Strategic Management (Lucky Air Case Study)
- 1. LUCKY AIR Submitted by Parth Khurana Roll no.-08317703518
- 2. COMPANY BACKGROUND Lucky Air is a Chinese LCC based in Kunming, Yunnan. Founded in 2004, the carrier operates domestic service with narrow body equipment from its main base at Kunming Changshui International Airport. Lucky Air officially transformed into a LCC in Mar-2016, becoming the first Yunnan-based LCC. The carrier is part of the Hainan Airlines Group.
- 3. FOUNDED JULY 2004 HUBS Kunming International Airport ALLIANCE U-Fly alliance PARENT COMPANY Hainan Airlines group HEADQUARTERS Kunming, Yunnan CHINA KEY PEOPLE Ma Guohua FLEET SIZE 57 DESTINATIONS 62 FOUNDED JULY 2004 PARENT COMPANY HAINAN AIRLINES GROUP HEADQUATERS KUNMING, YUNAN CHINA ALLIANCE U-FLY ALLIANCE KEY PEOPLE MA GUOHUA HUB KUNMING INTERNATIONAL AIRPORT FLEET SIZE 57 DESTINATIONS 62
- 4. WHAT IS LCC? Low cost carrier or low cost airline is an airline which generally have low fares. It is an airline that is operated with an especially high emphasis on minimizing operating costs and without some of the traditional services and amenities provided in the fare, resulting in lower fares and fewer comforts.
- 5. VISION
- 6. MISSION
- 8. PROBLEMS FACED BY LUCKY AIR IN CHINESE MARKET Fuel -China Aviation Oil was the sole fuel supplier for Chinese Airlines and the fuel price was set by the National Development and Reform Commission (NDRC). A small airline like Lucky Air had to pay for its fuel in advance until it proved itself as an established airline, adding to the firm’s financial burdens. Landing fees-The landing fees for major airports were set by the government and had been rising in recent years. Airports in very small cities (less than 1 million inhabitants) did offer much lower landing fees, but there were usually not enough passengers in these cities to make the routes viable. Taxes- Various government taxes laid an additional burden on an airline’s operation – in Lucky Air’s case, anywhere from 2% to 10%. .
- 9. TICKET DISTRIBUTION SYSTEM- Off-line travel agents were the dominant ticket distribution system in China. In this case, Lucky Air and other airlines found that they had to pay a commission ranging from 2% to 15% to the ticket agent. For passengers, the ticket delivery was free and convenient. Moreover, the face time with the agent gave passengers additional reassurance in case questions or issues arose in the future. Such reassurance wasn’t always available to those who bought online.
- 10. E-Commerce in China-Although China’s technology infrastructure had improved rapidly in recent years, the e-commerce sector remained relatively unsophisticated. Transaction security was often poor and payment systems expensive or unavailable, so only 15.8% of Internet users were online buyers and only 25% used online banking service. Credit card penetration in China was less than 4%
- 11. COMPETITORS IN THE MARKET Lucky Air's three top competitors are: China Eastern Airlines, Kunming Airlines (which is owned by Shenzhen Airlines), and the startup company which is one of the new competitors Ruili Airlines. At Kunming Airport Lucky Air is the second-largest airline after the China Eastern airlines
- 12. SWOT ANALYSIS Strength-The company is considered as one of the law cost carriers airlines and has an efficient operational management. 2. The company is considered as one of the most profitable airlines that achieved profitability three years it was founded. 3. Lucky Air has IT operations which leads to efficient operational matters that result in low cost hence having low fare with great values. Strengths of a company is determined from both customer perspective and the company’s financial statements
- 13. Weaknesses: The areas that company needs to strengthen, and needs to work on in order to grow and upgrade their efficiency level. 1.Is to upgrade their services to attract new customers, and to satisfy their loyal customers. Lucky Air like all LCC (Low Cost- carriers) companies practice “unbundling” which means the company cuts all the services they could provide to their customers in order to lower their operational costs. When a company practices unbundling is makes it easy to fly in a very low cost from a distention to another.
- 14. Opportunities: 1. The company has unfilled seats that dominate segments between Yunnan regions such as Dalie and Xishuanbanna. That gives the company the opportunity to grow and expand because Lucky Air has high capacity usage that could be used to expand. 2. Customers are getting attracted to fly LCC to save money, and the LCC is becoming very popular across the world. Where low cost-carriers have become not only a fixture of the travel industry but an essential element of contemporary life. 3. The market and the increasing availability of new and improved aircraft types (such as the Boeing 787 Dreamliner) is an opportunity for the company to upgrade the way it operates, and achieve the highest efficiency level when operating.
- 15. Threats 1.The first and the most important threat the company is facing is the high fuel costs, Fuel costs represent one of the biggest expenses in the airline industry. On average, fuel costs account for “29% of all operating expenses and 27% of the overall airline industry revenue” (Blokhin, 2015). Even if the company tries to save money and cut down from the fuel expenses, it will take time and will not accrue fully because the airline carriers most times sign purchase agreement few years in advance with fuels companies that has a fixed fuel price. 2. Although Lucky Air has not faced a push back from the government, but some of the China government regulation could prevent and restrain the company from entering a region or a country. 3. LCC (Low Cost- Carriers) companies market is growing, and the level of competition is also growing. The services that Lucky Air currently provides for its customers are not enough.
- 16. STRATEGIES ADOPTED BY LUCKY AIR 1. Cost leadership: is an action plan that is developed by the company, to provide services and air tickets at the lowest cost possible. By doing so the company, will achieve its profitability and will provide services at lower than what the company’s competitors can provide. That will help the company attracting more customers and gaining a larger share of its target market. 2. Differentiation- It is an action plan that the company creates in order to provide unique services that customers want or remark as being unique. This action plane is more conceded with customer opinion/needs, this plan is to thrive and look to what is important to the company’s targeted customers.
- 17. 3. Focused strategy, this strategy focuses on finding the customer need, the company could work on finding what their customer needs. When using this focus strategy, the company would need to serve the needs of a “narrow customer segment.” The company needs to find the needs that are not covered by other companies, or the things that other companies don’t provide. 4. Hybrid: is a combination of the mentioned strategies above, where the plan emphasis on providing services with both differentiation and low cost. This strategy will help Lucky Air provide services that are differentiated from what the other airlines provide in the Yunnan region, and those services would be provided at a low cost This strategy is going to help Lucky Air because it is designed to serve the needs of a broad target market. 5.Use of IT and e-commerce- Lucky air has helped itself by gaining an advantage over others by promoting online booking hence helping in cost cutting in form which is to be paid to ground staff and the ticket agent.
- 18. 5 FORCES MODEL OF LUCKY AIR
- 19. Supplier Power The power of suppliers in the airline industry is immense because of the fact that the three inputs that airlines have in terms of fuel, aircraft, and labor are all affected by the external environment. For instance, the price of aviation fuel is subject to the fluctuations in the global market for oil, which can gyrate wildly because of geopolitical and other factors. Similarly, labor is subject to the power of the unions who often bargain and get unreasonable and costly concessions from the airlines. Third, the airline industry needs aircraft either on outright sale or wet lease basis which means that the airlines have to depend on the two biggies, Airbus, and Boeing for their aircraft needs Entry and Exit Barriers The airline industry needs huge capital investment to enter and even when airlines have to exit the sector, they need to write down and absorb many losses. This means that the entry and exit barriers are high for the airline industry. As entry into the airline industry needs a high infusion of capital, not everybody can enter the industry, which in addition, needs sophisticated knowledge and expertise on part of the players, which is a deterrent. The exit barriers are also subject to regulation as regulators Therefore, applying Porter’s Five Forces framework, we find that the airlines pose significant entry and exit barriers, which means that the impact of this dimension is quite high. Intensity of Competitive Rivalry As mentioned in the introduction, the airline industry in the United States is extremely competitive because of a number of reasons which include entry of low cost carriers, the tight regulation of the industry wherein safety become paramount leading to high operating expenses, and the fact that the airlines operate according to a business model that is a bit outdated especially in times of rapid turnover and churn in the industry.
- 20. Buyer Power With the proliferation of online ticketing and distribution systems, fliers no longer have to be at the mercy of the agents and the intermediaries as well the airlines themselves for their ticketing needs. Apart from, the entry of low cost carriers and the resultant price wars has greatly benefited the fliers. Moreover, the tight regulation on the demand side of the airline industry meaning that passengers and fliers have been protected by the regulators means that the balance of power is tipped in their favour. All these factors make the airline industry cede power to the consumers and hence, the power of buyers is moderate to high as per Porter’s Five Forces methodology. Apart from this, the buyers can engage in “price discovery” meaning that price fluctuations do not deter them as they have multiple channels through which they can book their tickets. Threat of Substitutes and Complementarities The airline industry in the China is not at threat from substitutes and complementarities as unlike in the developing world, consumers do not necessarily take the train or the bus for journeys. What this means is that flying is a natural phenomenon for the consumers and hence, the substitutes in terms of the train and bus is minimal in its impact. Of course, many Chinese motor down which means that there is the threat of this substitute. As for complementarities, the provision of services like free Wi-Fi, a la carte meals, and passenger amenities offered by the full service airlines does not really translate into more passengers as in the recent past; fliers have been induced more by lower fares than these aspects.
- 21. MANAGEMENT COMMENTARY OVER FEW YEARS. Lucky Air is now mainly operating scheduled flights from Kunming, the so-called spring city. It is spring here all the year around and you will find the most ethnic minorities where offers natural beauty and a taste of exotic. Three bases, which located in Kunming (KMG), Lijiang (LJG) , Chengdu (CTU), have been established with extensive network routes covering 54 domestic routes in 44 cities, 7 international routes and 1 regional route as of Sep 2015. Through 9-year development, there is more than 1,400 staff working for Lucky Air. With the annual planning of 10 aircrafts introduction and extensive network construction, Lucky air has become a new prominent airline in China. As of Sep 2015, Lucky Air has 27 aircrafts in operation, included 20 Boeing 737NG and 7 Airbus 319/320, enjoying 15.7% of civil aviation market share in Yunnan, which makes Lucky Air the second ranked airline in Yunnan Province. By establishing the brand system and adjusting the brand core value, Lucky Air is exploring a new developing mode of aviation companies.
- 22. Lucky Air currently operates 57 aircraft, according to the CAPA Fleet Database. Lucky Air could more than double (nearly triple) this over the next year by operating up to 70 aircraft at the end of 2020. Some of these aircraft could be wide bodies and Lucky Air hopes to introduce unspecified variants in about three years. LUCKY AIR GROWTH OVER 5 YEARS(2008-14)
- 23. There is much pride in operating wide body aircraft. Only a handful of China’s numerous airlines operate wide body aircraft, but success – financial returns – are highly mixed. It is unlikely Lucky Air in the medium-term could find many international routes that could deliver an annual return. A more pressing matter is getting its narrow body fleet cost structure in order. To move to riskier wide body deployment, Lucky Air first needs narrow body discipline and efficiency. Wide body aircraft are bigger, and so too can be the losses. Lucky Air’s 57 aircraft comprise eight A320 family aircraft and twenty one 737NG aircraft etc. Two different family types and four variants is hardly an efficient fleet for any small airline, let alone a LCC. Lucky Air is not publicly remarking on the future direction of its fleet, but there are likely private plans to bring efficiency.