Problems at China Airlines

Understand the reasons for China Airlines' problems. » Understand how politics could affect the business prospects of an organization. » Analyze the initiatives adopted by China Airlines to restore consumer confidence and bring the company back into profits. » Analyze how China Airlines could benefit from the improvements in cross-strait relations between Taiwan and mainland China. » Explore other ways in which China Airlines can bring the company back into profits.

Strategy Case Study on China Airline Executive summary China Airlines Ltd. (CAL) is a Taiwan-based airline. It was founded in 1959. In the early years, it undertook mostly military contract work. It was then declared as the official airline of Taiwan in 1968. Early on, CAL had a lot of problems including poor safety in 1990s which severely discredited the image, faulty pilot recruitment policies, lax maintenance systems, high cost operational structure, inefficient corporate culture, and strained political relations between China and Taiwan which prohibited the airline from launching flights to route in China. On top of that, the economic crisis caused the company huge loss. However, CAL put remarkable efforts to revive their business to profitibility. This report provides analysis, evaluation, and recommendation for China Airlines. Strategic Difficulties • Outrageous crashes record (safety issue): there were 12 fatal crashes in its history that heavily discredited the image and revenue of CAL. All due to low standard of recruiting and training captain, pilots and crews, wrong policies and low standard of maintenance at the time (cost-cutting in maintenance), and desperate responses to save its image. • Constrain on China and Taiwan relationship: Taiwan’s airlines (flights and cargo) were required to land in Hong Kong or Macau before entering the mainland China, which wasted time and added extra unnecessary costs. Moreover, tourists travelling from China were not allowed to travel to Taiwan individually but only in groups. CAL also was banded from many countries because of its relation with PRC. As a result, Taiwan’s airlines faced huge losses in revenue and the international expansion opportunities. • Low cost airline threat: CAL faced competitions from many Taiwanese carriers and Chinese government-own budget airlines which operated on domestics as well as international routes. • High cost structure: (from exhibit 1) the average cost structure is 84% of the total revenue. Since it had various types of aircraft, it required to stock spare-part accordingly also including training staffs for safety maintenance and operating. Moreover, as the oil price (which contributes to a large part of operating cost) sky rockets, the operating cost increases as well. CAL Revitalization Strategies (The strategies they took to achieve competitive advantages.) CAL is trying to revive the airline business in sustainable ways. • Fleet simplification: It lessened the types of aircrafts in its fleet and fleet renewal. Hence, it has only three aircraft types and it also is one of the youngest fleet in the world. As a result, it decreased the operational cost.

• Continuing its business model: It continued with the Full Service Airline (FSA) model rather than going for Low Cost Carrier (LCC) model. It decided to control operational costs, buy new aircrafts, introduce new routes, expand cargo business, enhance in-flight service, and develop maintenance and safety facilities. All of which resulted in effective controlling cost and sales boost. • Impressive LCC’s characteristics adoption: It launched a series of e-service e.g. product and price information on flights, cargo, and travel packages, online booking, online check-in, and online baggage tracking service. It then started a B2B2C system so travel agencies around the world could issue e-tickets within a few minutes. All were done in order to lower operational cost and to facilitate customers’ needs of convenience. • Further international alliances: It tried to increase numbers of international passengers and destinations so it signed agreement with Saudi Arabia Airlines to connect to Middle East Destinations and it formed a joint venture with Mandarin airline to gain more landing permission in Europe. Later on, it entered into code sharing agreement with many reputational airlines. • Reinventing the organization structure: Due to prevailing culture, it removed some top-level managers and hired a woman chief executive. Also, it reduced hiring pilots with military background. And it started hiring pilots who had worked with international airlines. Above all, the recruitment policies and process were tightened. It started to flying and landing test, including in emergency situations, to their pilots regularly ensuring the highest safety standard. And offered the monitoring guideline to ensure best teaching practice. It then launched “Safety Management System” to achieve zero accident objectives. Moreover, it took severe disciplinary actions. It started an online education system for employees to study up-to-date information and improve their aptitudes. The system also served as a platform for employees to share useful experiences. • Strong promotional efforts: CAL resumed its Dynasty Flyer Program (DFP) and offered various travel packages to its customers. As a result, sales rose despite of the global economic slowdown. • Cost control: As CAL was launching and pursuing many strategies, it always implemented effective cost control in every step. It tried hard to lower the operational cost (not at the expense of its passengers’ safety and its reputation) so it had competitive advantages over its competitors and to improve its brand image. All of which resulted in the increased traffic and revenue despite of some economy downturns. • New look: It introduced new uniform which were fashionable yet traditional, to reflect its corporate image and spirit. It also set up new operation headquarters at the Taoyaun International Airport Airline Operation Center. All of the functions e.g. dispatch center, training center, in-flight service center, flights operation center, and four-star hotel, were integrated into a single location to help improve image, work efficiency, and reduce cost. It added “team spirit” to its existing core values, “safety, discipline, innovation, and service.” SWOT Analysis |Internal Factors | |Strength |Weakness | |•Strong promotional efforts e.g. Dynasty Package Program to attract new |•CAL has diversified businesses under its guard. Not all of these are |

|customers and Dynasty Flyer Program to retain loyal existing customers. |compliment of each other. | |•Strong and wide range of alliances around the world |•"China Airline" brand is regarded as Chinese company not Taiwanese | | |firm. | |•Strong human resources polocies to recruit and train all employees for |•High operational cost and it grows faster than revenue. Thus, |