Problems at China Airlines

1.0 Identification and Prioritization of Key Issues/ Problems

In 1959, China Airlines Limited (CAL) was the flagship carrier of the Republic of China (ROC). However, it is not completely state-owned. The China Aviation Development Foundation (CADF) had a nearly 54 percent stake in CAL.

Key issues: Poor safety record in the 1990s severely tarnished its brand image besides lowering passenger traffic. Faulty pilot recruitment policies, lax maintenance systems, high cost operational structure, inefficient corporate culture of company added to its troubles. Strained political relations between mainland China and Taiwan prohibited the airline from launching flights to routes in China.

After that, CAL mounting problems prompted it to look for ways to restore its image. The efforts were focused on improving its brand image and regaining consumer confidence. CAL sought to pursue stringent safety norms, increase its maintenance facilities, hire trained experienced pilots from foreign countries and also improve cross-strait relations between Taiwan and mainland China. Finally CAL succeeded to hit their goal by undergone many changes, efforts and initiatives.

2.0 Application of Theory and Critical Analysis

2.1 SWOT Analysis

SWOT analysis is useful for an organization because it provides a good framework for reviewing strategy, position and direction to a business. This is because SWOT analysis involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving company’s objective (Mind Tools Corporate, n.d.).

2.1.1 Strengths

The internal strengths of CAL was initially operate undertook mostly the military contract work. Besides that, in 1968, CAL was declared as the official airlines of Taiwan and start to operating domestic services across the island and at 1969 the airline was enlisted by the International Air transport Association (IATA). CAL built a massive maintenance facility at Chiang Kai Shek Airport and expanded the other areas. Due to rebranding and unveiled a new brand logo, CAL was gaining the landing rights in many cities. In 1996, CAL went in a code-sharing arrangement with American Airlines for trans-Pacific routes.

2.1.2 Weaknesses

CAL has much weakness that cause the airline sales decrease, the most serious problem was the dreadful safety record of the airline which frequents airlines disasters and the pilot errors and poor maintenance procedures. The pilot do not have appropriate training process and bad hiring policies, which most are the ex-air force background of the airline’s pilots. However, the airline crew was also insufficiently trained to handle the emergency situation and also fail to give proper instruction to people. CAL also has the low standard of maintenance and careless regarding the flight simulators and training time of pilots. According to this case, the safety events of CAL in the previous 37 years total happen 12 serious incidents that cause estimates 806 people died.

2.1.3 Opportunities

The joint venture between the CAL entered and the Koos Development Corporation is to form the Mandarin Airlines, the purpose was to escape the diplomatic threat. While, the opening of direct cross strait routes helped the CAL to take advantage of thriving aviation market in China. International passenger and the fright services was the CAL was to concentrate more on it to improve the domestic operations.

2.1.4 Threats

CAL has several threats that was external threats, the United Nations (UN) official accepted communist PRC as Taiwan legal government and the airline’s membership of the ICAO was revoked. The cancellation by the UN cause the CAL lost the international contracts with Japan, Malaysia, and Korea. Besides that, the rail and road services network has been improved on the island make the CAL suffered with it. The relation between mainland China and Taiwan remained strained due to the disagreement regarding the political status of Taiwan. CAL has also faced competition from the China-based Low Cost Carrier (LCC) and at 2001, the terrorist attacks US has hamper the airlines business.

2.2 Business Model

A company’s business model describes the basic means by which it creates value, delivers value to consumers and collects revenue from customers to cover costs and yield an attractive profit (Hamel, 2013). There have two crucial elements of company’s business model which are (1) customer value proposition and (2) profit formula.

2.2.1 Customer Value Proposition

China Airlines enter into alliances with important international airlines to expand its global networks, introduced new routes, expanded cargo business, enhanced in-flight services and develop its maintenances and safety facilities. Besides, it also providing e-services on its website to give convenience to their customers. China Airlines also implemented Dynasty Flyer Program (DFP) to offer members a range of considerate, value added services.

2.2.2 Profit Formula

Revenue Generation: China Airlines uses DFP to encourage returned customers as they can earn each mileage when traveled with CAL or any of its participating partner services. (China Airlines, n.d.). It will directly boost up the sales and thus generates higher sales revenues. Besides, the increase in passenger and cargo services to mainland China helps to push its revenue up. Profit Margin: Most of costs arise from gate rental, repair and maintenances of airplane, insurance and utilities, which are classified as fixed costs. Variable costs include fuel, labor, and others. To increase the profit margin, China Airline introduced new routes and develops its maintenances and safety facilities and others to reduce its fixed cost per route. Once the breakeven volume is reached, CAL’s revenues from additional sales are almost pure profit.

2.3 Best-Cost Provider Strategy

China Airline Limited (CAL) can be regarded as lowest quality airline, yet not the one with lowest cost. Therefore, when they decided to adopted several efforts to revive its image to compete in airline segment, CAL employed a classic best-cost provider strategy. Best-cost provider strategies stake out a middle ground between pursing a low-cost advantage and a differentiation advantage between appealing to the broad market as a whole and a narrow market niche (Thompson, Peteraf, Gamble & Strickland, 2012, p205). In case study, it mentioned while CAL continued with its business model which operated as an FSA by pursuing a different set of strategies to control operational costs and garner profits, it also planned to adopt some characteristics of LCCs to lower operational costs. CAL took the following steps in crafting and implementing its revival strategy: • Procured new aircraft which are safety to fly. In 2007, with only three aircraft types, making it one of the youngest fleet in the world which is only average 5.6 years. In 2008, removed two Being B747-400s and added a new Airbus A330-300 which average fleet age of 6.2 years to make them comparable in performance and safety to other airline.

They believe that reducing the kinds of aircraft it operated can help CAL save cost since there are only four aircraft in total. • Striving to capture all available economies of scale by alliances with important international airlines to expand its global networks, introduced new routes and expanded cargo business in order to eliminate transfer time and reduce operational cost. • Creating differentiation as superior product features by enhancing in-flight customer services and developed higher-quality maintenance compared to before to boost sales. Hence, passengers will be more confidence with the security of aircraft and satisfied with CAL’s services. • Improve supply chain efficiency by introduced a series of e-services on its website and provided two check-in kiosk in Taiwan. This has expressed passengers booking and purchasing process at the same time. Therefore, it can reduce operational cost and quality since workforce is unneeded and human error can be eliminated. • Started employed pilots who had renowned international airlines.

Although this changes may increase CAL operational cost in short term, yet, the cost may decrease in long term. This is because those pilots can reduce fatal events during operations, hence CAL do not need to offer any accident compensation. Therefore, in long tern it will help cost cutting and increase CAL reputation. • Target on value-conscious buyers by appealing extras and functionality at an appealing low or “fair” price. In case study, CAL doing promotion by continued with its Dynasty Flyer Program (DFP) in 1989, and launched the Dynasty Package Program in 2005. Both program offered various value added services to elite members such as providing option of upgrading their booking for a better cabin, enjoyed better amenities, collect mileage points and redeem, convenient option of transferring awards to nominated relatives and friends, six years membership, get latest information and could avail program benefits online.

CAL’s best-cost provider strategy has helped it received the “Best Overall Airlines” and “Best Cargo Airlines” categories in the 2004 Skyliners Awards. From the Airline & Airport Customer Satisfaction Survey, CAL ranked the highes worldwide for its “First Class” service, second runner-up for “Economy Class”, and the “Best Cabin Staff” for both Business and Economy Class. In 2005, CAL registered an increase in revenue of 14.5 percent and 13 percent in passenger and cargo business. As compared to 2004, CAL’s total operational revenue increased by 13 percent in 2005 and reached NT$ 108.6 billion. Insurance fees were also reduced by insurance companies by 45 percent in 2006 which reflect the fact that the airline had been win back trust by its all-round efforts.

3.0 Recommendation and rationale

CAL was not doing well all along, in fact, it have bad reputation, poor management, corrupted company system, and vile company culture before 1990s. Start from the late 1990s, CAL was successful in revamping its image as evident from the fact that passenger traffic increased through the effort undergone ranging from organizational reconstruction to new product and appearance. It had turned its image around and the revival efforts contributed the growth and restored of consumer confidence. The mounting of profit from these successions should be involving aggressive corporate social responsibility (CSR) by creating a socially and environmentally conscious business and donation implement by CAL, not only as an obligation and appreciation to the support of society, but a condolence from the previous losses. This view was supported by Taylor (2012) which stated that by integrating CSR in a business activities, these corporate businesses will enjoy a stronger financial performance and profitability, enhance employee relations, productivity and innovation, improve relations with investors, identify possible new ventures, and build a stronger reputation and branding.

References

China Airlines, n.d., Dynasty Flyer Program, accessed 23/4/2013,
https://calec.china-airlines.com/club/enroll.aspx?lang=e

Hamel, G 2013, The Relationship between Business Model and the Strategy, Demand Media, accessed 23/4/2013, http://smallbusiness.chron.com/relationship-between-business-model-strategy-25963.html

MindTools Corporate, n.d., SWOT Analysis: Discover New Opportunities, Manage and Eliminate Threats, accessed 22/4/2013, http://www.mindtools.com/pages/article/newTMC_05.htm

Taylor, D 2012, Ghana Business: The Importance of Using Corporate Social Responsibility (CSR), Development Wing, accessed 24/4/2013, http://corporatesocialresponsibilitygh.com/?p=36

Thompson, AA, Peteraf, MA, Gamble, JE & Strickland, AJ 2012, Crafting and Executive Strategy, The Quest for Competitive Advantage: Concepts and Cases 18th edition, McGraw-Hill Irwin, New York, USA.

Purkayastha, D, Faheem, H & Samanta, M 2010, Problems at China Airlines, IBS Center for Management Research, India.