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NOVEMBER 17, 2000 VOL. 26 NO. 45 | SEARCH ASIAWEEK

After the Crash
Good crisis management and a fine reputation can save SIA
By ASSIF SHAMEEN Singapore

Singapore Airlines was flying high. At an Oct. 27 briefing for fund managers, stockmarket analysts and journalists, canned applause periodically greeted CEO Cheong Choong Kong as he announced dazzling figures for the six months to September 2000. SIA earned $647 million, up 93% from the same period last year, including $250 million in exceptional gains from the listing of two subsidiaries. Applause. Expenses rose 13% to $2.3 billion on the back of a 58% increase in fuel costs, but revenues grew 15% to $2.8 billion. Prolonged applause. Passenger loads improved three percentage points to 77.8%. Yes! "On the traffic and revenue side, we remain fairly optimistic," said an upbeat Cheong, an amateur actor and former mathematics professor who was named managing director of SIA in 1984.

Four days later, a somber Cheong was apologizing to the families of the 82 people who died when Flight SQ006 bound from Taipei to Los Angeles plowed into debris on an out-of-service runway and burst into flames. "There is no point in concealing anything," he said. "They are our pilots. It was our aircraft. It should not have been on that runway. We fully accept our responsibility to our passengers, our crew and their families." Now, as Cheong and his executives pick up the pieces, many fund managers, stock analysts and investors are asking: How much damage has the crash done to Asia's premier airline?

Thanks to textbook crisis management, not much. "It's true that SIA's untarnished record now has a blemish on it," says Kevin O'Connor, a regional airline analyst for Deutsche Bank in Hong Kong. "However, this is still one of the world's largest and most profitable airlines. Until last week, SIA had the best safety record in the world. My guess is that the airline would bounce back fairly quickly." Adds Sydney-based Peter Harbison, who heads the regional airline consultancy Center for Asia-Pacific Aviation: "Partly because we all quickly forget accidents and partly because people need to fly, the impact on the bottom line is fairly limited, unless the airline has a history of problems."

SIA does have a history — sort of. In 1997, a plane operated by wholly-owned subsidiary Silk Air crashed in Indonesia, killing everyone aboard. The investigation, which dragged on for years, has yet to produce a final report, although interim findings did not exclude pilot suicide, a possibility that the airline had sought to exclude. After much soul-searching, Silk Air increased its compensation offer to the families of the 104 victims from $75,000 each to $140,000.

Unlike far too many companies, SIA learned important lessons from its subsidiary's mistakes. In New Zealand for a business meeting on Oct. 31, Cheong was awakened in the middle of the night. Within hours, he was supervising a crisis-management strategy aimed at minimizing the damage to SIA's reputation. He flew to Taipei and met grieving relatives and a media hungry for answers — at least partially because an airline spokesman in Los Angeles had erroneously claimed in the hours just after the accident that there had been no fatalities.

SIA initially denied that the aircraft was on the wrong runway. But as soon as Taiwan authorities declared categorically that it was, Cheong admitted that the pilot of the Boeing 747-400 had indeed taken a fatal wrong turn. His emotional mea culpa was applauded by almost everyone in Singapore. Senior Minister Lee Kuan Yew said the country and its flag-carrier should learn from the disaster. "We can be demoralized or we can say, 'Let's overcome, let's press on,'" he said. "Make sure it doesn't happen again."

The airline also moved quickly to show its compassion for the families of the victims. Soon after the Oct. 31 crash, the carrier released $25,000 to each family of the deceased for emergency expenses. Later, it offered an additional $400,000 to the kin, far above the maximum of $75,000 in compensation recommended by the Warsaw Convention, which governs the liability of airlines arising from accidents. SIA also offered to reimburse the medical bills of the injured and pay them compensation based on the extent of their injuries.

But while the apology and generous payments made sense from a public relations standpoint, they may leave SIA vulnerable to very expensive liability lawsuits. The courts can set aside the compensation cap under the Warsaw Convention if the victims can prove that the airline was willfully negligent. Some legal experts say they can file charges in the U.S., since SQ006 was flying there. In August, a U.S. court awarded $11 million in compensation to a survivor of an American Airlines crash.

Mindful of the legal implications, Cheong did not exclude the possibility that other factors could have contributed to the accident. "There are questions we ought to ask," he said. "How could any trained professional pilot get onto wrong runway, much less a pilot with many years of experience?" The Taipei airport had closed the equipment-strewn runway that Flight SQ006 tried to use. Investigators are trying to determine whether some of the runway lights were left on, which could have given the impression that it was open.

Financially, SIA can afford to pay even $11-million awards. The Boeing jumbo was insured for $1.75 billion, and the company has a cash hoard of more than $1 billion. But lawsuits can drag on for years, which could cancel out the airline's efforts to make the flying public forget the accident. "The one thing that can keep a negative halo around an airline is bickering by relatives over compensation packages or lawsuits," says Harbison. "Lengthy lawsuits keep reminding the world of the crash long after it should have been forgotten." Some families are reportedly demanding more than $1 million.

And even if the civil suits are settled, a Taiwan investigator hinted that other charges might be filed against the crew for negligence. Flight SQ006's captain, first officer and co-pilot, who were virtually unscathed, have remained in Taipei and are being interviewed by SIA and Taiwan investigators. A lengthy, high profile trial could also delay the restoration of the airline's once spotless reputation.

The stock market may have already discounted the damage to Singapore Airlines. Its share price, which had been soaring because of the stellar financial results, fell from $10 on Oct. 31 to $9.10 on Nov. 6. But by November 8, the stock had rebounded somewhat to $9.43. "A study of listed U.S. airlines after crashes shows that one accident has very little, if any, impact on passenger volumes or share prices beyond the first few weeks," says Deutsche Bank's O'Connor.

And investors continue to be impressed by SIA's expansionist mode — it recently bought 49% of Britain's Virgin Atlantic and 25% of Air New Zealand, which in turn owns Australia's No. 2 carrier Ansett. Wendy Wong, a regional airline analyst for Merrill Lynch in Hong Kong, praises SIA's crisis management. "I don't think the Taipei crash has dented its image at all," she says. "People are seeing it for what it is — a one-off accident." As long as the crash of SQ006 remains a unique event, SIA will continue to soar.

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