SIAS ALLIANCES: THE STAR ATTRACTION

Prem N Shamdasani*

February 1999

___________________________ *This case was prepared by Prem N Shamdasani, Department of Marketing, National University of Singapore as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative or business situation. The case is based on public and published information. This case was first published in the Asian Case Research Journal. All rights reserved to the author and John Wiley & Sons (Asia) Pte. Ltd.

SIAS ALLIANCES: THE STAR ATTRACTION

Joining an airline alliance will not cure a sick carrier, said SIA chairman S., Dhanabalan when questioned about the wisdom of forming strategic alliances in an interview with The Straits Times on October 19, 1997. Basically, each airline must be viable, competitive and efficient. Putting two weak airlines into an alliance is not going to help.1 Soon after this interview, aviation circles were rife with talk that SIA may abandon its alliance with Swissair and Delta Airlines. Swissair group chief executive Philippe Bruggisser was reported telling a Geneva newspaper that, I dont want to rule out that it could come to a new Lufthansa-Singapore Airlines alliance. In a report published by Bloomberg, Lufthansa chief executive Juergen Weber said he hoped to add two Asian carriers by year-end to the Star Alliance. He declined to name the potential alliance partners but many airline sources believed that SIA was a strong prospect. The Star Alliance, which was established in May 1997, was made up of Lufthansa, Thai Airways, United Airlines, Air Canada, Scandinavias SAS and Varig of Brazil. 2 Bruggisser acknowledged that the partnership with SIA was not working because ties were not deep enough. In late October 1997, SIA chairman Mr. S. Dhanabalan had also echoed similar sentiments where he noted that although SIA was one of the first airlines to enter a tie-up with Swissair and Delta in 1989, it had become more realistic about the potential benefits of an alliance. He pointed out that airlines still preferred to retain their distinct branding and that a cautious approach should be taken in forming alliances despite recent trends which showed this was gaining momentum.

BACKGROUND

The Logic of Airline Alliances As of May 1996, there was a total of 389 airline alliances world-wide. Equity was involved in 62, or 16% of these alliances.3 The nature of these alliance relationships ranged from code sharing arrangements to full-fledged cooperation and complete mergers of ground services and frequent flyer programs. The motivation to form alliances depended on the advantages partners wished to obtain from their cooperation both from an airline service provider and passenger points of view. Advantages to passengers included the ability to travel to a greater number and variety of destinations in a seamless manner on one ticket with convenient connecting flights through harmonization of partner airlines schedules. Additionally, the integration of frequent flier programs and benefits enabled passengers to redeem awards on any of the partners flights. Benefits for partner airlines included the cost savings realized primarily from the capital-intensive services such as the sharing of ground services including baggage handling, check-in, and business lounges. Other operational cost savings could be realized with partner airlines providing each other maintenance, catering services and exchange of personnel in times of need. Additionally, through joint purchasing agreements, the alliances bargaining power vis--vis suppliers would be increased. Generally, proponents of airline alliances believed that the passengers stood to benefit from better service, convenience and improved perks. However, to get the most benefit from alliances, partners needed to make a variety of changes in their organization, strategies and operations. For example, to

benefit from joint purchasing agreements, the equipment bought by the partners (e.g., airplane type, cockpit design, in-flight systems, etc.) had to be similar. Additionally, to extend their reach effectively, partners had to better coordinate their flight schedules. However, there was no guarantee of commercial success for airlines that entered into these alliances. For example, Air France, the airline with the most strategic alliances, 31 according to the Airline Business Survey, was struggling financially. 3

SIAs Alliance Strategy SIAs alliance strategy continued to evolve in response to changes in the competitive environment in the aviation industry. In 1989, SIA entered into a trilateral alliance called the Global Excellence Alliance with Delta Airlines and Swissair to form a global network spanning 300 hundred cities in more than 80 countries. From SIAs point of view, the alliance enabled it to effectively service a greater number of destinations both in the US and Europe. By the end of 1990, the three airlines had created a marketing campaign that highlighted the alliance, the carriers excellent customer service and specific products such as Switzerland skiing packages and vacation packages in both Europe and the US. In June 1995, SIA, Delta Airlines and Swissair set up DSS World Sourcing, a joint purchasing agency equally owned by all three airlines. However, after the formation of the Global Excellence Alliance, all three partners also tied up with other airlines, including competitors. For example, in 1996 Delta had a trans-Atlantic alliance with Air France, a neighbor and strong competitor of its primary alliance partner, Swissair. On the other hand, Swissair had an alliance with Sabena and Austrian Airline, and SIA had code-sharing agreements with

American Airlines (e.g., Singapore-Chicago route) and Austrian Airlines (e.g., Singapore-Vienna route). Additionally, SIA also operated joint cargo services with British Airways, KLM and Lufthansa, among others. SIA had entered a partnership with SAS that allowed joint marketing of an all-cargo service between Copenhagen and Singapore. SIA also formed an alliance with Aerolineas Argentinas to offer one of the cheapest round-the-world economy fares for a trip via the South Pacific. On 20 June 1997, Singapore Airlines, Air New Zealand, Ansett Australia and Ansett International announced plans for the formation of the Asia Pacific regions biggest international alliance. With a combined fleet of 223 aircraft, the enlarged network of the airline partners would cover 200 cities in 47 countries. The SouthPacific alliance also planned to introduce new around the world, around the Pacific and around Asia travel packages. Besides air and cargo cooperative arrangements, SIA was one of the pioneering members of the group that created Abacus, the Asian Computerized Reservation System. Realizing that, by itself, it did not have the critical mass, SIA enlisted eight partners including Cathay Pacific, China Airlines, DragonAir, Malaysian Airlines, Philippine Airlines, Royal Brunei Airlines, SIAs SilkAir and WorldSpan Global Travel Information Services to form Abacus. Additionally, in line with the growing importance of frequent flier programs in retaining and rewarding loyal customers, SIA together with Malaysian Airlines and Cathay Pacific set up Passages, a frequent flier reward program jointly administered by the three alliance partners. In doing so, SIA was able to share the high costs and administrative overheads incurred in running a viable frequent flier program.

THE STAR ALLIANCE ATTRACTION

Despite market talks of the impending break-up of the Global Excellence Alliance in October 1997, Swissair reported that it was discussing with SIA how to broaden their code sharing arrangement. The code sharing agreement would allow SIA and Swissair to share flight codes and sell each others tickets. Swissairs Chief Executive Mr. Bruggisser commented that while losing Singapore Airlines as a partner would not affect its corporate results, it preferred to stay with SIA. 2 Lufthansa announced on November 21, 1997 that it was setting up its regional office in Singapore to oversee its entire operations in the Asia-Pacific. The Singapore office would coordinate its operations, including marketing and sales and services currently being performed by its regional offices in Tokyo, New Delhi, Hongkong and Bangkok. Lufthansa already had a cargo and maintenance division in the Singapore, and the setting up a regional office in Singapore would help to consolidate its operations and give it the flexibility to expand cargo operations in the future. 5 Soon after, on November 25, 1997, SIA announced that it had dissolved its eight-year, three-way alliance with Swissair and Delta Airlines and teamed up with Lufthansa in a bilateral alliance to boost its international competitiveness. Dr Cheong Choon Koong, SIAs deputy chairman and chief executive officer admitted that the Global Excellence Alliance with Swissair and Delta had not provided the benefits it wanted and the three partners were parting ways amicably. He emphasized that the newly formed alliance between SIA and Lufthansa was purely a bilateral cooperation and not a decision to join Lufthansas six-airline Star Alliance. The primary objective was to strengthen the Singapore-Frankfurt route as the premier trunk route between Europe and Southeast Asia. Other benefits of the bilateral alliance included code

sharing on flights on the Singapore-Frankfurt route and on services beyond both hubs; joint frequent flyer programs and benefits; access to both carriers airport lounges for qualified members; ticketing and service assistance worldwide at offices of both airlines; and improved siting of airport facilities in both Frankfurt and Singapore to reduce transit times. 6 SIAs alliance with Lufthansa came hot on the heels of the trilateral alliance with Air New Zealand and Australias Ansett earlier in 1997 and raised the question of whether SIA would eventually join Lufthansas six-airline Star Alliance with Thai Airways, Lufthansa, United Airlines, Air Canada, SAS and Varig. Joining the Star Alliance would not only extend SIAs global market reach and help it to cut costs by pooling resources with partner airlines but also provide it with a competitive safetynet against other large alliances that may be formed in the future. Additionally, SIAs customers would also benefit by being part of the Star alliance network in the form reciprocal lounge privileges, better scheduling, convenient ticket purchase, check-in and boarding, improved access to affordable shares and improved customer service. Despite these benefits of being part of a global alliance, SIA needed to be concerned about the transaction costs in negotiating and maintaining multiple alliances, schedule coordination and operational problems, and the cannibalization of business on certain sectors, for example those served by SIA and Thai Airways in Asia. Additionally, the lack of consistency in service delivery of any of the Star Alliance members could have a negative effect on SIAs strong brand positioning. As of December 1997, there was already talk in aviation circles of the likelihood of at least 2 large alliances being formed by the end of this decade. One such global alliance would be led by British Airways and American Airlines and the other would be led by Northwest and KLM. Global alliance networks such as the Star

Alliance made strategic and operational sense since they offered major benefits to both partner airlines and their customers. However, despite the changes in the airline alliance landscape that favored the formation of large global alliances, when asked to comment, SIAs deputy chairman and chief executive officer, Dr. Cheong refused to be drawn on the issue of joining the Star Alliance. 6

ENDNOTES 1. The Straits Times 1997. Tie-ups wont help sick carriers. October 19. 2. The Straits Times 1997. SIA mum on whether it will dump Swissair for Lufthansa. October 27. 3. National Aviation Press Club of Australia 1996. Global Aviation Trends. Speech by Dr. Cheong Choong Kong, Deputy Chairman & CEO of SIA. December 3. Http://www.singaporeair.com/corpinfo/press/aug0498.htm 4. The Straits Times 1997. Lufthansa will open new regional office here by year-end. November 21. 5. The Straits Times 1997. SIA opts for Lufthansa, ending 8-year pact with Swissair, Delta. November 25.

Case Discussion Questions 1. What are the benefits of forming strategic alliances for airlines and their customers? 2. Why did SIA dissolve its alliance with Swissair and forge a new alliance with Lufthansa? 3. What are the strategic and operational considerations for SIA joining the Star Alliance? Why is SIA reluctant to join the larger Star Alliance?