Singapore airlines balancing act

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T here’s something about Singapore Airlines. Over the past four decades, it has earned a stellar reputation in the fi ercely competitive commercial avia- tion business by providing customers with high-quality service and dominating the business-travel segments. SIA has won the World’s Best Airline award from Condé Nast Traveler 21 out of the 22 times it has been awarded and Skytrax’s Airline of the Year award three times over the past decade.

What’s not so well known is that despite the quality of its services, SIA is also one of the industry’s most cost-effective opera- tors. From 2001 to 2009, its costs per avail- able seat kilometer (ASK) were just 4.58 cents. According to a 2007 International Air Transport Association study, costs for full- service European airlines were 8 to 16 cents, for U.S. airlines 7 to 8 cents, and for Asian airlines 5 to 7 cents. In fact, SIA had lower

costs than most European and American budget carriers, which ranged from 4 to 8 cents and 5 to 6 cents respectively.

It’s intriguing that SIA has combined the supposedly incompatible strategies of diff erentiation—which it pursues through service excellence and continuous innova- tion—and cost leadership. Few enterprises have executed a dual strategy profitably; indeed, management experts such as Mi- chael Porter argue that it’s impossible to do so for a sustained period since dual strate- gies entail contradictory investments and organizational processes. Yet pursuing dual strategies is becoming an imperative. The demand for value-for-money products and services has shot up since the recent reces- sion, particularly in developed countries, so even producers of premium offerings have to fi gure out how to grab opportuni- ties in the middle and the low end of the

Asia’s premier carrier successfully executes a dual strategy: It off ers world-class service and is a cost leader. by Loizos Heracleous and Jochen Wirtz

Singapore Airlines’ Balancing Act

July–August 2010 Harvard Business Review 145

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market. Moreover, multi national corpora- tions face competition from rivals—many of them from emerging markets—that use new technologies and business models to provide good-enough offerings at attrac- tive prices. Incumbents can fi ght back by cutting prices or further differentiating products and services, but it’s often a los- ing battle. Price wars typically hurt leaders more than they do challengers, and re- lentless diff erentiation is tough to sustain. Adopting a dual strategy is often the only choice.

Our research suggests that dual strate- gies are embraced more readily in Asian countries. Many Western executives be- lieve that, for instance, cost leadership and diff erentiation, globalization and localiza- tion, and size and agility are fundamentally contradictory and can’t be reconciled. But SIA and other companies such as Banyan Tree, Haier, Samsung, and Toyota operate as though the dualities are opposites that make up a whole; that is, they comple- ment, instead of contradicting, each other. This way of thinking is embedded in East- ern thought; the concept of yin and yang in Taoist philosophy, for instance, encap- sulates the idea. To be sure, pursuing two strategies will result in organizational par- adoxes, but executives in Asian markets tend to realize that opposing insights pres- ent the full picture and develop policies to manage both of them.

No company executes a dual strategy better than SIA. The airline has delivered healthy financial returns since its found- ing, in 1972, never posting an annual loss. It has almost no debt, and except for its initial capitalization, it has funded growth through retained earnings while consis- tently paying dividends.

We’ve been studying SIA for the past nine years and have found that it executes a dual strategy by managing four para- doxes: providing service excellence cost- eff ectively; innovating in both a centralized and a decentralized manner; being a tech- nology leader and a follower; and achiev- ing standardization and personalization in its processes. SIA’s self-reinforcing system

is diffi cult to imitate, yielding sustainable competitive advantage. As we shall see in the following pages, the dual strategy has become part of the airline’s organizational DNA over the years.

Achieving Service Excellence Cost-Eff ectively SIA has two main assets—planes and peo- ple—and it manages them so that its ser- vice is better than rivals’ and its costs are lower. Unlike other airlines, SIA ensures that its fl eet is always young. For instance, in 2009, its aircraft were 74 months old, on average—less than half the industry aver- age of 160 months. This triggers a virtuous cycle: Because mechanical failures are rare, fewer takeoffs are delayed, more arriv- als are on time, and fewer flights are can- celed. New planes are more fuel efficient and need less repair and maintenance: In 2008, repairs accounted for 4% of SIA’s to- tal costs compared with 5.9% for United Air Lines and 4.8% for American Airlines. SIA’s aircraft spend less time in hangars—which means more time in the air: 13 hours, on average, per day versus the industry aver- age of 11.3 hours. And, of course, customers like newer planes better.