SIA Alliances

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~IAN CASE R E S E A R C H JOURNAL; VOL. J, 65-70 (1999)

=======ACRJTIlis C~St W4iS prepared byPrtm N. SIUlmd"s",.i, Department 0/ MlIrktli"x,Nil ';1)1141 Univer. ity o]Si'IX ilPU(C ilS " hllSis [ 1 ) 1 'clau discussion fath"fhiln to illustrat either t/feaiu or i"tfftctiT1t ',4",d /i nK o f " " " J, tt i" ;s t, ,, riv ('or bllsinns situation. Thellst if busld un public ill1dl,ubli:Jhed jn/umulliul1.Pttol~' OAJdnu 0111 ,cUY"(-$l'uPld,.,,, to:';Hudate Pro/tUOr Pre",N. Shamdils&ll1i, Dep art-rtlttft o] M~rkttinx,Filculty 1 ) / Du.i"u$ AJm in is t r a t i o n, Nu t i o n a tUniWrJ;ty 1 1 / Sinxaport.10 Kent RiJXt Crescent,S 't1,tl'POf'< 11926U.

SINs Alliances:The 'Star' Attraction

'Joining an airline allianc e w ill not cure a sick carrier', saidSIA chairman, S. Dhanabalan when questioned about thewisdom of form ing strategic alliances in a n in te rv iew withT he S tra its T im es on October 19, 1997 . 'Basi ca ll y, each airlinemust be viable, competitive and efficient. Putting two weaka irlin es in to an alliance is not going to help ." ,Soon a fte r th is in te rv iew, aviation c irc le s w ere rife withtalk that SIA may abandon its alliance with Swissair andDelta Airlines. Swissair group chief executive PhilippeBruggisser was reported telling a Geneva newspaper that, 'Idon't want to rule out that it could come to a new Lufthansa-Singa pore Airlines alliance'. In a report published byBloomberg, Lufthansa chief executive Juergen Weber said hehoped t~ add two Asian carriers by year-end to the Star Al-liance. He declined to nam e the potential alliance partnersbut many airline sources believed that SIA w as a strong pros-pect . The Star A lliance, w hich w as established in M ay 1997,was made up of Lufthansa, Thai Airways, United Airlines,A ir Canada, Scandinavia's SA S and V arig of B razil.2Bruggisser acknowledged that the partnership withSIA was not working because ties were not deep enough.In late October 1997, SIA chairman Mr. S. Dhanabalan hadalso echoed similar sentiments where he noted that althoughSIA was one of the first airlines to enter a tie-up with Swissairand Delta in 1989, it had become more realistic aboutthe potential benefits of an alliance. He pointed out thatairlines still preferred to retain their distinct 'branding' andthat a 'cautious approach' should be taken in forminga ll iances despi te recent trends which showed ~ was gain-in g momentum . : .. . .

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CCC 0218-9275/99/03065-06"() 1999 by [ohn Wiley & . : Son. (Asi,.) ltd


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. L V?,"

t t ,I. . . . . ... BACKGROUNDOF As of May 1996, there was a total of 389 airline alliancesworldwide. Equity was involved in 62, or 16% of these

alliances.' The nature of these alliance relationships rangedfrom code sharing arrangements to full-fledged cooperationand complete mergers of ground services and frequent flyerprograms. The motivation to form alliances depended on theadvantages partners wished to obtain from their cooperationboth from an airline servicd provider and passenger pointsof view.

Advantages to passengers in clu de d th e a bility to travelto a greater number and variety of destinations in a 'seam-less' manner on one ticket with convenient connecting flightst hr ough h armon iz at io n of partner airlines' schedules. Addi-tio na lly ; th e integration of frequent flier programs and ben-efits enabled passengers to redeem awards on any of thepartners' flights. Benefits for partner airlines included thecost savings realized primarily from the capital-intensive ser-vices such as the sharing of ground services including bag-g~ge handling, check-in, and business lounges. Other oper41-tional cost savings could be realized with partner airlinesspacing providing each other maintenance, catering servicesand exchange of personnel in times of need. Additionally,through joint purchasing agreements, the alliance's bargain-ing power visa-vis suppliers would be increased. Generally,proponents of airline alliances believed that the passengersstood to benefit from better service, convenience and im-proved perks.How ever, to get the most benefit from alliances, part-ners needed to make a variety of changes in their organize-tion, strategies and operations. For example, to benefit fromjoint purchasing agreements, the equipment bought by thepartners (e.g., airplane type, cockpit design, inflight systems,etc.) had to be similar. Additionally, to extend their reacheffectively, partners had to better coordinate their flightschedules. However, there was no guarantee of commercialsuccess fo r airlines that entered into these alliances. For ex-ample/Air France, the airline with the most strategic alli-ances, 31 according to the Airline Business Survey, was strug-gling financially.)


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SIAtS ALLIANCES: TIiE 'STAR' ATIRACTION 67- - ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SII\'5 ALLlANCESTRATEGY SIA 's alliance strategy . continued to evolve in response tochanges in the compe tit iv e env ironment in the aviation in-dustry. In 1 98 9, S lA e nte re d in to a trilateral alliance called theG lobal Exce lle nc e A l lia nc e with Delta A irlin es a nd Swissair

to form a global network spanning 300 hundred cities inmore than 80 COWl tries. 'From SIA's point of view, the alliance.enabled it to effectively service a greater number of destina-tions both in the US and Europe. B y the end of 1990, t h e t hre eairlines had created a marketing campaign that highlightedthe alliance, the carriers' excellent customer serv ice and spe-cific products such as Swiss sk iing packages and vacationpackages in both Europe and the US. InJune 1995 ,S IA, DeltaAirlines and Swissair set up DSS World Sourcing, a jointp urchasing ag ency eq ually ow ned by all-three airlines.

However , after the fonnation of the Clobal ExcellenceA llia nc e, a ll three partners also tied up with o ther a ir lin es ,including com petitors . For exam ple, in 1996, D elta had. at rans-At lan ti c a ll iance with A i r France, a neighbor a nJ stro ngcompetitor of its p rim a ry a llia nc e partne-. Swissair. On th eother hand, Swissair had an alliance witn Sabena and Aus-trian Airlirt: .: iand SIAhad code-sharing agreements withAmerican Airlines (e.g, Singapore-Chicago route):.md Aus-trian Airlines (e.g., Singapore-Vienna .route), Additionall~SIA also operated joint cargo s e r v . ~ ~ w ith B ritish A irw ays,KlM and Lufthansa, among others . SIA had entered a part-nership with SAS th at a llowed jo int m ark eting o f a.1 '\!~ wearg oserv ice b etw een C openhagen and Sing ap ore. SIA also formedan a llia nc e w ith Aerolineas Argen~~ '~!o offer one of thecheap est rou nd-the-w orld eco nomy fares for a trip via theSouth Pacific. .O n 20 June 1997, Sin gap ore A irlines, A ir N ew Z ealan d,A isett A u stralia and A nsett International announced plansfor the formation of the Asia Pacific region's biggest interna-tional alliance. With a com bined fleet of 223 aiicraft, the en-larged netw ork of the airline partners w ould cover 200 citiesin 47 countries. The South-Pacific alliance also p lanned tointroduce new 'around the w orld ', 'around the Pacific ' and'around Asia' travel packages.Besides air and c arg o c oo pe r- tive arrangements, SIAw as one of the pioneering m em bers r ; : . r th e group that createdAbacus, th e Asian Comput eriz ed Re se rv at ion System. Realiz-ing'that, by itself, it did not have the critical mass, SIA en-liste d e ig ht p artn ers in clu din g Cathay P a,lfk , C hin a A I rlin es,


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DragonAir, Malaysian Airlines, Philippine Airlines, RoyalBrunei Airlines, SIA's SilkAir and WorldSpan Global navel'Information Services to form Abacus. Additionally, in linewith the growing importance' of frequent flier programs inretaining and rewarding loyal customers, SIA together withMalaysian Airlines and Cathay Pacific set up Passages, a fre-quent flier reward program jointly administered by the three

>'. alliance partners. Indoing so, SIA was able toshare the highcosts and administrative overheads incurred in running aviable frequent flier ptfgtra~.

THE STAR ALUANCE ATTRACTIONDespite market talk of the impending break-up of the GlobalExcellence Alliance inOctober 1997, Swissair reported that itwas discussing with SIA how to broaden their code-sharing,~rrangement. The code-sharing agreement would allow SIAand Swissair to share flight codes and sell each other's tick-ets. Swissair 's Chief Executive Mr. Bruggisser commentedthat while losing Singapore Airlihes as a partner would notaffect its corporate results, it preferred to stay with SlA.2Lufthansa announced on November 21, 1997 that itwas setting up its regional office in Singapore to oversee itsentire operations in the Asia Pacific. The Singapore officewouJd coordinate it s operations, including marketing andsales and services C W T e n U y being performed by it s regionaloffices in Tokyo, New Delhi, Hong Kong and Bangkok.Lufthansa already had a cargo and maintenance division inSingapore, and the setting upol a regional office in Singaporewould help to consolidate it s operadons and give it the flex-ibility to expand cargo operations in the future."Soon after, on November 25, 1997, SIA announced thatit had dissolved its eight-year, three-way alliance withSwissair and Delta Airlines and teamed up with Lufthansa ina bilateral alliance to boost its international competitiveness.Dr. Cheong Choon Koong, SlA's deputy chairman and chief.executive officer admitted that the Global Excellence Alliancewith Swissair and Delta had not provided the benefits itwanted and the three partners were parting ways amicably.He emphasized that the newly formed alliance between1Aand Lufthansa was purely a bilateral cooperation and nota decision to join Lufthansa's six-airline Star Alliance. The


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SlAtS ALLIANCES: rus 'STAR' AITRACI10N 69primary objective was to strengthen theSingapore-Frankfurtroute as the premier trunk route between Europe and South-east Asia. Other benefits of the bilateral alliance includedcode sharing on flights on the Singapore-Frankfurt route andon services beyond both hubs; joint frequent flyer programsand benefits; access to both carriers' airport lounges for quali-fied members: ticketing and service assistance worldwide atoffices of both airlines; and improved siting of airport facili-ties in both Frankfurt and Singapore to reduce transit times.s. SlA's alliance with Lufthansa came hot on the heels ofthe trilateral alliance with Air New Zealand and Ansettearlier in 1997and raised the question of whether SIA wouldeventually join Lufthansa's six-airline Star Alliance with ThaiAirways, Lufthansa, United Airlines, Air Canada, SAS andVarig. Joining the Star Alliance would not only extend SIA'sglobal market reach and help it to cut costs by pooling re-sources with partner airlines but also provide it with a com-petitive safety net against other large alliances that, may b efotmed in the future Additionally, SIA's customers would'also benefit by being part of the Star Alliance network in theform of reciprocal lounge privileges, better scheduling,convenient ticket purchase, check-in and boarding, improvedaccess to affordable shares and improved customer ser -ke.Despite these benefits of being part of a global alliance, SIAneeded to be concerned about the t""1r ~h_:tioncosts innegotiating and maintaining multiple alliances, schedulecoordination and operational problems, and the cannibaliza ..tion of business on certain sectors, for example those servedby SIA and Thai Airways in Asia . Additionally th e lack ofconsistency in service delivery of any of the Star Alliancemembers could have a negative effect on SIA's strongbrand positioning.

As of December 1997; there was already talk in aviationcircles of the likelihood of at least two large alliances beingformed by the end of this decade. One such global alliancewould be led by British Airways and American Airlines andthe other would be led by Northwest and KLM. Globalalliance networks such as the Star Alliance made strategicand operational sense since they offered major benefits toboth parmer airlines and their customers. How.ever, despitethe chanoes in the airline alliance landscape that favoredthe f?rmation of large global alliances, when asked toconunent, SIA's deputy chairman and chiel executive officer,


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SIA Alliances