Air China’s SWOT Analysis and Strategic advantages in the Chinese market
Abstract
Air
China Ltd. is one of the largest carriers in the People’s Republic of China.
They are a very well-known airline. In the airline industry, there is a lot of
rivalry among different carriers. Air China Ltd. was a recipient of the 2017
“Most Popular Chinese Airline.” (Air
China Ltd, 2017) Air China has been increasing routes domestically and
internationally connecting China to the rest of the world. This study is to
analyze Air China Ltd.’s business and strategic position in the airline
industry. Air China strives to become a world-class airline and has created
strategies such as expanding routes due to the growing number of Chinese
travelers, joining the Star Alliance to better serve its loyal customers as
well as subsidiary divisions of smaller airlines to boost revenue. The study
will conduct a SWOT analysis, strengths such as its massive route expansion,
and the Star Alliance, and financial ratios. Weaknesses are negative reviews
from passengers, as well as racial profiling will be covered along with financial
ratios of the company. Opportunities such as growing Chinese travelers will
create an opportunity for Air China to target them and create more routes, as
well as bilateral trades with the United States. Threats such as flight delays
and unruly passengers negatively affect the airline, lastly, terrorist attacks
have been a problem causing fewer people to travel due to the sense of
security. The Chinese market is very competitive as Air China faces competition
with local Chinese carriers China Eastern Airlines and China Southern. The
airline has the better market share in its own hub airport of Beijing, but
other airports and international destinations other airlines have the higher
market share. Although it is tough, a huge carrier well known to the world will
strive to become one of the best Chinese carriers in the world.
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Introduction
Traveling outside of China for Chinese citizens twenty years ago were limited to the wealthy elite, and government officials, as today the Chinese airline market is growing tremendously. According to the Civil Aviation Administration of China, there is a total of 487 million domestic and international flights made in 2016. (Pham, 2017) China has a large population of 1.4 billion, and China is expected to surpass the U.S. in the airline market by 2030. (Pham, 2017) Air China is one of the main carriers in the People’s Republic of China. Air China has successfully expanded their market to connect to the rest of the world and maximizing their profit by taking advantage of China’s growing population of travelers. This is a strategic advantage in the Chinese market, and internationally. It is crucial for Air China to maximize its opportunities and minimize its threats in the airline industry, and finally, understand the strengths and weaknesses of Air China. Understanding these factors will not only make Air China one of the best airlines in the world, it will improve their strategic management.
Air China Ltd was founded in 1988. The company was known as Air China International Corporation. In October 2002, China’s central government implemented a reform plan, which caused the airlines at that time to merge. Air China International and China Southwest Airlines merged. On September 30, 2004, the company was rebranded as Air China Limited. (Air China Ltd., 2017) Soon the airline company became a publicly traded stock in Hong Kong’s Stock Exchange as well as London’s. (Air China Ltd., 2017) Air China is in the People’s Republic of China (PRC) and its major hub is in Beijing Capital International Airport. On December 15, 2004, Air China signed an agreement to become part of the Star Alliance, one of the largest airline network in the world. Air China is “China’s only national carrier.” They are the only carrier in China designated to transport the President and high-level government officials to visit other countries. (Air China Ltd., 2017) Air China currently provides its air transportation services to 39 countries and regions, with 66 international cities, 3 regional cities, and 115 domestic cities. With the help of Star Alliance, Air China expands to 1,307 destinations in 191 countries. (Air China Ltd., 2017)
Purpose
The purpose of this study is to conduct a SWOT analysis of Air China Ltd. This will determine the strategic advantages the airline has in the airline industry and provide suggestions to improve the company.
Specific Objectives
This study will go over these specific objectives.
Examine the strengths and
weaknesses of Air ChinaIdentify the
opportunities and threats of Air ChinaContributions Air China
made to improve the Chinese airline market Comparison of Air China
and its competitors in China
SWOT Analysis – (S)trengths
Air China’s massive route expansion
Air China is an international airline, it must
open routes to get its name out to the outside world. Air China has done a
great job at expanding routes to the United States, Europe, Oceania, and many
parts of the world. As stated on the Air China website, the airline provides
services to 1,330 airports in 193 countries (Air China Ltd., 2017) The mission
of Air China is to connect China to the world. The hub is Air China is Beijing
International Airport. Air China has created routes from bigger Chinese cities
such as Shenzhen, Chengdu, and Shanghai. On December 11th, 2017 Air
China announced its first transpacific route from the Southern city of Shenzhen
to the U.S city of Seattle-Tacoma. (Air China Expands, 2017) Another flight
mentioned Air China will start service from Chengdu International airport to
London in May 2018. These are ways Air China is striving to bring more Chinese
passengers to more international countries, as well as foreigners to visit
China from the comfort of their own airport.
(Cantle, 2018) According to La Croix and Wolff (1995), the expansion of
air transportation is extremely important and will benefit Asia’s export
economy. In the case of Air China, not only bringing passengers to
international countries, the expansion of routes will also help the transport
of goods for sale to another country. This had really changed the Chinese
airline market as goods are traded through the Chinese market with other
countries.
Airline Alliance
Air
China is part of the well-known Star Alliance. The Star Alliance is a
partnership between the 28 airlines. The Star Alliance serves 191 countries,
with 1,300 airports served. (Star Alliance, 2018) The total combined total for
current Star Alliance member airlines is a grand total of 164.04 billion U.S
dollars, with annual passengers of 725.51 million. (Star Alliance, 2018) Air
China uses Phoenix Miles. Being a part of the Star Alliance passengers from Air
China can earn mileage points from flying their partner airlines such as United
Airlines, Air Canada. Passengers can utilize priority boarding, exclusive
lounge access and other amenities offered. (Air China, 2018) The advantage of
having the Star Alliance is to expand routes to more destinations. Some
benefits Air China can get out of this is sharing other airlines check-in and
ticketing counters, and sharing lounges, and baggage facilities. (Star
Alliance, 2018) According to Casanueva, Gallego, Castro, & Sancho (2013),
the mobilization of destinations among partner airlines within an alliance has
positive as well as significant influence on the performance of each airline
company. As stated above, having an airline alliance the airline can use their
partner airline’s resources. According to Zou, and Chen (2016) Code sharing is
another strength of alliances. Airlines can use other partners major
hub-and-spoke. With the benefit of taking advantage of hub-and-spokes airlines
can expand globally without using its own resources. Airlines feed traffic
throughout spoke cities to its hub cities, using hub-and-spoke networks
airlines are profiting through connections. An example would be Beijing to Los
Angeles, the passenger will need to transfer to Las Vegas. As United Airlines
is part of the Star Alliance, they can pick up Air China’s passenger and
transfer their bags over to the next flight and utilize that codeshare
agreement. That way both airlines benefit.
Higher profitability ratios than the competition
Air China has higher profitability ratios than its competition China Eastern Airlines and China Southern Airlines. According to Mergent Online Air China has been improving in ROA% where it started off at 1.84% in 2014, and later increased to 3.34% in 2015. Although in 2016 it dropped by 0.24% they came a long way from 1.84% in 2014. In general ROE, and ROI has been increasing over the past 3 years. Air China is one of the largest airline companies in Mainland China, from looking at their financial ratios Air China is a profitable airline.
Higher Asset Management than the competition
According to Mergent Online, Air China is doing well managing its assets than its competition, from examining China Eastern Airlines and China Southern Airlines their asset management is a bit low. Air China is the dominant carrier in Mainland China. An example would be their Cash & Equivalents Turnover, in the year 2014 Air China started off at 8.3, in 2015 at 12.43 then at 2016 it increased to 15.49. It increased a lot. This shows that Air China can quickly turn its cash and equivalents quickly.
SWOT Analysis – (W)eakness
Low rating scores
One
of the weaknesses of Air China is the low rated consumer scores. According to
SkyTrax (n,d), Air China is given a 3-star rating out of 5. The scores were
weighted from categories such as Airport services, Lounge, Onboard product, and
Cabin Crew service. From reviewing the scores on SkyTrax, the airline seems to
fail on the following categories: Staff assistance on arrival given, transfer
service assistance, washroom amenities, selection of wine and beverages, service
and service hospitality, interaction with customers, lastly language skills. A
lot of the issues were related to customer service, a passenger had posted
reviews describing their unpleasant experience inflight regarding the cabin
crew had little to no service on board, and lack of English speaking skills.
According to Chow (2014), customer expectations of the service provider is a
huge factor that will affect customer satisfaction. Customers will often state their dissatisfaction
and share it with the public with social media such as Yelp, TripAdvisor. And
SkyTrax. Having negative reviews will affect prospective customers that may not
fly with the airline due to the poor customer service. According to Wang, Fu,
Zhou (2013), North American airlines strongly rely on passenger service as 90%
of their revenue. The Americans value customer service, airlines such as Delta,
American, Southwest are so successful today. Customer service is a must in any
business if customers are dissatisfied with their experience they will not
return. Air China will need to improve their customer service.
Racism Issue
On
September 2016, on a London bound flight, an in-flight magazine was given out
to passenger’s onboard showcasing information about London and its attractions,
cuisines, culture, and tips while traveling abroad. A CNBC reporter was onboard
that flight, reading a magazine and she stumbled into a very racist tip
regarding areas with large populations of ethnic minorities. (Mullen, Jiang,
2016) The statement was stated that London was a safe place to travel, but
visitors must take extra precautions when visiting areas that are filled with
minorities such as Indians, Pakistanis, and Black people. The airline suggested
visitors not to venture outside alone and suggested females be accompanied by
another person as these ethnic groups are dangerous. According to Diebelius,
Davis, and Newling (2016), the racist statement was interpreted by citizens of
London that their city was a bad place to visit, locations such as London are
very popular destinations among tourists but having a negative statement
towards minorities is unacceptable. This also puts negative tensions against
Air China because this is what they believe in. Citizens of London expressed
thoughts of hate to the Chinese carrier and did not want the carrier to fly to
London. Citizens also vouched to welcome Chinese tourists to areas where there
are a lot of diverse communities with open arms. (Diebelius et Al. 2016) The
article was then posted on the social media platform of Twitter, where a lot of
users expressed hate among the Chinese airline. Air China, apologized to the
public due to an editorial error made by its publishing company and withdrew
all its in-flight magazines. The United Kingdom is a major market area for the
Chinese, as in the year 2015, the increasing number of Chinese visitors rose by
46% to a total number of 270,000 arrivals. (Air China Under Fire, 2016)
Editorial mistakes like this can cause tensions with the United Kingdom and may
want to prevent Chinese tourists from entering their country. This is a major
weakness of Air China, as passengers that rode the airline which was from those
ethnic backgrounds may want to avoid the airline due to the fact they were
identified as “bad people”.
Low-Interest Coverage
Out
of all airlines, Air China has the least in the category interest coverage.
China Eastern Airlines started off in 2014 at 2.41 and then gradually increased
to 956.19 in 2016. That is a substantial increase. China Southern Airlines had
the most among the three from the year 2014 at 2.47 and increasing to 1,216.18
in 2016. That is a huge increase from its competitors, as Air China will need
to work harder on its low-interest coverage.
SWOT Analysis – (O)pportunities
More Chinese travelers
According to Peck (2017), The growing
number of Chinese travelers are increasing every year. Nationals of Mainland
China went on 136.8 trips in 2017. Chinese tourists have spent about $292
billion dollars abroad. They have spent more than the Americans and Europeans
while traveling abroad. (Peck, 2017) As more Chinese travelers are willing to
travel abroad, according to Zhang, Yang, Wang. & Zhang (2013) the Chinese
airline industry experienced tremendous growth. Air Passenger traffic in China
has grown more than 17% during the past 30 years. China is now the second
largest in air transport market since 2005. It is expected within the next 20
years the rate will slowly increase. (Zhang, et al. 2013) China indeed becomes
a major economic powerhouse with large middle-class people that can travel
overseas. (Pan et al. 2016) Since the growing number of Chinese nationals are
increasing Air China will always be in business, as there are customers willing
to travel outside of their country.
China to boost more economic trade with the United States
The
Chinese trading industry is growing incredibly. According to Geng, Sarkis,
& Ulgiati (2016), China is the largest exporter and known as the second
largest importer in the world. China produces a lot of industrial goods used
for buildings, and mechanical and electrical goods as well as high-tech goods.
The USA is known as the world’s largest economy, which is made up by foreign
trades. The gross value of China’s foreign trade in 2001 had increased from
1.32 trillion USD to 8.23 trillion USD in the year 2012. (Geng et al, 2016)
This is an increasing trend as China exports more items over to the USA than
the import items. From the years 1993 to 2008, there was a 300% increase in
trades as shown in the table below. Today, Beijing and the U.S has made an
agreement for more American imports to China. President Xi Jinping and
President Donald Trump created a $350 billion-dollar trade. The U.S will trade
liquefied natural gas to China, which is highly demanded the improvement of
China’s environment, and U.S beef will also be allowed into China thus creating
an end to the 14-year ban of American beef. The U.S will also allow China to
sell its poultry in the U.S. (Delaney, Lu, 2017) Air China has the opportunity
as the largest and the official carrier of China to do these trades through its
cargo company Air China Cargo.
Table 1: Chinese imports and exports to the U.S
Source: Geng, et al. (2016)
SWOT Analysis – (T)hreats
Flight Delays and Unruly Passengers
Chinese
airports are known for the worse delays. According to Bergman (2016), there are
numerous factors that airlines cannot control. First, the Chinese airspace is
regulated by the military, which means there is little space for aircraft to
use the runway to take off. About 30% of airspace can be used by airlines. Massimiliano,
Seddik, & Zhu (2016) analyzed the delay of Chinese airports. The percentage
was broken down as The Civil Aviation Administration of China counts estimated
for 40% of the delays were airlines related due to maintenance issues or
passenger problems, air traffic control counts for 20% as there is a lot of air
carriers arriving and leaving Chinese airports daily. Weather is another factor
which counts for another 20% due to heavy rain, snow, and fog, and lastly,
military exercises count for 10%. The 4 categories listed above, count for 90%
of delays in Chinese airports. (Massimiliano, et al, 2016) Flight delays hurt
the airline’s reputation, it will cost them time, and money. This is not
something they can get back so easily. Delays are uncontrollable as there are
different factors that happen in the airline industry.
Figure 1: Comparison chart of delays Rest of the world
Vs China
Another
uncontrollable factor by the airline is unruly passengers. As the flight takes
off, there can be a bunch of factors that case diversions. Passengers may throw
fits on the aircraft, threatening other passengers on board and flight crew.
According to IATA, in 2016 there was one incident for every 1,425 flights.
Alcohol and drugs can also be the cause of these problems. According to the article
“Stronger Laws for Unruly Passengers” (2014), Unruly passengers are known as a
very small minority, and they can cause serious consequences that can put other
passengers and the flight crew in danger. When a problem occurs in flight, if
the crew feels the passenger is endangering everyone on board, a decision must
be made and divert the plane back to its origin, or to the closest airport.
China is known for its boisterous tourists, a common problem for Chinese and
international airlines. Air China has experienced these problems with unruly
passengers in the past. Flight diversions will cost the airline a lot of money.
Issuing customers vouchers or coupons to use at airport restaurants, hotel
housing, changing flight schedules, and refueling. Table 2 refers to the amount of unruly
passenger on board that affected the flights. As the title shows, according to
IATA (2016), 9,837 incidents were reported. The year that had the most was in
2015, while 2016 it dropped by one.
Figure 2: Reports of unruly passengers
Source: IATA (2016)
Terrorist Attacks
Terrorism
is one of the most concerning threats to all airlines in the industry. It is
very difficult for airlines to prevent these threats. Terrorist has ways to by
pass-through TSA screenings as well using fake identity’s. The enhancement of
security at airports has been improving since the well-known terrorist attack
on September 11th, 2001. This has shocked the entire world as a
group of terrorists planned to hijack aircraft and suicide bombers for one
purpose to destroy America. Air China had not experienced any terrorist attacks
on board, but an airline in China named Tianjin Airlines experienced a
hijacking in 2012. (Qiu, Liu, 2012) According to Hall (2002), the aftermath of
terrorist attacks affects the public, this affects their decision if they would
like to board a plane to travel or not. The psychologic effect is caused by streaming
of media, as fewer people would travel out of their country with the fear of
terrorist hijacking aircrafts and wreaking havoc. According to Oxly (2017),
airline revenue can take a loss of 2.5 billion due to terrorist attacks. The
airline industry cannot control these factors, they are not able to control the
decision made by people. An important issue airline can work on is gathering
intelligence through no-fly lists where passengers are blacklisted due to prior
or past events that occurred in flight or at airports, as well as working
together with TSA and customs officers to prevent shady passengers from
entering the aircraft.
Contributions to the Chinese airline market
One
of the major contributions Air China made to the Chinese airline market was
creating smaller subsidiary airlines to connect throughout the rest of China to
counter its competition. Subsidiary airlines such Air China Cargo, Air Macau,
Shenzhen Airlines, Dalian Airlines, and Beijing Airlines as well as owning
shares with Cathay Pacific Airways and Shandong Airlines. (Air China, 2018) The
goal of Air China is to cover more ground, which most of its business is from
its domestic flights. Air China not only covered more ground in domestically,
it has expanded to 193 countries with affordable tickets than their
competitors. According to Fong (2005) Airfares have fallen since 2003,
state-owned airlines such as Air China are able to discount fares as up to 40%
without consent through the Chinese government. Air China tries to be competitive
in their airline industry, as said earlier with the expansion of its subsidiary
routes they can cover more ground in China, as well as relying on the Star
Alliance to get more recognition through its code-share flights. Beijing
Capital International airport is well-known as the second world’s busiest
airport, Air China has that advantage in its favor due to the fact Beijing is
its major hub where most of its flights take place. Strategic planning and
pricing is a must for Air China.
Air China vs Other Chinese Carriers
Air
China is the largest carrier in the People’s Republic of China. There are a lot
of airlines in Mainland China but will only focus on two of its major
competitors in China. China Eastern Airlines, in Shanghai and China Southern
Airlines in Guangzhou. These are the top 3 carriers in Mainland China. Beijing,
Shanghai, and Guangzhou are huge cities with a large population of people, and
the cities have experienced economic growth. The chart below shows the market
percentage each airline has in their hub city. Air China has the advantage in
their hub at Beijing Capital. Other airlines are reaching 34.2%, Air China may
need to step up to prevent other airlines from catching up to them. On the
competition, China Eastern Airlines hub is in Shanghai which covers Shanghai
Hongqiao and Shanghai Pudong, Air China is weak at 5.6%, and in the territory
of China Southern in Guangzhou Baiyun international airport, Air China is weak
at 6.8%. Other airlines have higher percentages in Shanghai vs Beijing and Guangzhou.
Air China will need to step up and work on their customer service skills
mentioned in the weakness section.
Figure 4: Market Share of
each airline within their hubs
Source: Bloomberg, (2017)
In
the next table below compares Air China, China Southern, China Eastern and
other airlines in international markets outside of China. Air China prevails in
the U.S, European market compared to its counterparts. China Eastern does
better in the Japanese market and China Southern does extremely well in the
Australian market. As shown below, the category “other airlines” in every
market except Australia have higher market shares than the 3 leading Chinese
airlines. According Airlines in China (2017) domestic flight accounted 91.2%,
while international flights accounted for only 8.8% for Chinese airlines in the
year 2016. A forecast was made for 2021 a forecast of 858.9 million passengers
with an increase of 76.8%. China will continue to increase because of the
growing number of passengers. Air China needs to work on perfecting its
customer service, and market to more foreign destinations. The future for
Chinese airlines will be strong.
Figure 5: Chinese airline market shares on
international routes
Key Findings
Due
to the intense competition in the airline industry, it is extremely important
to analyze the strategic advantages of airlines when competing against
competitors. From performing the SWOT analysis on Air China, we are able to
access the strengths, weaknesses, opportunities, and threats for the airline.
According to the strengths of Air China, the massive route expansion has
benefited the Chinese citizens connecting to more cities, as well as connection
to other countries. The Chinese economy is growing, and more Chinese nationals
can afford to travel, as more routes are opened there are more doors to Chinese
travelers. The Star Alliance is also the largest airline alliance in the world
with 28 airlines.
As
Air China is part of this massive airline alliance, passengers of Air China are
able to fly on partner airlines and accumulate mileage and take advantage of
priority check-in, boarding, lounge services, etc. Being an international
airline, in certain countries where the airline has routes too, Air China can
take advantage of partner airline’s check-in counters, lounges, and baggage
facilities. The main benefit is to cut costs and utilize the hub-and-spoke
system to gain more feedthrough airport transits from other airlines.
There
are some weaknesses Air China will need to improve on such as customer service,
by improving employee relations to customers, Air China will do much better
than its competition. The airline industry is highly competitive, Air China
needs to take advantage of its opportunities to minimize its threats to
succeed. In order to become an even better airline, Air China needs to create
and utilize its strategic advantages, to become the most profitable, successful
airline in the world.
Contributions
The contributions of this study were to analyze and discuss the strengths, weaknesses of Air China, and to identify the opportunities and threats for the firm. By performing the SWOT analysis the airline can understand its strength and weaknesses, and opportunities and threats outside of the company. By understanding these factors, the airline can improve its company effectively and financially by maximizing its profits and provide the best service. The key findings of this study will be beneficial to Air China, which will help improve its strategic advantage, to help minimize its weakness and threats to become the best airline in the world.
Suggestions
Air China may not have the best reviews and customer satisfaction on SkyTrax and Tripadvisor, they will need to work on their customer service. Passengers are complaining about the lack of hospitality they are receiving from the cabin crew and their lack of English speaking skills. As this is a problem when traveling, some suggestions would be creating mandatory training classes for everybody, ground staff, cabin crew, and the employees that deal with the passengers. Occasionally, a training course should be implemented to refresh customer service skills. Being a flight attendant, it is important to know the English language, as it is a universal language of the world when traveling to international countries. English courses should be implemented for ground staff and cabin crew about airport operations and inflight.
When referring to the competition of the Chinese airlines, Air China faces two major competitors. China Eastern Airlines and China Southern Airlines. As shown in table 4, Air China is prevailing in its major hub at Beijing Capital International airport, China Eastern, and China Southern remains victorious at their own hubs, as well as other airlines are catching up. In table 6, shows the market share of Air China, China Eastern, and China Southern in areas outside of China. Air China must come back with a strong strategic plan to counter its rivals. Air China has intense competition between the 2 main carriers of China as well as other carriers in the market. A competitive profile matrix should be done to analyze the major strengths and weaknesses of the competition, and what Air China can do to take over the cities in China where the competition is victorious. Lowering airfares can help, as well as improving their customer service inflight for passengers, and improving technology on board such as Wi-Fi, movies, and aircraft design are one of the factors to success. Customer service is extremely important in the airline industry. If nothing is done about improving the customer experience of their passengers, everything will go downhill. Air China has the potential to do well in the airline industry as it is the largest carrier of the People’s Republic of China, the airline will continue to open new routes as well as ways to satisfy its passengers.
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