Sia Airline Business

Introduction

This essay seeks to provide an opinion on whether SIA should gain control of Tiger Airways to gain competitive advantage, in relation to SIA’s recent decision to increase its stake in Tiger from 44% to 56%. Competitive advantage can be briefly defined as an advantage that a company has over its competitors to generate greater sales and or retain more customers. Hence, does SIA have a competitive advantage in the arena? Certainly yes, and this can be easily justified from its strong financial position, in flight service innovations, awards and accreditations that it has received over the years. In order to understand whether having a controlling stake in Tiger Airways, a short haul budget airline, will allow SIA to sustain its existing competitive advantage, and or increase this advantage, an analysis will be done on what would likely be the impact of the deal. Two main areas identified are synergetic benefits and management control. Please also note that the scope of the essay will be limited to SIA’s passenger airline business.

Synergetic Benefits

SIA airline business can be broadly classified into long, medium and short haul. Within medium and short haul, it is further classified into premium and budget which are operated by different airlines within its portfolio (fig.1). Despite some routes that overlap, Tiger is still primarily focused on short haul services while Scoot is targeted at providing medium haul services in the budget service space. The controlling stake in Tiger would allow SIA to have the flexibility to unlock revenue enhancement and cost reduction synergies. [pic 1]

Revenue Enhancement can be achieved through integration of traffic for both Tiger and Scoot through cross-selling and code sharing. This is supported by SIA’s CEO Mr Goh Choon Phong speech in the fy14Q3 financial results briefing. Mr Goh recognized that connecting traffic between the two is less than 5% and that poised a huge revenue increment potential. Success in the strategy is evident from similar partnership in its premium service business between SIA and Silkair which have, since 2010, increased the connecting traffic by 60%.

Cost Reduction. After the stake increment, SIA would be parent company of Tiger which then gives it larger autonomy to integrate services of both companies to enjoy economies of scale thus reducing cost. Some examples would be maintenance, reduction of overlapping routes, ticketing database system and back office manpower.  

Does the synergies translate into competitive advantage? Yes, and it is evident from Porter’s business-level strategies. SIA’s strategy will place it in the integrated cost leadership and differentiation segment. The increase in connecting traffic between Scoot and Tiger creates value by providing more options and convenience for consumers which then increase its chance to retain and attract customers thus increasing profits.  By integrating homogenous services and operations, the value chain is reconfigured to provide a cost advantage which will increase its’ bottom line.