Sustainability And Profitability - Air China Cargo Company Limited - Case Study Example

Air China Cargo Company Limited Sustainability and profitability Name Class Unit Table of Contents Table of Contents 2 Introduction 2 Background information Air China Cargo Company Limited 3 Summary of the current situation and analysis 5 Air China cargo revenue analysis 6 Government framework and deregulation of the industry 8 SWOT analysis 9 Strengths 9 Weakness 10 Opportunities 10 Threats 11 PEST analysis 11 Political 11 Economic 11 Social 12 Technological 12 Recommendations 12 References 14 Introduction A lot of firms globally have been working hard to enhance profits while at the same time being sustainable. Based on the convention notion of firm goal, the main aim is to maximise profits through allocating and utilising resources. This meant that corporate resources have been oriented to maximise profits (Kasarda & Green, 2005). Despite this, firms face a challenge of ensuring that they integrate environmental and social concerns with an aim of ensuring sustainability. Airlines globally have been working hard to be sustainable. This is through trying to reduce their ecological footprint while at the same time remaining profitable (Morrell, 2011). This research paper focuses on Air China Cargo Company Limited in their journey to increase profits while at the same time being sustainable. This is through focusing on the various strategies which the firm has employed to augment their market share while at the same time focusing on sustainability and increasing profits. This is based on the current market and economic conditions. The report then gives recommendations to Air China Cargo Company Limited on how to improve their strategies and enhance profits. Background information Air China Cargo Company Limited Air China Cargo Company Limited started in 2003. In 2011, a joint venture project was completed between Air China and Cathay Pacific Airlines. This is a joint venture that led to registered capital of RMB3, 235,294,118. Based on the arrangements, Air China was to hold 51% of the equity interest. An additional registered capital was subscribed in 2014 between air china and Cathay pacific which amounted to RMB2 billion. This was based on the airlines respective shareholding. This led to an increase of Air China Cargo registered capital to RMB5, 235,294,118. The process of registration is still in progress (Air China Limited, 2015). Air China Cargo has been working to ensure that they are sustainable while at the same time meeting the shareholders targets. This can be seen through their efforts where the airline has made massive investment in sustainability. To remain sustainable, the airline has been modernizing their fleet with fuel efficient aircrafts. There has also been employment of new technologies and efficiency standards in the airline to ensure that emissions are reduced (Air China Limited, 2015). It has also been common for the airline to have water recycling programs and research on alternative source of fuels. Although the industry has a long way to go in reducing their carbon footprint, a lot of technological innovations have been made (Morrell, 2011). The new airlines are up to 40% fuel efficient than the older jets. There is also less waste being produced by the jets. According to the airline report, 2015 saw Air China Cargo acquire modern aircrafts. This helped Air China Cargo to phase out some of the old aircrafts. The group has aircrafts which has an average age of 6.11 years. This shows that the airline is committed to a modern fleet which has low environmental impact. The efforts by Air China have made them attain a profit sustainability index of 8.2 as a group. This is due to fact that the Air China Cargo has maintained profits for consecutive years posting above average profit margins (Air China Limited, 2015). Sustainability and profitability continues being a major focus at Air china cargo. This is through aiming at generating higher profits while being sustainable. A lot of firms in the industry have managed to generate billion of dollars by being sustainable (Wang, 2007). Environmental and economic friendly services are air china cargo core values. China has been able to complete their management systems. Through environment protection program, Air China Cargo has been able to reduce their carbon emissions (Air China Limited, 2015). Summary of the current situation and analysis Despite china slowing economic growth, China aviation industry which is the second largest globally has continued to grow. The airline has seen its returns increasing for the 1st quarter of 2015. Air China Cargo had their AFTKs and RFTKs reaching 5,442 million and 2,911 million. This represented an increase of 22.99% and 25.15% compared to the similar period in the past year (Air china Limited, 2015). The cargo increased by 10. % while the cargo and load factor was able to increase by 0.92%. Despite this, Chinese international traffic has remained small component of about 6.8%. This has shown a stagnated growth in the international market. There has been a major challenge in capturing the international market. In the first quartered of 2015. The domestic growth has remained to a healthy growth of about 11%. This growth was also reflected in china air cargo division which saw an increase in both cargo and mail (Air China Limited, 2015). Chinese government has been able to transform the airline industry leading to impressive improvements (Kasarda and Sullivan, 2006). In 1992, the airline had only 16.6 million passengers and the air transport capacity was too low while cargo transport lagged behind. Despite the low volume especially in cargo transport, the airline was able to maintain an upward growth trend to the current status (Chow and Fung, 2009). This is through the government liberalization of the airline industry. The country economic boom has been able to support the air transport industry making it second in passenger traffic. From 1986, the government started to deregulate the airline industry. This helped in boosting the airline development and enhances diversification of investment. With the clients demanding for shorter routes and low fares with high efficiency, there have a rise in competition. The airline industry has seen a rise in call for sustainability (Wang, 2007). Air China cargo revenue analysis Air China Cargo has a fleet with an average age of 9.29 years. Over the first half of 2015, the amount of cargo and mail carried increased by 22.99 and 25.15% (Air china Limited, 2015). The turnover for the china air cargo was RMB4, 392 million which was an increase of 7.59%. The revenue from the cargo and mail transportation was at RMB3, 802 million which represented a 5.41% increase. The profits after tax for the same segment was at RMB108 million. This was an increase compared to same period in the past year where there was a net loss of RMB131 million (Air China Limited, 2015). As at 30th June 2015 As at 30th June 2014 Change Freight tonne kilometres (million) 5,818.22 4,750.37 22.48% Cargo and mail load factor in % 54.41 53.95 0.47 ppt. (in RMB’000) Percentage Amount Percentage Change International Domestic Macau 70.12% 26.48% 3.40% 2,846,681 939,491 166,418 72.02% 23.77% 4.21% 6.44% 21.79% (11.66%) Total 100.00% 3,952,590 100.00% 9.32% Table 1. Air China Cargo revenue (Air China Limited, 2015). In the period of six months, it is clear that Air China Cargo has been able to increase their profits and reduce their costs. It is also clear that the cargo volume has been increased in all three main segments. The total increase in cargo transport for 1st quarter in 2015 was 9.32%. The profits have been able to rise tremendously as compared to the profits in the previous years. The increases in revenue indicated that the firm is moving in the right direction. In each of the geographical regions, there was an increase in revenue. Since the airline started adopting eco friendly practices, there has been a reduction in their expenses and increase in revenue. There has been implementation of environmental protection projects aimed at reducing the carbon footprints. The airline main aim has been to be green while at the same time remaining being competitive (Air China Limited, 2015). In 2015, Air China Cargo embarked on ensuring that their supply chain was sustainable. This is through a supply chain management policy which looked at safety, environment and reduction of carbon foot print. This has involved partnership with hope of sharing knowledge and experience with the partners. Sustainability involves community involvement. For Air China Cargo, community has been a partner in their success. This is through contribution to the community using charities and supporting talent in aviation (Air China Limited, 2015). Air China Cargo has proved that through sustainable development, it is possible to bring happiness and prosperity to the firm (Wang et al., 2014). This can be supported through the firm high profits since they adopted sustainability management. With the airline market segments experiencing growth and fuel and maintenance costs being low, the cargo airline is optimistic for continued high profits. The cargo airline commits itself to giving stakeholders best returns and ensuring that the society benefits from its sustainable business operations (Air China Limited, 2015). Government framework and deregulation of the industry Chinese airport deregulation was carried out in four main stages with an aim of attracting non state actors in the industry (Zhang and Zhang, 2002). The first step which took place from 1980 to 1986 involves opening up policy. It involves both policy and management structure changes. It involved separation of the civil airports from the military and the foundation of the Civil Aviation Administration of China (CAAC). The second deregulation took place in 1986 to 1992. This was based on the airport administration regulation and airport administration was made separate from the civil aviation. The third phase was limited relaxation on airport administration and took place from 1993 to 2001. This led to more diversification of the airport ownership while the central government maintained monopoly. Since 2002, the industry fourth phase involved airport ownership diversification (Lei and O’Connell, 2011). Since 2002, Air China Cargo has been able to benefit from reduction in economic regulation. The government has continued loosening their regulatory control in the industry. There has been liberalization of the airport charges giving the airlines freedom to price their services based on their business nature (Zhang and Zhang, 2002). These are moves that have helped to improve the growth of the airlines such as Air China (Zhang, 2004). The industry is now more open and conducive for investment with a lot of bilateral treaties being signed. Pricing has now become more incentive based rather than earlier cost plus principles which has led to expansion of the airport economic activities (Lei and O’Connell, 2011). The airline industry thus has been greatly transformed through reforms. Air China Cargo has been able to enhance their earnings through use of modern technologies which has made them highly sustainable. In the first half of 2015, the Chinese economy saw a slight growth while the world economy was in recovery. The global aviation industry maintained sustained growth combined with high demand and low prices of fuels (Air china Limited, 2015). Air China Cargo has been able to attain profits through management innovation and capturing opportunities in the market. This has enabled the airline to gain high performance in their cargo transport business (Wang et al., 2014). Cost controls by Air China Cargo have been a major source of leverage. This is through an increased focus on the efficiency and optimizing their capital structure. Through use of FCM, the Air China Cargo has been able to conserve their fuel use. This has also been supported by optimization of flight paths, APU data monitoring and enhanced coverage of the bridge borne equipments (Air china Limited, 2015).Through enhancing the efficiency of the finance costs, the airline has also been able to save a lot of revenues and reduce planned borrowing (Wang, 2007). SWOT analysis Through best practices and total quality management implementation, Air China Cargo has been able to succeed in the market. SWOT analyses helps in analysing Air China Cargo in its environment to determine its strengths, weakness, opportunities and threats. Strengths Air China Cargo is the largest airline in china with a huge traffic volume and assets. Air China Cargo operates in collaboration with Air China airline which has over 20,000 employees with over 2300 pilots and more than 4,520 flight attendants. Air China Cargo has been able to offer the best training to its crew and ensure that they are well trained in their international operations. Over the recent years, the airline has been able to update their fleets and enhance their maintenance expertise. This has given Air China Cargo leverage in cargo transport (Hong and Zhang, 2010). Among the Chinese airlines, Air China Cargo has the most advanced information systems. The airline has also been able to create a good reputation in both international and domestic markets. Through their quality services, the airline has been able to increase the number of frequent flyers and also improve their services. The annual report shows that the airline has been able to have the best performance in the industry (Air China Limited, 2015). In fact, Air China Cargo has been able to operate for consecutive years without making loss. This has been associated with good management practices and sustainable operations (Wang, 2007). Weakness Air China Cargo is operating in a global market which has exposed it to competition from international cargo airlines (Zhang, 2004). There is also high competition in the local market from the small operators. Lack of clarity in the Air China Cargo strategic direction has diluted the airline capabilities. This has also led to confusion in the brand within its market. The airline has also been facing a challenge in maintaining their competitive advantages. This is due to fact that most of their quality services efforts and practices are easily imitated by the competitors. Opportunities China Air has growing at a fast rate than the country’s GDP. This is a trend that is expected to continue. There are high opportunities in adopting modern technologies. This is especially in ICT and modern fleets. With the worldwide deregulations, Air China Cargo has a lot of opportunities to expand their market. There has been an increase in the foreigners’ visits to china. This presents an opportunity for the airline to increase their cargo market share for international passengers. With the Chinese tourism industry expanding, there are high chances of visitors to the country increasing. Tourism is a complementary industry that will help in enhancing the demand for the airline cargo services (Zhang, 2004). Through CAAC regulations, Air China Cargo has high chances for consolidations and optimizing their services. The level of disposable income has been on rise which has influenced customers’ tastes and preferences. This has also made their customers to be less price conscious (Wang, 2007). Threats Air China Cargo faces high and aggressive global completion. This is especially from the leading airlines as well as from domestic players. Foreign cargo airlines have entered the market offering Chinese customers a lot of choices. Trains and buses have been improving their services which have drawn some of the customers from the airlines especially in the domestic market (Morrell, 2011). PEST analysis Political China has been able to liberate their airline industry through deregulation. The airline has been able to benefit a lot from deregulation of the industry. Despite this, the political environment has been able to favour passengers more than the airlines. This is where passenger needs are prioritised leading to strict regulations (Zhang, 2004). Economic Chinese economy has slowed over the past decade. Despite this, the airline industry has been growing at a fast rate. Air China Cargo has shown impressive growth despite the economic situation. The fluctuations in the global oil price and the global slowdown of the economy have impacted the airline industry. There is also high competition on the domestic market from the low cost airlines. Despite this, there have been high demands in the labour market and increasing maintenance costs (Zhang, 2004). Social The emergence of the millennial generations to become customers has led to a lot of social changes. This is especially in service delivery where there has been high demand by the customers (Zhang, 2004). The passenger profile in the airline industry has become more economically minded. Customers’ tastes and preferences have been changing. This has led to need for more technology being incorporated in the airline cargo industry. Online shopping has also increased leading to more demand for airline cargo transport (Morrell, 2011). Technological The airline industry has been facing a lot of competition leading to incorporation of technology into airlines. Adoption of technology is aimed at ensuring sustainability and enhances efficiency (Hong and Zhang, 2010). Air China Cargo has been able to use the latest technology to improve their service delivery. Use of the latest fleet in the airline has lowered fuel consumption and cut the costs of airline operations (Wang et al., 2014). Recommendations The analysis shows that Air China Cargo need to adopt new and fair strategies which fit with the country social economic position. With the technology growing at a very fast pace, the airline has to adopt latest communication systems and equipments. This will allow the airline to survive in the current competition in the market both locally and globally (Chow and Fung, 2009). Modern technology has the ability to reduce the airline fuel consumption and improve efficiency which will lead to high margins. Airlines rely heavily on the ICTs. The airline should continue investing heavily in their ICT infrastructure. Through enhanced adoption of ICT, it will be possible for the airline to improve on service delivery and facilitate friendly interactions. Through technology, it is possible for Air China Cargo to come up with simple processes and procedures which are understandable. This will also give the customers more control on their travel (Hong and Zhang, 2010). There is need for the airline to enhance their investment in sustainable business. This is due to fact that it has been proved sustainability pays. There is a proof that airlines which are highly sustainable have high profits. The airline should consider engaging in sustainable projects which can generate a lot of revenue. This is also in line with the customers’ tastes and preferences where more customers are attracted to sustainable companies. This should include continuous fleet modernisation, use of green energy and investments in environmental conservations (Hong and Zhang, 2010). With the rising air pollution in china, the airline has a role to play in reducing carbon emissions. The airline should come up with carbon reduction targets (Rohde and Muller, 2015). By being sustainable, it will be possible for the airline to enhance their profits. References Air china Limited, 2015. Interim Report 2015, Retrieved 30th September 2016 from, https://et.airchina.com.cn/en/investor_relations/images/financial_info_and_roadshow/ 2015/09/18/FF923AB78A7AFAC512B07AA608FFB38C.pdf Chow, C.K.W. and Fung, M.K.Y., 2009. Efficiencies and scope economies of Chinese airports in moving passengers and cargo. Journal of Air Transport Management, 15(6), pp.324-329. Hong, S. and Zhang, A., 2010. An efficiency study of airlines and air cargo/passenger divisions: a DEA approach. World Review of Intermodal Transportation Research, 3(1-2), pp.137-149. Kasarda, J. D., & Green, J. D. 2005. Air cargo as an economic development engine: A note on opportunities and constraints. Journal of Air Transport Management, 11(6), 459- 462. Kasarda, J.D. and Sullivan, D.L., 2006. Air cargo, liberalization, and economic development. Annals of Air and Space Law, 31, pp.1-26. Lei, Z. and O’Connell, J.F., 2011. The evolving landscape of Chinese aviation policies and impact of a deregulating environment on Chinese carriers. Journal of Transport Geography, 19(4), pp.829-839. Morrell, P.S., 2011. Moving boxes by air: the economics of international air cargo. UK: Ashgate Publishing, Ltd. Rohde, R.A. and Muller, R.A., 2015. Air pollution in China: Mapping of concentrations and sources. PloS one, 10(8), p.e0135749. Wang, K., Fan, X., Fu, X. and Zhou, Y., 2014. Benchmarking the performance of Chinese airlines: An investigation of productivity, yield and cost competitiveness. Journal of Air Transport Management, 38, pp.3-14. Wang, R.T., 2007. Improving service quality using quality function deployment: The air cargo sector of China Airlines. Journal of Air Transport Management, 13(4), pp.221-228. Zhang, A. 2004. Air cargo in mainland China and Hong Kong. UK: Ashgate Publishing Zhang, A. and Zhang, Y., 2002. Issues on liberalization of air cargo services in international aviation. Journal of Air Transport Management, 8(5), pp.275-287. Read More