised by just a few

carriers. The so-called ‘Kangaroo Route’, involving connections between Southeast Asia, Australia and New Zealand is an excellent example

(Heracleous et al, 2006). Since there are just a few carriers operating this route, competition tends not to be as fierce. The exceptional performance of

Singapore Airlines in recent years has been attributable to the capture of the Kangaroo Route (Chan, 2000).

The threat of substitute services

This aspect of the Five Forces refers to the extent to which the product or service offered by an industry incumbent can be replaced by another similar

service. Porter (1985) argued that businesses providing substitutable products and services were at risk of market losses. Once again, distinctions must be

made between the short-haul and the long-haul arms of Singapore Airline’s business operations. The threat of substitute services to the short-haul

element of the business is relatively moderate. With globalisation, there are increasing investments in transportation links between major geographical

hubs, including those served by Singapore Airlines. It is possible, for example, that high-speed rail connections will exist between the major cities of

Eurasia in the future (Richards, 2012). More immediately, a threat to Singapore Airline’s market for long-haul business class passengers is posed by

the growing recalcitrance of workers in internationalised organisations to travel for work. Due to increased concern with the environmental impact of air

travel, improved real-time telecommunications technologies and the growing number of virtual enterprises, individuals that would previously have made

considerable use of long-term business travel are finding that they can do their work from home.

The bargaining power of customers

According to Porter (1985), where buyers have strong bargaining power, the relative position of suppliers of goods and services is relatively weak. In such

industries, product and service providers must be particularly cognizant of the needs and demands of their customer base if they are to develop – and

maintain – their market share. The bargaining power of customers in the airline industry is moderate. Switching costs between airlines are

very low (Cook, Tanner and Lawes, 2012). Switching costs refer to the burden perceived by customers in selecting one supplier over another, and are

comprised of time, emotions, opportunity and financial costs. Observers have argued that switching costs for passenger flights have considerably lessened

in recent years, driven by the decline in high street airline offices and travel agents and the proliferation of the Internet (Lim and Lee, 2012). Although

virtually all airlines have their own websites through which passengers can search, book and pay for flights, it is more common for passengers to search

for flights using one or more of a multitude of ‘comparison sites’ such as Lastminute.com and Traveljungle.com. These websites enable

passengers to compare the airfares of like-for-like routes and services, which in turn facilitates easy switching (Lim and Lee, 2012). Airlines, have

however, been attempting to increase switching costs through the provision to passengers of loyalty schemes, either alone, or in conjunction with partners

in strategic alliances. Passengers are encouraged to remain loyal with one airline or one alliance as frequency of purchase enables them to accrue

‘points’ or ‘air miles’ that can be exchanged for free or discounted flights, or other rewards. The extent to which these

initiatives drive purchasing decisions, is, however, under debate (Wang, 2014).

The bargaining power of suppliers

This aspect of the Five Forces refers to the extent to which suppliers can negotiate with businesses over materials and equipment. Porter (1985) argued

that where suppliers have strong bargaining power, the relative position of businesses is relatively weak. Unusually for a transportation industry,

suppliers to the airline industry are in a relatively strong bargaining position. Fleets to the industry are supplied by what is effectively a duopoly

– Boeing and Airbus –, while an oligopoly exists in the supply of engines (General Electric, Pratt and Whitney, and Rolls Royce). With so few

suppliers in operation, manufacturers are able to unilaterally establish prices and set delivery times (Olienyk, and Carbaugh, 2011).

Conclusion

This paper has examined the business environment, the resources held by the company and the threats and opportunities facing Singapore Airlines. Emerging

from this analysis is a picture of a company with an excellent reputation in fine financial health. While there is little danger of the company succumbing

to the competition any time soon, there are, however, a number of environmental threats, of which it must remain cognizant, if it is to remain the leader

of what can be an intensely competitive industry. Importantly, the company will need to develop new markets, particularly in India and North America, and

develop its low cost arm in order to meet changing consumer demands.

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