Competitive Advantage Of Airline Industry In Singapore Tourism Essay

Singapore economy is one of most prosperous in the world. Singapore airline industry accounted for 5% of GDP and the industry value-added rate is 15%. As an important role in Singapore economy, Singapore airline industry has growing fast. In this paper will use the Porter’s “Diamond Model” (Factor endowments; Demand conditions; Related and supporting industries; Firm strategy, structure and rivalry; Chance Government) to analysis the competitive advantage of Singapore airline industry and explain how the Singapore airline industry developed its competitive advantages.

Introduction

Singapore economy environment

Singapore economy is one of most prosperous in the world. Singapore economy is a capitalist mixed economy, with minimal government intervention in the market. It has an open business environment, relatively corruption-free and transparent, stable prices and one of the highest per capita gross domestic products (GDP) in the world.

Airlines industry in Singapore

Air travel is a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries.

In Singapore economic environment, the Singapore airlines industry had total revenue of $5.8 billion in 2009, representing a compound annual growth rate (CAGR) of 1.7% for the period spanning 2005-2009. Industry volumes increased with a CAGR of 4.1% between 2005 and 2009, to reach a total of 18.1 million passengers in 2009. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 11% for the five year period 2009-2014, which is expected to drive the industry to a value of $9.8 billion by the end of 2014 (Airlines Industry Profile: Singapore, 2010).

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Porter’s “Diamond Model” of Competitive Advantage

The diamond model is an economical model developed by Michael Porter in his book The Competitive Advantage of Nations (Porter, 1990), where he published his theory of why particular industries become competitive in particular locations. Porter’s diamond model suggests that there are inherent reasons why some nations, and industries within nations, are more competitive than others on a global scale. The argument is that the national home base of an organization provides organizations with specific factors, which will potentially create competitive advantages on a global scale.

The analysis is classified into six broad factors incorporated into the Porter diamond, which has become a key tool for the analysis of competitiveness:

Factor endowments – a nation’s position in factors of production such as skilled labor or the infrastructure necessary to compete in given industry.

Demand conditions – the nature of home demand for the industry’s product or service.

Related and supporting industries – the presence or absence of supplier industries and related industries that are internationally competitive.

Firm strategy, structure and rivalry – the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry.

Chance events are occurrences that are outside of control of a firm. They are important because they create discontinuities in which some gain competitive positions and some lose.

Government can influence each of the above four determinants of competitiveness. Clearly government can influence the supply conditions of key production factors, demand conditions in the home market, and competition between firms. Government interventions can occur at local, regional, national or supranational level.

Figure 1: Porter’s “Diamond Model”

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Source: The Competitive Advantage of Nations

By using Porter’s diamond, business leaders may analyze the competitive factors which may reside in their home country company, and what factors may be used to achieve global competitive advantage. Business leaders can also use the Porter’s diamond model during a phase of internationalization, the leaders can use the model to analyze whether the factors in the domestic market to support the internationalization process, and whether in the country eligible to create a global scale competitive advantage.

Analysis of Airline Industry in Singapore

Factor endowments

The factor endowments of airlines industry include human resources, capital, equipment and facilities, air space resources, etc.

In human resources, due to the characteristics of technology-intensive in airlines industry, the organization requires a lot of professional and technical personnel. Meanwhile, the aviation industry also needs administrative, financial investment and sales staffs. The multi-cultural Singaporean workforce is highly educated, highly motivated and highly productive. It is also proficient in English – the language of international business. Singapore has a large base of engineering talent, with the number of engineers in universities and polytechnics expanding steadily each year, in addition to the sizeable pool of skilled technicians. In addition, Singapore government through the open immigration policy enhances Singapore’s talent pool. This gives companies the opportunity to source for the best personnel from anywhere in the world (http://www.edb.gov.sg/edb/sg/en_uk/index/why_singapore/knowledge.html). For these reasons, the Singapore airlines industries have good manpower.

In capital, airlines industry needs a large finance support, the aircrafts and airport cost millions of money. In Singapore, the world’s major banks have opened branches or offices. Therefore, the Singapore airline industries do not have problem in capital. For example, Commerzbank Singapore branch has 30 years’ experience in financing aircraft to arrange and manage the entire deal, and a complete suite of financing products (https://www.commerzbank.com.sg/en/financing/aircraft/aircraft_financing.htm).

Although the Singapore’s skies are limited, however the airline industry not far from reaching saturation point. According to Lee Kuan Yew (former Prime Minister of Singapore), due to the aid of advanced navigation technology, Singapore can shorten the distance of the aircraft flight and to increase flights density, therefore Singapore in terms of the open skies, still have a lot of space.

Demand conditions

Airlines generally have a large number of buyers. Many of these are individual consumers purchasing flights directly from the airline, although there are business to business sales to charter companies, discounters, and similar buyers.

With the increasing living standard, the customers are demand on convenient, comfortable and fast transportation. Travel by air is one of the best choices for Singapore customers. Firstly, Singapore has a strong international trade link, there are thousands of businessmen which from different countries doing business in Singapore. The businessmen through the air travel to make sure they can reach the right place on time. Secondly, Singapore is one of the most popular tourist cities in Asia. There are 10.8 million tourists visit Singapore in 2008. Furthermore, due to the population growth, Singapore has a great potential demand for air travel.

Table 1: Singapore Population Statistics

Year

2007

Total Population (‘000)

4588.6

Singapore Residents (‘000)

3583.1

Birth Rate (Per 1000 Population)

10.3

Death Rate (Per 1000 Population)

4.5

Infant Mortality Rate (Per 1000 Live Births)

2.1

(Source : www.singstat.gov.sg)

(Source: Airlines Industry Profile: Singapore, 2010)

According to the tables, it obviously shows that the passengers of Singapore airlines industry have increasing by year.

Related and supporting industries

The related and supporting industries including airports, air traffic control, navigation information, aviation fuel, air material and other support services, and aircraft manufacturing and maintenance of related industries.

From the supply-side perspective, the airport provide the basic conditions for airlines industry, it contains safety and quality service. Changi Airport is the main airport in Singapore which humble beginnings in 1981. Changi Airport also is a major aviation hub in Southeast Asia. Currently managed by Changi Airport Group, Changi Airport was corporatized on 1 July 2009 to bring Changi to the next level and deliver an even better Changi Experience. (http://www.changiairport.com/our-business/about-changi-airport) Serving more than 90 international airlines flying to some 200 cities in 60 countries, Changi Airport handles about 5,000 arrivals and departures every week and over 37 million passengers a year. With over 40,000 square meters of commercial space, Changi Airport is also one of Singapore’s largest shopping locations.

As the air traffic controller, Civil Aviation Authority of Singapore (CAAS) promotes a strong safety culture and embeds a robust safety framework, with a modern and progressive regulatory regime based on international best practices.

Aircraft manufacturing and maintenance are the most important supporting industries for airlines industry. For Singapore airline industries, Boeing Company and Airbus is the main supplier for aircraft. Fortunately, Singapore also has its local brand. SIA Engineering Company is leading aircraft maintenance, repair and overhaul (MRO) company providing total maintenance solutions to an expanding client base of international airlines (http://www.siaec.com.sg/).

Firm strategy, structure, and rivalry

Local conditions affect firm strategy. For example, German companies tend to be hierarchical. Italian companies tend to be smaller and are run more like extended families. Such strategy and structure helps to determine in which types of industries a nation’s firms will excel. Singapore is a hierarchical paternalistic authoritarian illiberal state. Cause of Confucianism is strong; Singapore society is based on a hierarchical order of things.

Rivalry in the Singapore airline industry is strong. Local rivalry forces firms to move beyond basic advantages that the home country may enjoy, such as low factor costs. The competitive landscape has several large companies, such as Singapore Airlines, alongside smaller competitors. Rivalry is increased by the presence of low-cost carriers in the market, as these companies can compete more intensely on price. Switching costs for buyers are low, which means that it is easy for them to change to a competitor. Cause of the globalization, there are many international competitors join in the Singapore market, such as China, Japan and India, etc.

Chance

The demand for air travel to the Asia Pacific is rising which is driven by increased economic activity in emerging Asian countries such as China and India. Traffic is projected to grow at 7% in China and India combined, above the world average of 5% in the fiscal year ended December 2007. Further, the share of Asia Pacific region in world passenger traffic is forecast to rise from 25% in 2003 to 31% in 2023.

According to the update of the United Nations World Tourism Organization, the global tourism will rebound strongly in 2010. With the anticipated growth, business and consumer confidence has picked up. This growth in world tourism industry will enhance airline business. Singapore airlines industry can capitalize on this increase in world travel and tourism to enhance its business and generate additional revenues.

Government

Government is the important variable of affecting the competitiveness of the airline industry. In the past, the airline industry was at least partly government owned. The airline industry has been strongly controlled by agreements and policies. Airlines couldn’t just fly to any destination or country without appropriate authorization. The deregulation of the Airline industry opens doors for more entrants to the market and increased competition. Singapore Airlines is still owned by the Singapore government and is still affected by such controls. Therefore, the government has great impact on the airline industry. In Singapore, the government is supporting the airline industry. The Singapore government has signed an agreement with the United States called “Open Skies” that gives both countries unrestricted flight access to each other countries. The open skies phenomenon is gathering momentum and more and more countries are signing up. Recently, the Civil Aviation Authority of Singapore (CAAS) will be setting up an S$100-million Aviation Development Fund to further develop the local aviation industry.

Conclusion

Airline industry in Singapore has growing fast. It’s due to have a good economic environment and stable politics. According to the analysis of Porter’s “Diamond Model” of Competitive Advantage, it obviously shows what competitive advantages of the Singapore airline industry have. Firstly, Singapore airline industries have the good human resources, finance support and other factor endowments. Secondly, the strong demand of market and the related and supporting industries. Additionally, the good opportunities and the government support. My recommendation for Singapore airline industry:

Keep strong emphasis on the brand name and quality of service.

Stay with the competitive advantage what the industries have, using the differentiation strategy.

Maintain the innovation and complimentary products.