Strategic Issues for China Airlines - Example

Strategic Issues for China Airlines Summary Although China Airlines (CAL), the flag carrier and oldest airline of Taiwan, has had a woeful history of safety problems and poor financial performance, recent years have seen great improvements in the airline’s operations and revenues. The timing for these improvements is excellent, coming as they do in a period in which the Asian air travel market is growing rapidly. Of course, this rapid growth in the market presents a number of challenges; much of the new service is being handled by a growing number of low-cost carriers, which presents formidable competition for airlines like CAL. In addition, the problematic political situation between Taiwan and Mainland China has reduced CAL’s opportunities to take advantage of the huge Chinese market. Recommendations for the airline going forward include positioning itself as an efficiency- and service-leader, while maximising the geographical advantage of having a hub in Taipei. Word Count: 2,039 List of Abbreviations ASK Available Seat Kilometer CAL China Airlines FSA Full-service airline LCC Low-cost carrier PRC People’s Republic of China (Mainland China) Introduction This report assesses the circumstances and strategic opportunities for China Airlines (CAL), the flag carrier and largest airline of Taiwan. In the first section, the Asian air market, which is the most successful and fastest-growing market in the world, is analysed by means of a Five Forces analysis. In the second section, a SWOT analysis of China Airlines is presented to describe and assess the airline’s current situation and its prospects for future success. Finally, some recommendations for CAL’s strategic orientation and planning are offered in the concluding section. 1. The State of the Asian Airline Industry In contrast to the rest of the world, Asia was less affected by the financial crisis which began in 2008 and has an overall healthy and growing economy (Bellman, 2011; Wassener, 2011). This has led to increased income and opportunities for travel for millions of people, and explosive growth in the Asian airline industry. This section summarises the competitive forces faced by airlines in the Asian market. Five Forces Analysis of the Asian Airline Market To best illustrate the market circumstances with which CAL and other Asian must contend, a Five Forces analysis of the threats of substitution and new entrants, the bargaining power of customers and suppliers, and the intensity of competition is helpful. A graphical illustration of the Five Forces in provided in the Appendix. Threat of Substitutions – LOW: In terms of substitutions for air travel, there are none. Travel by rail is an option in some countries, but even at its best cannot be a real match for air travel in speed between destinations. Threat of New Entrants – HIGH: While substitutes for air travel are rare, substitutes for any particular airline are abundant. In a study published in 2007, industry analyst William Swan explains that the impression the airline industry is consolidating is an illusion created by the dissolution of some well-known airline brands and some big mergers, such as between Delta and Northwest Airlines, or Air France and KLM. While it is true that 40% of the airlines that existed in 1981 had disappeared during the next 20 years, 30% of the world’s available seat kilometres (ASKs) in 2001 were being flown by airlines that did not exist 20 years earlier (Swan, 2007, p. 3). So it would be more appropriate to say that new entrants are not simply a threat, but a reality. New airlines are being created constantly, and nowhere more energetically than in Asia; in some cases, the new entrants are spin-offs created by existing airlines. Australia’s Qantas, for example, announced the formation of two new carriers in August 2011, one a “premium” airline to serve the Asian market, and another as a low-cost carrier (LCC) partnership with Japan Air Lines (Wassener, 2011). The greatest growth, of course, is in the LCC segment, led by airlines such as Malaysia-based AirAsia, and the Philippines’ Cebu Pacific (Bellman, 2011). Bargaining Power of Customers – VERY HIGH: The rapid growth of LCCs in Asia is primarily due to such high demand, but was made possible by the moves towards privatisation and deregulation in the Asian airline industry that followed the pattern established elsewhere in the world from the mid-1990s onward (Hamill, 1993; Bellman, 2011). Fare prices are the biggest factor, and LCCs have a natural edge because they are naturally more efficient than larger FSAs, but only to a point; once a certain level of activity is reached – the exact point differs among the world’s regions – the larger airlines have an edge in cost-effectiveness and efficiency (Barbot, et al., 2008, pp. 273-274). The consequences of all that are that customers have many choices. Small carriers such as AirAsia, which operates as several separate airlines in different countries, can offer competitive choice based solely on fare prices, while FSAs that operate on a truly global scale, such as Singapore Airlines, can afford to offer both priced-based and enhanced service choices to consumers (Bellman, 2011), leaving airlines like CAL that are neither quite small or large enough at a disadvantage. Bargaining Power of Suppliers – MODERATE: In order to operate successfully, every airline needs aircraft to carry passengers efficiently, and airports at which to collect and deliver those passengers. In Asia, rapidly-growing demand gives these two suppliers – airports and aircraft manufacturers – a bit of bargaining power over airlines, but within limits. In some parts of Asia, there are too few airports for the number of passengers, which means that the airports can dictate terms to the airlines that use them (Wassener, 2011). On the other hand, as new airports are built, the existing ones will be under pressure to keep their airline patrons, and so cannot be immoderate in imposing fees and conditions. Likewise, aircraft manufacturers are enjoying a period of high demand for their products in Asia; Boeing’s recent commercial market outlook estimates the Asia-Pacific region will need 11,450 new aircraft over the next 20 years (Boeing, 2010). The supplier advantage is moderated, however, by intense competition between Boeing, Airbus – the world’s other large commercial jet manufacturer – and builders of smaller, regional aircraft, such as Bombardier. Airline alliance structures also give the airlines flexibility in fleet management, and reduce the needs for aircraft that operate on a point-to-point schedule (Gudmundsson & Lechner, 2006). Thus the bargaining power of the two key suppliers, airports and aircraft manufacturers, is moderate; they need the airlines as much as the airlines need them. Intensity of Competition – EXTREME: Taken all together, the four forces of customer and supplier bargaining power and the threats of substitutes or new entrants create an extremely competitive environment in the Asian air transport industry. The Asian market presents vast opportunities, and those opportunities are still growing; but there are a large number of aggressive competitors, and the number of competitors is growing as well. These appear to be the circumstances that will characterise the market for some years as well, and so any strategic planning will have to be done with consideration of these factors as the nominal situation. 2. China Airlines: Current Situation and Challenges Faced China Airlines (CAL) is the flag carrier of the Republic of China (Taiwan), and the nation’s oldest airline. CAL and its subsidiary Mandarin Airlines comprise the largest of only three airline companies based in Taiwan. The second-largest concern in EVA Air, whose main hub is at Taiwan Taoyuan International Airport where CAL and Mandarin are also based; EVA’s subsidiary UNI Air operates from the southern city of Kaohsiung. The third and smallest Taiwanese airline is Transasia Airlines, which operates mostly domestic routes and charter flights to Mainland China from its hub at Taipei’s Songshan Airport (Nations Online, 2011). The case study highlighted several critical problems for CAL throughout its history, in particular its poor safety record and a problematic employee culture brought about by the presence of a large number of former Air Force pilots. The political conflict with Mainland China is also a significant factor. The case study details have many of these problems have been successfully addressed up to recent times, mainly through changes in hiring and training practises to improve service and safety, and some easing of the restrictions imposed by Taiwan’s conflict with the PRC. These improvements have allowed CAL to increases its revenues and forecast profitable years going forward from 2010, but many challenges remain. The following SWOT analysis details the circumstances faced by CAL, and is summarised in table form in the Appendix. Strengths: CAL’s attention to safety, training, and hiring issues has greatly improved the airline’s image, and this is reflected by its improved revenues and very good prospects for profitability. In terms of safety and efficiency, CAL has an advantage in that it operates one of the youngest fleets of aircraft in the region (Nations Online, 2011). This lowers maintenance and operating costs, as well as improving safety. Finally, Taiwan is in a good central location for service throughout all of Asia, and allows CAL to make better use of an efficient hub-and-spoke network than many of its competitors (Gudmundsson & Lechner, 2006). Weaknesses: Unfortunately, CAL’s poor safety record in its past is something the airline cannot escape; despite safety improvements in recent years, its past record of problems will be raised if there is another serious incident, and could wipe out the “image capital” it has so carefully saved up. Another weakness mentioned by the case study is the relatively low fare structure compared to most FSAs that CAL uses; this limits the airline’s ability to compete with the growing number of LCCs on even terms. Another persistent weakness is the continuing limitation on CAL’s abilities to access the vast market in Mainland China; although relations have improved, they are far from equal to the relationship airlines from other countries have with the PRC. Opportunities: Of course, the biggest opportunity for CAL is the rapidly-growing Asian market, which provides opportunities in both passenger and cargo service because of the strong economy of the region. And while relations between Taiwan and Mainland China do present some continuing problems, the recent improvements may well be a sign that the attractive Chinese market may become more accessible to CAL in the years to come. Perhaps the biggest opportunity comes from the one the airline has made for itself in improvements that have led to higher revenues and profitable operations; easing financial constraints allows more flexibility in CAL’s strategy and planning. Threats: The most immediate threat to CAL is the rapid growth of low-cost carriers throughout Asia; while CAL does have its own LCC subsidiary in Mandarin Airlines, the sense of the case study and the airline’s current situation is that CAL is definitely in a position of having to react to the LCC threat, rather than being proactive about it and establishing a market advantage. Other threats come from potential unforeseen circumstances, such as a change in worldwide economic conditions that might affect Asian markets, a sudden negative shift in relations with Mainland China, outbreaks of diseases such as avian influenza or SARS that might restrict or discourage travellers, and Taiwan’s typhoon-prone climate, which has already been a factor in CAL accidents in the past. While CAL cannot build a strategy around these unknown potential factors, they are legitimate possibilities for which the airline should have contingency plans. Conclusion & Recommendations This report has examined the Asian air market and the outlook for China Airlines, and in general, the conclusion must be that the opportunities for success outweigh the challenges the airline must face. The Asian air market is growing rapidly, fuelled by regional economies that have been largely unscathed by the worldwide economic downturn, and which have provided millions of people with new opportunities to travel (Wassener, 2011). Much of the Asian air industry’s growth, however, has been in low-cost air travel, with many new LCCs entering the market. This poses the greatest challenge for FSAs like China Airlines, who are not in the best position to compete on price alone, and are not large enough to offer greatly differentiated levels of service with the same efficiency as bigger airlines. The best course to take for China Airlines in view of these conditions would be to continue its recent aggressive improvements in safety, efficiency, and reliability, and to make these a key feature of its brand positioning. On-time schedules and comfortable service in well-handled, relatively new aircraft are features that passengers should be able to expect, but are not as likely to associate with LCCs (Barbot, et al., 2008). Since CAL’s fare structure is already on the low end of the scale for FSAs, and because it has a subsidiary LCC of its own in Mandarin Airways, service quality will be a competitive differentiation that could give CAL an edge, even if it offers slightly higher fares. In addition, CAL should focus on building an efficient hub structure based on its Taipei headquarters, something which the airline is already doing, of course, but in which there is much room for expansion. The hub-and-spoke model is still the most efficient mode for most airline networks (Gudmundsson & Lechner, 2006), and should thus be maximised, particularly in view of the current ‘infrastructure bottleneck’ (Wassener, 2011) in Asia due to too few airports to serve the high passenger demand. References Barbot, C., Costa, A., and Sochirca, E. (2008) “Airlines performance in the new market context: A comparative productivity and efficiency analysis.” Journal of Air Transport Management, 14, pp. 270-274. Bellman, E. (2011) “Competition Takes Off in Asia's Budget-Airline Market.” The Wall Street Journal, 22 July 2011. Retrieved 9 January 2012 from http://online.wsj.com/article/SB10001424052702304567604576453651762471330.html. Boeing. (2010) “Long-term Market: Asia-Pacific.” Boeing Corporation, 2010. Retrieved 9 January 2012 from http://www.boeing.com/commercial/cmo/asia-pacific.html. Gudmundsson, S.V., and Lechner, C. (2006) “Multilateral airline alliances: Balancing strategic constraints and opportunities.” Journal of Air Transport Management, 12, pp. 153-158. Hamill, J. (1993) “Competitive Strategies in the World Airline Industry.” European Management Journal, 11(3), pp. 332-341. Nations Online. (2011) “Major Airlines of Asia.” Nationsonline.org, 2011. Retrieved 10 January 2012 from http://www.nationsonline.org/oneworld/Airlines/airlines_asia.htm. Swan, W. (2007) “Misunderstandings about airline growth.” Journal of Air Transport Management, 13, pp. 3-8. Wassener, B. (2011) “Airlines Race for Slice of Expanding Asia Market.” The New York Times, 16 August 2011. Retrieved 9 January 2012 from http://www.nytimes.com/2011/08/17/business/global/airlines-race-for-slice-of-burgeoning-asia-market.html?_r=1&pagewanted=all. Appendix: Five Forces and SWOT Analyses Five Forces Analysis of Asian Regional Air Transport Market: SWOT Analysis for China Airlines Strengths Weaknesses Attention to safety, training, and hiring has greatly improved CAL’s image. Operates one of the youngest fleets in the region (Nations Online, 2011). Taiwan is in a good central location for service throughout all of Asia. Despite safety improvements, past record of problems will be raised if there is another serious incident. CAL already has a fairly low fare price structure. Still limited in its ability to access the huge market in Mainland China. Opportunities Threats Asian market is growing rapidly. Better relations with PRC may lead to more opportunities and destinations. Profitable operations give CAL strategy and planning flexibility. Worldwide economic conditions still unstable; may yet affect Asia. Rapid growth of LCCs. Unforeseen problems – China’s economy, SARS or bird flu epidemic, political relations with PRC, climate. Read More