Talk: Achieving Cost Effective Service Excellence - Lessons from Singapore Airlines

6 October 2006 @ IPAM
Speaker: Dr Nitin Pangarkar

The Agenda was

• Difficult Industry economics yet superior performance by SIA
• Key drivers of SIA's performance
• How SIA achieves operational excellence
• How SIA achieves service excellence
• Sustainable competitve advantage

Several interesting strategies employed by the airline were shared:
...frame the mental model ...what qualities to look out for as a Number 1 ...who to benchmark against ...how airline manages cost ...what's the philosophy

Some points shared:

1. There isn't many suppliers of aircrafts in the market, however, the airline sticks to mainly 2 key players in the market - Boeing and Airbus... why? Because of reputation and reliability of these companies? Well, the speaker did not elaborate on this aspect... however, he pointed out that, it eventually has something to do with deployability of pilots, too! Certainly, as he pointed out, the design and therefore the management of the cockpit does not differ much from one model of the plane to another... hence, that enables the airline to deploy its pilots easily.
2. Because it keeps to the 2 key choices, it also means that in terms of maintenance, the airline can easily house spare parts for the plane, hence making it easily available when in need. This is definitely much more cost efficient if one gets a 'range' of aircrafts and therefore having to deal with higher costs in terms of maintenance. Indeed, the speaker gave another illustration: When buying a car, it's much easier to get the spare part of a brand that is popular and common on the road and therefore get the problem more easily rectified as compared to having a car that not much of its spare parts are carried locally, having to fly it all the way into the country - the cost and delay... {the same logic applies to the air business, too...}
3. Indeed, because it carries a young fleet, it has kept its maintenance cost low. Being new, regular maintenance is already factored in, for the first few years of operation. Of course, new planes can save up to 20% of the fuel. Indeed, interestingly... the life-span of any aircraft is around 30! and planes move on to other owners before 'repair maintenance' creeps in, and therefore saves up lots of money on this. What does the 'unanticipated manintenace' cost emcompass? The cost when the air plane is on ground (that's definitely very expensive, not to talk about landing fees alone), and also the cost of flying in the technical personnel/experts and etc - avoiding these penalities can lead to hefty savings!
4. Certainly, having a notable and 'household' brand in the business brings in other advantages such as having better negotiating power in terms of getting and transferring ownership of the aircrafts. One point to note is fleet acquisitions are financed by cash rather than debt... and that certainly makes a huge difference. Of course, it also looks at the timing of acquisitions, that probably generates more returns!
5. Another interesting point of the air-business is: Cost of any unsold seats is unrecoverable - ie. the products are 'perishable' in that sense. For instance, if there are 5 seats unsold, then there's no way to recover the cost (ie. through the ticket price of these seats!), once the plane takes off, it's gone. How about reducing the cost of the tickets? This strategy does not work, especially in a long run! There are budget airlines to compete with. Hence, the best strategy is not to be engage in the competition of price. Hence, other strategies like the Frequent Flyer programme kicks in! Of coures, I guess that's also where the "Star alliance" programme where several airline join hand to provide the inter-connected flight servces. This definitely helps to fill up the remaining seats. Well, the mathematical concept of Operational Research comes in, the airline would have recover its operating costs when x% of the seats are filled, and the rest would be the profit. Isn't it amazing that the airline's breakeven load factor is 70% while its average load factor is 74%?
6. Another interesting point is the landing fees charged by the various airports. Only after talk then realised that Changi Airport charges a much lower rate as compared to Tokyo-Narita and Hongkong airports! So, what has it do with the whole business? Link it to the previous point :D
7. Training/Development is another strategy that they keep the cost of pilots low! Yes, training costs alot... and one thing is, the airline believes in sending the pilots for trained. Of course, the airline has a bigger say in the paycheque in the days the pilots are committed to company.
8. Surprisingly, the cabin crew salaries and allowances are also lower than developed carriers. Of course, the speaker cautioned us it's in comparison to the developed carriers such as BA and UA. He also brought our attention to the make-up of the cabin crew - it's multi-national! So, that's one big cost saver?!

Drivers of Productivity

1. Recruitment - "picky" top managers are involved... and the format is like a simulation - "party" where the various attributes that make a good cabin crew are assessed. But why the top managers? Reason being, to identify the suitably of candidates who may eventually have to serve the 'big shots' in the first and business classes in the flight!
2. Incentives - apart from the basic salary, its allowance is also tied to the company's performance, hence the better the company performs, the more and better incentive one can look forward to.
3. Organisation - teamwork is key, especially the inflight services.
4. Training - Everybody has to undergo training, ongoing.
5. Technology - Big spending on technology to improve overall service; and there is clear customer benefit kept in mind. Technology here goes beyond just ICT (that includes online booking and online check-in service), it includes other improvements such as cabin services (like TV in demand, bigger foot room). Of course, on-going feedback gathering.

Cost-conscious Culture

Profit orientation and cost conscious

• Top management harps on the message "We don't want to be the largest company. We want to be the most profitable"
• From day 1, employees are told that the airline has to swim on its own and it will shut down if it makes losses

Cost-consciousness message is reinforced through actions

• The approach: It saves internally while it spares no effort in bringing up customer services

Service Excellence

• Innovation - continuous, incremental discontinuous
• Implementability of innovations
• Recruitment, training and incentives
• Empowerment for maintaining quality

Operational Excellence

• Holistic perspective - SIA believes in being better in 1% in 100 things than 100% better in one thing - just a little bit better than competitors in everything
• Continuous improvement - Benchmarking against other industries (eg. customer service) & closer monitoring of competitors
• Strong customer orientation - technology for customer's benefit and not for technology's sake