Enhancing Competitive Abilities for Airline Companies

Case of Air China

Abstract

This study examines the strategic, performance and learning issues confronting the Air China, in the aftermath of the Open Skies agreement between China and the United States. It uses a comparative perspective of United Airlines to examine Air China and the Chinese airline industry in context of ‘open skies’, and in contrast to the wider global airlines industry. This is a questionnaire based study that uses both qualitative and quantitative data but relies more on the latter. The study is limited in its scope and implications primarily due to a small sample size, and the resulting inability to use inferential statistics. The study provides some focused recommendations on strategic thrusts and choices that could augment Air China’s growth and performance as an international player.

Chapter 1: Introduction

1.1 Background

In the year 2008 the aviation industry forecasts show that Air China is the only Chinese airline that is likely to make a profit. Even Air China – the Chinese flagship airline has been underperforming on international routes for some time now. While air travel is increasing on the backs of economic growth and the Olympic Games, fuel prices and competition under the ambits of international agreements like the ‘open skies’ between the US and China seem to have found Chinese airlines on the back foot for the moment. The fast expansion of the Chinese aviation market has seen investment flow in and international parties becoming interested as partners, investors and competitors in the sector. Chinese Airlines have responded with forays such as exploring alliancing, and strategic restructuring to respond to this duality of opportunity and threat.

The open skies agreement in general implies “unrestricted access by any carrier into the sovereign territory of a country without any written agreement specifying capacity, ports of call or schedule of services” (Murali, 2005). Thus, theoretically, when the skies are open, any foreign airline can land any aircraft at any airport, with no restrictions on frequency and seat capacity. The frame of reference for the US China open skies agreement is the central provinces of Anhui, Hunan, Hubei, Jiangxi, Henan, and Shanxi. As per the terms of the agreement they are completely open to US airlines. Being open to the American enterprise means generous funds flow but harnessing this implies capturing the air routes and the passenger traffic. Major US airlines including the United maneuver to do this with their greater experience, resources and air traffic exposure alongside Chinese airlines. The latter have the advantage of being domestic players and thus have the local advantages that come with the same (Ahmed et al, 2006). Coordination and configuration issues also affect highly transnational international airlines in both positive and negative ways (Porter, 1985, 1986). One is by having greater experience of reaching out to new markets and the other is inevitable increasing challenge of synthesis and adjustment as each fresh market is encountered. The domestic flagship carrier Air China also has the advantage of national prestige just like Lufthansa has for Germany and British airways for Great Britain: “Air China is the only airline company which carries the national flag to fly. It has the first rank of brand value among domestic airline companies (the world brand laboratory evaluated it in 2006 as 18.896 billion RMB), and it is among the leading position of air passenger transport, freight transport and related service” (airchina.com, 2008). The advantage shows in it being at least better performing than other domestic airlines.

However, the international experience and resource strength of players like the United Airlines is considerable. United operates more than 3,700 flights a day on United, United Express and Ted SM to more than 210 U.S. domestic and international destinations from its hubs in Los Angeles, San Francisco, Denver, Chicago and Washington, D.C hubs (AsiaTravel.com, 2007). With key global air rights in the Asia-Pacific region, Europe and Latin America, United is one of the largest international carriers based in the United States. United is also a founding member of Star Alliance

With the Star alliance, United is clearly in elite company where international code sharing, passenger traffic movements, innovations, and control of international hubs are the forte of a group of heavily resourced carriers. International alliancing is rather nascent as a strategy in the case of Chinese airlines with Air China having but recently joined the Star Alliance. Furthermore, within the Star Alliance also competition is not nullified among alliance partners. With the squabbling over alliances in domestic market viz. between Air China and China Eastern Airlines, the market seems dangerously susceptible to foreign takeovers unless either performance improves or government takes safety measures through anti-trust clamp down. The trust in a government safety net have often resulted in airlines facing major crisis like for instance, the German carrier Lufthansa in 1990s where a leadership change and strategic turnaround of a seminal nature were required to save it (Mintzberg et al, 2003). With the domestic carriers making a loss even for the flagship carrier Air China it is imperative to make sure that it does not sit easy on its asset of existing brand recognition that stems primarily from carrying the national flag.

It is reported, at present in the Chinese and American aviation routes, the domestic operators is relatively disadvantaged. Neither the passenger transportation nor freight transportation have been able to raise profits and even made losses, the situation being particularly acute in the Chinese context. Low occupancy in flights returning from the United Stated is just one reason among other operational and strategic aspects like fuel prices, customer preferences, quality perceptions, pricing, and alliancing effects, to name a few(ATKearney, 2008). Since the open skies agreement the need to strengthen the Chinese airlines competitive position has been seen as key to both the airline industry and to the validation of the strategic intent of China to successfully globalize its key industries.

1.2 Motivation

The aviation agreement between China and the US signals the intention of the Chinese Government to take on global competition for larger gains. With a five fold increase in airline frequency proposed over six years commencing the onset of the agreement in 2004 it is probably the right juncture to examine the state of the Chinese airline industry in the aftermath of this strategic drive. Air China being the flagship carrier makes for an ideal setting to be examined with a comparative frame of reference of United Airlines of the United States. The agenda is to look at strategies, performance, and impact across a range of indicators to reflect on competitive performance, and issues therein for the Chinese aviation industry. The perspective of the China US agreement is also a case that has implications for other open skies agreements that China has entered into like with the European Union in 2005. The consequences of China’s opening up and joining the World Trade Organization in 2001 are also implied in issues, challenges and performance related reflections that are to stem from this study. The motivation for this study in its chosen research site of Air China, in a comparative reference with united airlines in the main, and under the US-China open skies agreement is thus of great relevance to industry and economic scenario.

1.3 Research Questions

In light of the aforesaid the following research questions will deliver the examination of Chinese Airline industry. This in context of the open skies agreement using the case of Air China in the main, with a comparative reference to United Airlines, and with a view to generate implications for the Chinese aviation industry as a whole.

• What has been Air China’s strategy in light of the open skies agreement?

• What are the issues affecting the performance of Air China in particular and of the Chinese airlines in general, in the aftermath of the open skies agreement?

• What are the issues affecting Air China’s global brand development and recognition?

• What are the lessons that Air China can draw from United Airlines as a sample of what the Chinese airline industry can learn from more experienced international carriers?

The first two research question clearly relates to the examination of Air China’s strategic choices in light of the open skies agreement and how these have resulted in the realized performance. The next question relates to the idea of stretching of the domestically acquired- flagship status based, brand recognition into an internationally acclaimed brand. A key indicator for the same is quality and value that is associated with the brand. The final question is in the domain of lessons learned more-so strategic lessons in the aftermath of the open skies and with a comparative context of more experienced transnational carriers. This completes the loop by looking at learning in context of strategic choices and performance

1.4 Outline of the Dissertation

This dissertation presents a literature review in the next chapter. The chapter takes off by a review the global airline industry, open skies agreement and the airlines under purview with reference to past information and research. This is in addition to and an extension of the background presented here. The literature review then contextualizes extant research – broadly in the areas of strategy, organisation learning and transnational aspects as discussed under the discussion on research questions above. The methodology and approach chapter that follows the literature review moves forward to discuss how the indicators from a synthesis of the literature review are developed into an instrument, and associated, data, sampling, approach and methods in analyses aspects, among other aspects. The findings chapter provide an objective outlay of the analysis from a questionnaire study and then the discussions chapter provides and interpretative discussion on the same. Finally the conclusions reflect back on the aims of the research as operationalised under the research questions to also provide recommendations for strategy and for future research in the area.

Chapter 2: Literature Review

2.1 Global Airline Industry, Open Skies and Air China

The AT Kearney’s (2008) report on the global outlook for the airline industry presents several noteworthy points. It posits that returns are lower than the cost of capital, and that oil prices have caused a dramatic decline in US business conditions with consumer confidence at an all time low since 2001. It further argues that growth looks better in emerging markets like China, tight credit norms are affecting U.S and Europe while excess capacity is a big issue to tackle with efficiency lifts being very critical across the board. In addition the argument for open skies to intensify competition is also driven home. This comprehensive scenario suggests that there is an opportunity for airlines in the growing/emerging markets to usurp dominant international carriers if they pull their act together. The overall crisis scenario has more negatives for the bigger carriers that are outside emerging markets. However, experience, network and resource muscle are keeping them ahead. The Chinese airline market is probably the biggest opportunity to gain fresh turf and revenues given its relative robustness in recent times.

The Chinese flagship carrier ‘Air China’ today is the new generation of what was the “Air China” established on 1988. It has come together as a merger of the erstwhile Air China, National Aviation Company and China Southwest Airlines. With this strategic reshaping event in the aviation history of China that happened in 2002, air China has taken giant leaps in trying to become a globally recognized player in the airlines industry over a short time frame. Its sustained profitability is a matter of pride and a signifier of the potential in and of emerging markets. Despite global downturns in profitability which have been a concern for Air China also, its performance is much better than most other global and all domestic players (Airchina.com, 2008).

The company has strategic targets that indicate its ambitious designs despite its nascent lineage. However, these, that of competitive lead, continuous quality, service and profitability improvements with unique and memorable experiences for customers (Airchina.com, 2008) are but rather generic across airlines and also conjoint agendas. Operationalising this strategy has seen quality impetus that we will discuss later, trying to learn from and network with other airlines, among others. This national carrier of China has joined the Star alliance in 2007 and its cooperation with leading airlines around the globe has seen it expand massively to nearly nine hundred locations around the globe. It has its catch phrases to help keep strategy and performance feedback simple and translatable into new initiatives and improvements. One such aspect is to do with service and is called ‘four hearts- implying reassurance, satisfaction, easiness and sensation’ (Airchina.com, 2008). Other configuration aspects that link with the sales network expansion, working to fine tune the much used frequent flyer tactic, and using supplier and partner networks to improve capacity utilization and efficiency.

It has tried to outdo professional and technical capacities deployed by international airlines, whether it be pilot and staff training, motivating service operations and innovations through awards, and as aforesaid, using symbolic emblems for quality in general that can make the strategic intent transmittable through the organisation at all levels. Branding at a global level has always been a concern worked at audaciously with domestic dominance never being in question (Ahmed et al, 2006; Airchina.com, 2008).

In 2007, Air China reported an increase of about fourteen percent in its operating revenue. The growth in passenger and cargo services fuelled by economic growth and also the impending Olympics seem to have contributed. Managing efficiency to make sure that capacity utilization and efficiency in operations given the fuel crisis deliver to their best might have paid off to some degree. However, rising operating costs have taken hold given the oil price scenario. While hedging has helped counter fuel price impact it is not a stable measure (ATKearney, 2008). The current scenario is not bleak by far – the overtime trends are of concern given the uncertainties that prevail in the aviation market and the intensifying competition under the open skies agreement.

Air China has focused on transfer traffic to increase passenger uptake while opening up steadily on international routes. Nearly thirty five percent of its routes are now international operating across nearly thirty countries. The revenue chunk from domestic operations stills makes the bulk. Having joined the Star Alliance recently Air China has made path breaking improvements in quality, service and has upgraded both its fleet and support infrastructure like under the new terminus at Beijing also hosting the alliance. The operating performance of Air China is markedly higher than other Chinese airlines including Eastern China Airlines. Domestic competition had defeated efforts at alliances here but the climate of uncertainty that has had international airlines pitching for co-operation saw Air China enter the prestigious Star Alliance. The inclusion was also triggered by promise in the emerging markets as aforesaid.

Being the largest carrier in China with over 20000 employees and well trained crew who are more abreast with international service norms and issues holds Air China in good ground when making internationalization efforts. Domestic market is a stable resource mooring for the Airline that seeks to become a globally renowned brand in the industry. It makes for a perfect alliance partner for international majors given that at the onset of the decade China was recorded to have the highest percentage increase in passenger traffic of about 11.50%. US on the other hand had the lowest at -6.30% (Ahmed at al, 2008). Since 9/11 things have finally shaken the slumber in the U.S but fresh crisis of rising fuel prices and capital crunch have nullified the recovery.

2.2 United Airlines: The lineage and Chinese Context

United is one of the oldest airlines. It claims its genesis in W.T. Varney’s airmail operations in the later 1920s. United went with the fortunes of the times whether it be the Wars or the economic boom thereafter which saw rapid expansion on the one hand and monopolistic competition on the other. The 1970s were true crisis times for United as it went through several leadership hands and tried to remain afloat during turbulent economic times. The era of stability thereafter has seen United become the largest employee majority owned company in the world. While this has had positive implications on service quality, it is also not without its downsides. Arguably employee lobbies resulted in factionalism at times but overall the service philosophy due to this ownership has taken great leaps, and the ‘friendly skies’ slogan got replaced with a more ambitious slogan of ‘rising’. This was probably as much aspiration based as it was given deregulation across the World. New economies and markets beckoned with domestic competition being as intense as ever. The 9/11 crisis probably hit the United the hardest. However, with government support, employee cooperation and smart financial management United managed to stay afloat and recover as a strong player in the international market. While it shares the industry downturn of recent times, experience and employee ownership hold it in good grounds to face competition and explore new markets (United.com, 2008).

In March 2008 United Airlines won the duel with other US based airlines like the Continental- to run daily flights between Washington D.C and Beijing. The implications for the United home – the Dulles airport is massive. This includes a boost through employment among other things much needed in the slumping economy. With the Beijing Olympics then just around the corner this meant even more money. Despite the open skies agreement the number of carriers from US in Chinese air space are limited by the government and the routes that open up thus draw fierce competition amongst prospective airlines (asiatravel.com, 2007).

Besides increasing communication, this has special implications for international carriers that are facing the brunt of global oil price rise and uptake of luxury class travel (ATKearney, 2008). The forecast of emerging markets being the place to be discussed before has seen airline industries queue up for the Chinese airspace. The success is not only in winning amongst peers but also by getting a bulk of revenue off Chinese airlines like Air China who have local advantages but when it comes to international travel where the clientele is mixed they have less experience.

The bids draw great political clout that pitch in with one airline or the other. With nearly 90000 people moving between China and Washington the market is serious. Us airlines like Continental, American and Northwest are serious contenders for the overall Chinese air space and are carving out their own niche for instance the connection between Shanghai and New York that continental offers (Asia travel.com, 2007).

The star alliance connection between Air China and United comes to the fore here as this alliance allows United to access more routes around Beijing. Clearly the alliance has a cooperation agenda at the fore but competition remains within alliance partners also. On the one hand they rope in customers based on loyalty points, better cumulative resource strength, and wider route configurations, among others – while on the other they vie for getting more and more alliance passengers as primary to themselves.

2.3 Network effects, Quality and Service Value

Quality drives with an international value paradigm are a key indicator of aspirations to become a globally renowned brand. Network effects like that of prestigious alliances and by virtue of passenger traffic in the area given events such as the Olympics and generally favorable economic climate also augment the potential.

Air China identified key business activities to enhance service quality and by extension value perceptions in customers. These were: “flight service (including off flight), people management (employee satisfaction leading to better customer service); supplier network management; technology adoption and integration; passenger perception management; and customer satisfaction measurement and complaint handling” (Ahmed et al, 2006).

Under these, customizing services for individual customers is considered important. At the same times basic satisfying aspects are to be ensured before specialist and high order services are to be configured. This is in line with the ‘hygiene -motivators’ theory of Frederick Hertzberg (1959). Working to deliver a unique experience through incorporating attractive cultural aspects that are also internationally appealing has also been on the agenda fueling creative insights and challenges in the process. It has not been without innovation meeting efficiency and operational bottleneck for example to stretch customer choices by providing onboard menus that met with some embarrassing failures to keep adequate stock of items. This was reworked with considerable focus on database management to record past preferences. Employee satisfaction and involvement at this stage is pivotal as they are central to service and in the airline business front end employee interface is critical for repeat business and reputation building. The people management agenda at Air China is closely juxtaposed with quality, the role of the manager in tying together people, and productivity and excellence stemming from motivated employees are all key tenets practiced with the adage that performance and quality issues begin at the top (Ahmed et al, 2006).

As far as network effects are concerned the company seeks to establish long term relations with suppliers for stability, assuredness and cost effectiveness. The product life cycle of the key artifact the aircraft also merits such an approach. Improvement needs, maintenance needs and incorporating new technology are connected issues where in-house capabilities are also important. The excellence 2008 programme works to look at technology as a nonhuman aspect and emphasizes the need for connection with people as pivotal in realizing developing capabilities. Processes and initiatives are kept simple for easy of delivery and communication – from the staff and to the customer respectively. The network effects Air China seeks stretch out to the customer through loyalty programmes and horizontally to partners with exchange and amalgamation of routes, loyalty points and information among others (Airchina.com, 2008).

Brand image as a natural and desired culmination of the aforesaid efforts takes number one priority, followed by scheduling which is closely connect with capacity utilization and efficiency. Interestingly pricing is at number six preceded by on and off board services and plane model (Ahmed et al, 2006). Clearly the agenda is to drive on quality first and be realistic about the associated price. This is a model very distinct from low cost short haul airlines and also some airlines in other emerging markets like Russia. This is also a bold step that underlines the agenda for brand recognition through quality and service value with a close perspective on customer needs.

2.4 Organisational Learning: Strategic Choices and Performance feedback

Organisational learning is understood as learning within the organisation and is complimented by the idea of learning by organisations as a distinct concept (Cyert and March, 1963; Senge, 1990). Overall the literature on learning with reference to organisations has a rather expansive lineage that is outside the scope of this study. In context of this study it is important to keep in mind the context that of learning from competitors and partners, learning from the experience of initiatives like those related to quality within the organisation, and learning from past direct and indirect experiences to counter environmental threats. These three issues will be central to the main research site Air China in context of learning. Competitive, growth and recognition aspirations that we have broadly contextualized so far will be of concern

The literature on organisational learning and learning by organisations as distinguished above can be viewed from several lenses. The first is the human development lens which is at the heart of Air China’s people management orientation that drives everything else. The emphasis on simplifying inputs, delivery and adoption are all tied into the concern of this perspective. The individual’s orientation, capacities and motivation to learn are at the core of this lens. Also the stages and enablers that make learning effective are design issues to be implemented and monitored (e.g. Kolb, 1979; Argyris, 1978, 1986, 1992; Talbot and Harrow, 1993; Dixon, 1994).

The management science is essentially about information management. It is important to generate feedback from processes and operations again an important but not central issue. This is because while people management is supposed to motivate this automatically at Air China, the importance of effective processes to say generate employee and customer feedback cannot be ignored (e.g. Huber, 1991; Nonaka and Takeuchi, 1995).

There are other lenses like the one that looks at organisation as a societal being and another that considers organisation from a productivity perspective only as far as learning is concerned (Easterby Smith, 1997). Both have consequences for efficiency and performance but alone do not suffice to deliver the needed learning for sustaining performance (e.g. Pettigrew, 1973; Hedberg, 1981; Talbot and Harrow, 1987; Buzzell and Gale, 1987). Easterby Smith (1997) has generated other perspectives from his extensive review of the growth of body in learning with reference to organisations. These include cultural and strategic lenses that are critical to appreciate given the globalization agenda to hand. The cultural multiplicity within organisations and the areas they operate is juxtaposed with increasing competitiveness as globalization becomes the order of the day for design and configuration of organisations and their goals (e.g. Shibata et al, 1991; Hamel and Prahalad, 1989,1993).

While I explore these lenses here in context of the Chinese aviation industry and Air China in particular it is useful to refer back to the comparative frame of United Airlines being used. The context of learning also becomes important as experiences, the feedback and the realization of this feedback into improvements are not imitable but need to be adapted (Nickerson and Zenger, 2002; McDermott and O’Dell, 2001). With Air China drawing on conventional strategic and tactical threads used in the airline industry to fuel its mindset in this nascent stage of development care should be taken to recognize that it is a different organisation especially when indirect (experience of other airlines) are learned from (Schwab and Miner, 2001; Rogers, 1997).

This is important because learning needs to translate into fine tuning the strategic frame. Choices that work need to be distilled from choices that don’t. However there is the simplicity agenda to contend with here (Miller, 1993). Overtime this implies bracketing and focusing on an industry wide panacea or select aspects which are considered pivotal to performance while others are made dormant. A non-performing element whether it be pricing that takes a back seat to people management may be the cutting edge one is looking for when the aspect of employee management has been honed by all competitors to an extreme. Innovations lie in such dormant aspects and creativity within the organisation needs to be fuelled to encourage bouncing of new ideas outside the confines of what is taken as doing well in the present time (March, 1991; Miller, 1990, 1993).

The globalization agenda makes this even more crucial as performance feedback is subject to more ambiguity than ever before. Outside once domestic arena interpretation of performance is often more difficult and mistakes can be costly. For Air China its bold steps like alliancing, technology and excellence drive that seems to be driven around dominant features of what has worked in the Airline industry may be risky. The learning agenda from United that is decades older than it could be to examine the shocks it faced when threading a similar path rather than what works for it and other more experienced transnational airlines (Mintzberg, 1979)

2.5 The transnational context: Establishing global recognition and competitiveness

Globalization is a phenomenon that most industries and major companies therein choose, strive for and adapt to. On the one hand lies the legacy of domestic or local experience and competencies shaped in that mould, while on the other lies the challenge to customize and adapt this ‘strategic configuration’ to market realities of different international markets (Mintzberg, et al, 1998; Mintzberg, 1979). The multiple subsidiaries and spread across countries creates the need for multidimensional competencies that are flexible. These also come with the principle competency of being able to choose the right mix and leverage it to local realities. The relationship between intermediaries and with the parent /home unit is important resource strength. The perspective of being able to adapt, and at the same time identify with the parent organisation brings to the fore the important aspect of creating a balanced interdependency (Bartlett and Ghoshal 1987). Going trans-national thus needs to be a carefully crafted initiative with the aforesaid issues and a host of variables to be considered. These variables include the economic climate, and industry level variables.

Baden fuller and Stopford (1991) provide a set of considerations that impact on the profitability of a global strategy (figure 1). While these are generic considerations that point that is again emphasized in shaping of this framework is that competing in the transnational market is a very distinct foray than domestic competition. Being a domestically profitable and successful firm will not imply that the same success will be repeated in the international market (Rangan, 2000). The company has to carefully stretch and leverage (Hamel and Prahalad, 1993) its value set and configurations (Prahalad and Hamel, 1990) so as to maintain a balance between the stability of its configuration and at the same time coordinate the diverse subsidiaries to gain maximum synergy and interdependent benefits (Porter, 1986). Air China with its nascent lineage that goes back just two decades, in its present form it being around for only a few years has a lot of lessons to draw on. Its dominance as the domestic player in China has spurred it on but its transnational success is still an early call to make. The importance of being part of the Star alliance brings a novel perspective to going transnational. The interface with more experienced airlines and the trade off of benefits from hosting each other in home countries is mutually beneficial. Alliances are crucial not only given the airline industry needs but also they bring a novel enabling and risk averse perspective to global business. How this tells on competitiveness amongst the partners is also rather unique in the case of the ai