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Moving China’s Air Transport Industry in a New Direction
Group COctober 1, 2015
INDUSTRY & HNA | Timeline
CAAC was formed under the direction of National Air Force
1949
1. CAAC was transferred to State Council 2. CAAC emerged as an international airline operator 3. Emergence of few private airlines – Shenzhen & Shanghai Airlines
1980-
1985
1. CAAC reorganization2. Consolidation of airline companies.3. Air China, CSA & CEA
2002
1. CAAC labialized the industry allowing for more privately funded airline to enter the market 2. Okay Airways & Spring Air
2005
1. CAAC tighten the control over the approval of new airlines2. High fuel prices impact the world airline industry
2007-
2008
Open skies agreement with U.S
20080nwards
1988 - 2002
1. Hainan Provincial airline Company2. Listing on Shanghai Stock Exchange3. Acquisition of Chang’an, China Xinhua, Shanxi Airline
2004
Establishment of Grand China Air
2006
1.Acquisition of Hong Kong Airlines & Hong Kong Express Airways 2. Launched Lucky Air
INDUSTRY | Overview
The Structures in Chinese Aviation Industry in 2008 • Highly regulated by the government
• Big Three was dominant in domestic market
• China was going to be the world's most desired destination for international tourists
• China was going to be the fourth biggest source of
international tourists by 2020
INDUSTRY | Overview
Segment Number of Aircraft
Revenue
(2007)
Service Offered
(1) National Flagship Carrier(2) Hub in Beijing(3) Best position to grow its international
routes
220 US$7.3 billion
Low Quality
(1)Hub in Guangzhou(2) Domestic route: Served most of the economically developing cities in Southern China
(3) International route: major metropolitan and commercial centers of the world from Amsterdam to Los Angeles to Sydney
332 US$7.9 billion
Low Quality
(1)Hub in Shanghai(2)Domestic route: Business connection between Shanghai with Beijing and the major commercial cities of Guangzhou, Shenzhen and Hong Kong
(3)International routes : East and Southeast Asia and key cities in Europe, U.S., and Australia
208 US$6.07 billion
Low Quality
(1)Domestic route: Serve underdeveloped area and avoid competition with Big three. e.g.) Haikou, Beijing, Xi’an, Taiyuan, Guangzhou, Ningbo,
(2) International route: “spoke” cities, From Beijing to Brüssels, Berlin, Dubai, Seattle etc..
80 US1.9 billion
High Quality
Industry | Ecosystem Mapping
• suppliers• Customers• competitors• Intermediaries• Publics
ANALYSIS | Internal Environment
Objective
Management
Human Resource
Brand Equity
Financial factors
Technological Capabilities
Yes YES
YES NO
YES NO
YES NO
Yes (Not very high) Yes (Low)
Yes (Not very high) No
LOCAL GLOBAL
ANALYSIS | External Environment-Porter’s 5 Forces
(1) CAAC has strong control
(2) Private airlines emerge- Shenzhen and Shanghai Airlines
(3) The government has gradually liberalized industry
New Entrant -High
(1)Low to Medium for domestic route. Substitutes - cars, bus, trains
(2)Low for international route
Substitute - Low
(1)High Price and Service Sensitivity
(2)Low Switching Cost
Customers -High
(1)The government monopolizes CNAF and controls fuel price
(2) Boeing and Airbus form almost duopoly
Suppliers - High
Competitors
1) Highly regulated market2) Few players but most of them are state owned3) Few private players4) In future market competitiveness will increase
ANALYSIS | External Environment-PEST Analysis
• China’s GDP is growing at 8-10%• FDI inflow is huge around USD
50 billion• Purchasing power in urban areas
including tier 2 and tier 3 cities is growing
Economic
Political• Highly Regulated Aviation sector• Big 3 airlines dominating the industry
are state owned• Provincial governments are eager to
help private players• Government is opening up market
slowly
Socio-cultural• Companies need to take social steps
to strengthen their status• Tourism is going up and
international crowd is coming in., while airline companies are not upgraded to suit different tastes
Demographic• Population is around 2 billion and
growing at a fast rate• High urban migrant population• Expat population in tier 1 & tier 2
cities
Technological• The sector is still dominated
by two main players Boeing & Airbus
• WTO agreement• Open Skies• Pressure from international
community to open up the economy
• Influence in South-East Asia
International
ANALYSIS | Competitive Advantage
• HNA provided better quality airline service that was renowned internationally, and which made it a world class airline
• HNA developed airports and travel services
SERVICE LEADER
• HNA was not competing with Big Three domestically and internationally
• HNA was expanding in 2nd and 3rd tier counties and “spoke” cities developing airports and travel services
STRATEGIC EXPANSION
• HNA worked closely with central and local government officials and demonstrated positive results and growth
• HNA improved China’s economy by depending solely on private and public investment
RELATIONSHIP WITH GOVERNMENT
• HNA had a unique corporate culture that combined both Chinese heritage and western management
CORPORATE CULTURE
• HNA focused on modern management practices
• HNA committed to training its staff in global management, strategy, and service
TRAINING PROGRAMS
ANALYSIS | The Issue
International Competition Rising Cost Government
ANALYSIS | Recommendation
❏ Develop connectivity of more provinces, tier 2 and tier 3, avoiding big 3, by getting government support and increase new routes
❏ Keep the social aspect going
❏ The HNA group companies are complementing each other. Only aircraft maintenance and catering are not a part of it and these can be considered to keep HNA Group even more vertically integrated.
❏ Focus on differentiating from Big Three through quality and capture the incoming international population. Upgrade the service quality to fight the competition that will come after Open skies and other liberalization agreements.
❏ Expand charter flights division. number of MNCs and epats increasing.
❏ Alliance with international carriers for domestic transfers in china and vice versa for International strategy
❏ Brand equity is medium in Southeast Asia. Try to increase the dominance by increasing more routes. Acquisition of small players can be an option.
ANALYSIS | Recommendation