External Analysis

External Analysis

In analyzing the general environment of Singapore Airline Limited (SIA), PEST Framework is used. It is important to understand the key drivers of change on these factors and the differential impact of these external influences have on particular industries of interest . As going to a narrower sense, Porter's Five Forces is to evaluate SIA's competitive strength and its position in the aviation industry.

1. PEST Framework

1.1 Political

Airline Industry is controlled by agreements and policies. In general, International Air Transport Association (IATA) sets guidelines and regulations, in the area of activities such as airline and aircraft operations, cargo, and safety and security , for the industry.

In particular, the Civil Aviation Authority of Singapore (CAAS) and the Singapore Government mainly regulate the airline industry in Singapore. CAAS ensures that the airlines adhere to the rules of civil aviation. And, being the national airline of Singapore, 55.81% share of SIA is held by the Singapore Government in 2011, through Temasek Holdings . Despite this, the Government refrains from intervening in its operations and has opened up Singapore skies to other carriers without giving SIA any preferential treatment . The first signing of "Open skies" Agreement, between Singapore and Unites States, marked the deregulation of industry in 1990. Under the agreement, involved countries are granted to have unrestricted flight access. However, for the sake of SIA, Singapore Government still contributes to stable workforce, wages and salaries to reduce cost.

Furthermore, terrorism caused massive economic losses for airline industry. After the 11 September tragedy, 20% of the scheduled US airline flights were cancelled compared to only 2% in previous year and the passenger load factor was down to 56% from 66.6% in 2000 .The strikes are unpredictable and airlines can do nothing but building strong contingency plans for such occurrences in to their risk management policies.

1.2 Economic

Volatility of oil prices threats the airline industry. From the annual report of SIA 2010/2011, Jet fuel accounts for approximately 35% of total expenditure for the group (See Appendix 1). Fuel costs excluding hedging has increased by 24.1%, as average jet fuel prices surged 26.3% in the year 2010/2011 . Oil prices are expected to rise due to the increasing demand for oil and the political turmoil in the Middle East. Thus, operating costs of SIA also increases, and in turns, having an adverse impact on its profitability.

The world's economy is recovering from the financial crisis, followed by the rapid growth in Asia, travellers and exporters are crowding Asian airports again . Also, the grand opening of Lion City's