Critical Evaluation of a Business Analysis: China Southern Airlines - Literature review Example

ASSESSMENT 4: Critical evaluation of a business case: China Southern Airlines By 25 October ASSESSMENT 4: Critical evaluation of a business case: China Southern Airlines Introduction China southern Airlines remain one of the largest airlines in the People’s Republic of China. According to China Southern Airline (2013), the airline began its operations in the year 1991, a time when the Civil Aviation Administration of China (CAAC) underwent a restructuring process. The company has its Headquarters in Baiyun District in Guangdong Province. According to Zhang (1998), the airline underwent a major expansion, which included getting more planes. Following the expansion, airline now has the largest fleet size and, as such, carries the highest number of passengers. This action has made the airline compete effectively in an industry faced with stiff competition. This paper examines the factors that have contributed to China Southern Airlines’ competitive advantage. In addition, the paper looks at how its growth affects other airlines. Overview China Southern Airlines’ Market Share Andrade and Stafford (2013) say that in the year 2000, the Civil Aviation Administration of China declared its intention to merge the 10 airlines it managed into three airline groups. Later CAAC merged the airlines into Air China Airline, China Eastern and the airline under study China Southern (AmCham China News 2004). Following that merging, China Southern has since become one of the three largest carriers in the country (AmCham China News 2004). According to China Southern Airline (2013), Southern Airline serves over 193 destinations in 35 different countries across the globe. The company is a regular in the local market with its main hubs being at Guangzhou Baiyun International Airport and Beijing Capital International Airport just to mention a few. In the year 2012, China Southern Airline (2013) reported that China Southern Airlines carried over 9.1 million local and international passengers which translates to an average load factor of 81%. Such a huge number of passengers carried by the airline clearly show it controls the airline industry in the Asia-Pacific. Competitors Following the merging of the airlines, it remains, therefore, that China Southern has two main competitors i.e. Air China and Eastern China. Air China, a major carrier in the People’s Republic of China, has its headquarters in Shunyi District in Beijing (China Tours n.d.). The airline’s flights are mainly out of Beijing Capital International Airport. According to China Southern Airline (2013), the airline carried an average 51 million local and global passengers in 2012. China Eastern, on the other hand, has its headquarters based at Changning District in Shanghai. The airline’s focus is at Shanghai Pudong and Shanghai Hongqiao international Airport (China Tours n.d.). According to China Southern Airline (2013), China Eastern carried an approximate 73.08 million local and international passengers in 2012. China Southern Airlines’ Competitive Environment Although China’s local market is characteristically oligopolistic, Bijan, Fleming and Mackay, (2010) say that competition especially in the airline industry remains very high. The use of price strategy among other strategies in order to maximize profits is highly pronounced. About the fare sensitivity, Doganis (2006) posits that there is a tendency for price inelasticity especially for business travel. This means that increase in air ticket prices has little impact on the demand. However, there is some price elasticity for visiting friends, relatives travel, and leisure travel. Evaluation Evaluation of the China Southern Airlines’ Competitive Environment This evaluation will be based upon Porters five forces analysis. Porter’s Forces Analysis The five forces model developed by Michael porter is critical in analysing an organization’s competitiveness in the industry. According to Porter (1980), the main areas of focus in this model include threat of new entrants, power of buyers and suppliers, threat of substitutes and competitor rivalry. New Entrants: According to Porter (1985), this relates to the ability of other companies to join the industry. The airline industry is highly capital intensive, and that has made it difficult for new airliners to join. This has effectively left the three airlines to dominate the industry in the People’s Republic of China. Bargaining Power of Buyers: Barone and DeCarlo (2003) say that buyer power concerns the recipient’s services or rather customers. In the Chinese airline industry, the customers’ power is based on the options of travel available. Unfortunately, the dominance of the three airlines means that the prices are relatively static. As indicated earlier, in the business class there is little price elasticity. However, people travelling for leisure and to visit friends have some price elasticity. Substitutes: According to Cornelius (2010), substitutes provide alternative means of transport. In China, the main substitute is the high-speed-railway. Since the inception of the high-speed-railway in 2007, China Southern Airline (2013) says high-speed-railway’s ridership has grown tremendously from 237,000 in 2007 to over 1.33 million in 2012. Following the high speed of the railway, it is likely to replace air travel especially the shorter mileage of airline roots. Rivalry among Competitors: There is intensive rivalry among competitors in China’s airline industry, and this is from the main players i.e. Air China Airline, China Eastern and China Southern. The competition of the different airlines is based on price wars with the different airlines undercutting each other with fare promotions (Stavins 2001). The service the airlines sell (air transport) is relatively uniform with little product differentiation. Even though there are pockets where some airlines have pricing power Stavins (2001) say that the industry is characterised by a significant buyer power arising from the intense price competition among airlines. Power of Suppliers: The suppliers in the airline industry are responsible for the provision of airplanes, labour and fuel. According to Winnie (2002), the main manufacturers of the planes are Boeing, Airbus and McDonnell Douglas. Aviation fuel is a commodity, and the airlines have little influence on its price. The market forces in addition to geopolitical factors usually determine fuel, being a commodity, its price. How China Southern Established Its Competitive Advantage China Southern airlines are currently the leading among other competitors in China. There are many things that the airline has done that have given the company a competitive edge among its rivals. China Southern’s Tangible Resources China Southern has a huge amount of resources at its disposal. According to Lin and Li (2006), the resources contribute immensely to the airline’s competitiveness in the industry. The airline’s tangible resources include large fleets, large capital and many employees among others. Large Capital and many Employees: According to Lin and Li (2006), China Southern Airlines has huge amounts of capital resources. These have enabled the airline to boost its fleet and offer its employees best services. Through its large capital, the company has built an international hub in the southern city of Guangzhou that is one of the world’s best international hubs. The large capital has also enabled the company to launch new direct flights to Moscow in addition to increasing frequencies to cities in Australia, New Zealand and Canada. China Southern Airlines Company Ltd (2014) says the Airline’s new more-efficient long-range jets such as Boeing 787 Dreamliner and Airbus A380 superjumbo have enabled it to raise its frequency to commercially viable routes. In addition, the company’s the airline’s financial stability enables the company to compete favourably especially in terms of its prices. According to China Southern Airline (2013), China Southern sells its tickets at relatively low prices compared to other airlines in the Asian pacific. Having enough work force ensures that the company attends to the needs of its customers efficiently. All these contribute to the airline’s competitive advantage. China Southern Large Fleet: That the company owns a very large fleet of aeroplanes plays a critical role in providing the airline a competitive advantage. According to China Southern Airline (2013), the airline currently has a fleet of 540 aircrafts including its Xiamen Airlines subsidiary, and the company grows at a rate of 10% per year. The large fleet offers the airline many advantages thus an edge over its rivals. For instance, a large fleet has enabled the company to push further into key long-haul markets as the domestic giant increasingly shifts its focus to its international network. All these contribute to the airline’s competitive advantage. The Airline’s Dynamic Resources Teece et al. (1997) describe dynamic capabilities as; embedded in organizational processes, captured in firm routines and directed towards effecting change. China Southern Airline’s dynamic resources include its brand name, trained employees, the company’s ability to innovate, covering a wide area, its ability to embrace different cultures and product differentiation. Brand Name: Over time, China Southern has established itself as the best airline in Asian-Pacific in terms of safety and punctuality; consequently, this has raised its brand image and customer loyalty. According to China Southern Airlines Company Ltd (2014), the airline’s commitment to safety has seen it accumulate over 11.4 million safe flight hours in 23 months since July 2013. This is so far the best flight-safety record ever held by an airline in China. The airline’s commitment to safety has seen it win many awards including the most coveted Five-Star Diamond Flight Safety Award among many others. According to Doganis (2001), these contribute to the company’s reputation as one of the safest airline, not just in China but also on the global map and give the airline a competitive advantage over other airlines. Trained Pilots and Crew Members: China Southern airlines boast of highly trained pilots and crewmembers. It also offers comprehensive training to its pilots and flight attendants. Currently, China Southern Airlines Company Ltd (2014) says the airline boasts over 3000 highly trained and experienced pilots. Most of these pilots get there trained in best schools such as Western Australian Flying College in Australia. Upon completion, the graduates advance their skills in Advanced Cadet Training at Zhuhai Centre. Such comprehensive training for its employees creates core competencies that ensure that the China Southern airline has great competitive advantage over its competitors (Barney, 1995). Different Cultures: Song (2010) says China Southern has made great strides in learning cultures of different people. The fact that the company operates the largest airline fleet in Asia and is the third largest carrier globally has made it necessary for the company to accommodate different cultures. In order to ensure smooth communication between its customers in English-speaking countries such as New Zealand and Australia, the company has hired people from those countries to ease communication challenges. The Airline is also in the process of learning other people’s cultures in its bid to raise its number of customers. According to Song (2010), the airline is among the first in China to introduce an “English First” policy for its entire staff in its attempt to break language barriers. This strategy is particularly important for the airline considering the potential market available in Australia and other English-speaking countries. Wide Area Coverage: Apart from China Southern having many routes in the domestic market, the airline also has many international destinations far more than its competitors do. The implication of this is that the airline can reach customers that its competitors cannot; consequently, this gives the airline an advantage over others in the industry. How China Southern’s Growth Has Impacted Other Airlines in the Region The growth of China Southern Airlines has had impacts on other airlines flying in the Asia-Pacific region. According to Jefferson Rawski and Zeng (1992), growth of China Southern airline has encouraged competition among other airliners as they work towards getting at China Southern airline level. In particular, competition has led to other competitors to adopt new technology and/ or ensuring the efficient use of technology. Tapscott and Ticoll (2010) observes that in China now each carrier has greater incentives to acquire new and more efficient aircraft and to develop efficient computer reservation systems and hub-and-spoke delivering systems. The fact that China Southern Airline has the largest fleet has made other small airlines collaborate in their bid to increase the size of their fleet. According to Chang and Yeh (2012), the growth of China Southern has revolutionised the industry by making other airlines improve the quality of service (in-flight services and meals) they offer to their customers. China Southern Airline’s growth has also seen an increase in competition among the aircrafts increase in terms of flight scheduling, marketing promotions and flight punctuality just to mention a few. The growth of China Southern airlines has also contributed to the expansion of the Asia-Pacific route. This is very important and is one of the factors that contributed to CAAC allowing smaller airlines to fly the routes. Such a move will have a far-reaching impact across all airlines. Recommendations How Other National Airlines Re-Focus To Remain Competitive In order for other national airlines to stay focused and competitive in the industry, they will need to come up with efficient strategies in their operations. Create Partnerships with Established Airlines: A partnership is one of the ways that the airlines might consider. Already Qantas has employed this strategy. According to Andrade and Stafford (2013), Qantas does only seven flights per week from Australia to China whereas China Southern does 47 flights per week to Australia and New Zealand. Following its low number of weekly flights, Qantas airline decided to code share and established a partnership with China Southern Airlines. In this move, China Southern airlines will help in boosting the number of Qantas’ flights and complement Qantas’ current partnership with other airlines such as China Eastern. Aviation Competitive Factors: In order for other airlines to remain competitive, they might want to re-evaluate the various aviation competitive factors including efficiency of asset operation and scale of production and operation. On the efficiency of asset operation, Driver (1999) posits that airlines with high operational efficiency are often able to achieve relatively more production at smaller costs while gaining high returns. Conclusion Other airlines should strive and streamline their operational efficiency since this will lower their costs and thus position them to compete. Regarding the scale of production and operation, the airlines may choose to configure their aircrafts to different with the focus being to achieve economies of scale, as long as the airlines can reach a certain scale. 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