Lucky Air has managed to be a different and unique from the other airline companies, where Lucky Air did not just adapt the key components of the southwest airlines, it also managed to reduce its maintenance and operational costs by using the single type of aircraft and offering one-way seat class only with no entrainment. In 2007 Lucky Air had 5 Boeing 737-700 airplanes, each airplane had 148 seats. In the same year, Lucky Air flew 1.2 million passengers and had the total of 17,875 flight hour with a load factor of 81.4% compared to the load factor of to 2006 that was 74.7% (CAPA, 2010).
Lucky Air operates mostly in the Yunnan region, and the region is considered as one of China’s “most popular domestic tourist destinations” (Transportation – China, 2008). Lucky Air based its routes on the tourist destinations within Yunnan province, such as Dalie and Xishuanbanna in order to capture the growing tourist market. By doing so the company had a significant growth in the number of tourists. The number of expected new customer arrivals was predicted to increase from 21 million to over 24 million Between 2007 and 2008. In the early months of 2008, Lucky Air slowly added new flights to the company’s regular destinations. The company started to expand its flights by assigning flights out of its region, these new routes represented 87 of its 150 weekly flights.
In 2006, the company attracted 500,000 passengers and had a total of 5,746 flight hours with a load factor of 74.7%. After only one year the progress of the company was shown in the company’s financial statements, the company grew, from having an operating revenue, worth US$31.2 million to having an operating revenue of US$104.3 million. The company’s revenue didn’t just double it was more than tripled, and that helped Lucky Air achieve profitability in just three years after it was founded. (Yunnan Lucky Air financial statements).
Lucky Air operated mostly in secondary cities and by doing so the company has avoided overcrowding and achieved to reduce its landing costs. By operating in secondary cities, the company has also differenced itself from the low-cost airlines in both the United States and Europe. Due to government-imposed constraints Lucky Air’s cost structure was about only about 5% lower than the industry average, Where the low-cost airlines companies in the west achieve about 30% roughly cost advantage.
The government regulations had a big influence on the company’s operating cost and its cost components. The four largest cost components that Lucky Air are spends on are: fuel, landing fees, aircraft leasing, and taxes. These components represent about 70% of its operating cost, all the mentioned components depend on the government’s power. Although the government regulations do affect the company’s components negatively, but the government provides Lucky Air a limited route license granted by the government. The license is hard to get and not all companies have it, that gives Lucky Air close to a Monopoly status within Yunnan and Dali routes. These routes that have regulations from the government, contributed to Lucky Air most of the company’s profits.
According to OAG and CAPA data Lucky Air “currently has 1.8% share of the domestic seat capacity in China” (CAPA, 2015). Lucky is considered as an LCC by CAPA and OAG, because of that the company’s capacity is currently included along with another five other airlines whom are the company’s competitors. Currently the LCC penetration rate for the Chinese domestic market is approximately 10%.
Lucky Air had carried 5.7 million passengers in 2014, up 21% growth from the number of passengers it had in 2013. The company had added about 990,000 passengers in 2014, that slightly above the 970,000 it added in the previous year 2013. Lucky Air worked on improving and expanding their services, and the company ended the year2014 with 61 routes across 50 destinations. Lucky Air doesn’t stop the growth it had reached in fact the company anticipates “20% annual growth through 2020, but if it is to reach its goal of having 70 aircraft by 2020, annual growth will have to be closer to 30%” (CAPA, 2015). Other Chinese airlines had shown that achieving high growth has to come with SMART (stands for Specific, Measurable, Attainable, Realistic/Relevant and Time Bound) ideas and well-studied strategic plans. (look at appendix d for more detailed information)
On Jan-2015 Lucky Air aircraft had launched a new livery and a new logo for the company, but the new updated branding took time to be released, then company officially released it on Mar-2015. Lucky’s old branding used to follow the company’s owners HNA’s and its branding matrix, according to the carrier “the logo had a red name and stylized object, in this case a bird for Lucky Air”. Lucky Air’s logo has been changed to “depict an old seal featuring its name in Chinese characters while the font script has been refreshed. The “A” in Lucky Air features a stylized cloud.” Although Lucky Air used to look very similar to other HNA carriers, but it was very unique from most Chinese carriers. The company had a logo that the Chines market favored, and when naming or designing a logo that represents specific country it gets hard when the company tries to expand globally. On the other hand, the geographic naming/ the logo of the company gave the local government a feeling of ownership and helped promote the airline company in the country. (to see the old and the new Logo look at appendix c pleases)
b. SWOT Analysis:
The SWOT analysis is used in this project to best identify the company’s strengths, weaknesses, opportunities, and threats. The SWOT analysis is an efficient technique that is used in the process of identifying what resources does the company has, and what it needs. The SOWT analysis will help show the company what opportunities could be taken to improve the company, and what threats is the company going to face. When using the SOWT analysis it is best to look for the internal factors of the company, the internal factors could be the company’s marketing, the production and the management information system. The internal factors that affect Lucky air are the company’s provided resources, and the company’s capability to serve and welcome new customers.
1. 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,
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.
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” (Ros, 2016)
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
Most of time threats and opportunities correlate, and are consider as being part of the same challenges. And external threat that the Lucky Air faces is high fuel prices, and that could also be seen as a helpful prompt to improve the company’s efficiency. where the fuel price is set by the National Development and Reform Commission (NDRC), and China Aviation Oil is “the sole fuel supplier for Chinese Airlines.” Adding to that fuel price differ from region to region and “Yunnan happened to have a higher price than the national average” (Yunnan Lucky Air financial statements). But even if the threats are seen as growth opportunities, they are also an obstacle that stops the company from growing and operating in a low cost.
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.
Apart from all the threats mentioned, being an LCC company is a threat. Because the main goal of the company is to save money and lower the budget, cost model is a “restless beast”. The company could maintain the internal threats, and example is the company’s advertisement budget and all internal factors are easy to manage. But the company is always threatened by the external challenges, for example the environment or the weather, could case a flight to cancel but would cost the companies operations budget and being an LCC company it is hard to cover the losses from the external challenges. (SOWT Analysis graph attached f in the appendix).
c. Competitor Analysis:
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. On March 2015 China Eastern had a 42% share of seats, while on the in the other hand Lucky Air had a smaller share that was worth 12% share. (please look at appendix b for more details).
Lucky Air’s competitors are also considered as Kunming Airport locally based airlines. Both companies threat Lucky Airlines because they are local and are attracting customers. Kunming Airlines had shown their strong desire and determination to grow their segment, and they spoke about the growth of the company’s targets. Kunming Airlines was bought by Air China and Shenzhen Airlines, and they own 7% of the seat capacity share where Kunming Airlines has only 5% share. So, Kunming Airlines decisions are made by both the 7% owners and owners don’t want Kunming Airlines to grow.
In 2014 Kunming Airlines had 10 aircraft and had signed an agreement to buy “10 more 737s, comprising four 737-700s and six 737 MAX aircraft” (CAPA, 2016). Kunming Airlines is growing and is trying to compete with its parents (Air China, and Shenzhen Airlines) by signing a codeshare agreement, where the two companies agreed on sharing the same flight. And each airline would market the flight under the company’s own airline designator. in 2014 Kunming Airlines stated that the agreement between them and Air China “will not only further expand our route networks, but also help us draw upon the experiences and expertise of other domestic fine airlines”.
Ruili Airlines had launched services in May-2014 and the company currently has four “737s in service with a further 13 on order.” Ruili Airlines was one of the first China “approved under its latest wave of liberalization” (CAPA, 2015). Both Ruili and Kunming Airlines follow China’s generic airline model, which is full-service but light on frills and seldom attracting premium yields. Where on the other hand Lucky Air follows the western generis airline model. Ruili Airlines has mentioned the it will not use the LCC pricing strategy and will not adapt the LCC business model. With that Lucky Air has an advantage of being LCC and following the western model.
Identification and evaluation of Lucky Air’s competitive advantage
Lucky Airline has a high competitive advantage from being linked to Hainan Airlines, because Hainan Airlines is one of the well-known airline companies in China. Not only that Lucky Air’s IT operation are backed by Hainan Airlines that has one of the “most advanced web portals in the Chinese airline industry.” The company still needs to upgrade its business strategy on a regular basis to ensure maintaining the lead they have over the other airlines. Lucky Air’s annual passenger volume and growth is growing, and the company has the capacity to cover that customer growth. (Please see appendix a for detailed information)
Newly established companies are operating as LCC, and large airline groups started launching their own low-cost carriers to compete head-on with low-cost airlines. But Lucky Air has got a big advantage by having the government support. Where the company has the license and the permissions to enter regions in China that not all airline companies have. Also, Lucky Air a well known local airline and that is another advantage the company has, with attracting local customers.
Lucky Air’s competitors have worked on building partnerships with other airline companies, especially big airlines that are full-service carriers. And that is a big risky commitment that any LCC airline takes, but they do so in order to for airlines that were doing everything to avoid costly complexities in their operations. Where Lucky Air doesn’t need that because of its parent Hainan Airlines, the company is already supported and has the capacity to grow and expand its outreach for new customers.
Recommendation on strategies
As mentioned earlier in this project, Lucky Air is facing several low-cost competitors which is consider as a big threat to the company. With this wave of new low-cost airlines that is emerging, Lucky Air should consider some strategic options in order to sustain and maintain its level of growth and its competitive advantage. According to Porter, a there 5 generic strategies that could be chosen. These strategies are:
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. The companies that have applied this strategy are Cooper Tire, Rubber and Easy Jet, they achieved the strategy by selling standardized products the markets “average/ middleclass” customers because they are the company’s largest target segment.
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. The companies that have applied this strategy is the British Airways, where the company didn’t focus on the average customer it focused more on the customers that want be unique and different from other customers. The British Airways, provided specific royal programs and deals for that targeted customers.
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. This focus strategy has two dimensions they are: focused cost leadership and the second one is the focused differentiation strategy.
a. Focused Cost Leadership: is to focus on providing the needed services for the targeted customers at the lowest cost. IKEA, is one of the known companies that apply the cost leadership strategy by targeting “younger customers desiring style at a low cost and who want to shop at hours beyond those typically available from other firms” (Ikea, 2015).
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. One of the companies that uses this strategy is (McDonald’s) and with airline serves there is not a specific customer segment, because all people travel, and the company would want to attract all customers to fill the plan’s seats.
From the case study it is shown that Lucky Air model is low-cost and high efficiency strategy, and the company operates at its lowest costs. the company doesn’t have to choose one stagey and go on with it, the company could move between the suggested strategy depending on how the company’s growth and need is going. The company could implement one strategy at a time, and that would empower Lucky Air’s presence in the market share, if the company needs to only focus on lower the prices then it should use the first suggested strategy which is the Cost Leadership, before it moves to the other strategies.
Luck Air has to be aware and really careful when changing it’s current strategy, and moving between the suggested strategies. There reason why Lucky Air have to be careful because potential change could harm the company’s legacy in both the Chinese airline industry, and the company’s customers. uncareful and unstudied change between strategies could create a significant confusion within the company’s stakeholders.
Lucky Air should start conducting its operations online the company could take advantage of the opportunity of growth of the Internet, by doing so the company would be taking the next step in adapting the new establishes LCC global companies. The company should provide an online service that gives their customers to purchase their tickets online, and that would help the company reaching its goal to becoming efficient.
Some recommendations that Lucky Air could focus on to cut some of the operational costs when applying the suggested strategies is that the company could first focus on using the Airbus 319 which “has less maintenance costs, thus reducing its current maintenance costs which are 5% of its total costs”. Additionally, the company’s financial statements showed that the cost of the in-flight food has 1.5% from the total costs, Lucky Air could not provide free lunch for all customers and should provide the chance for people to pay extra fees to receive food. By doing so the company would save for its operational costs. by updating the online booking Lucky Air would save the costs of printing the tickets, where they could be sent via email rather than paper by cutting down the use of paper it would show how the airline company is trying to be is environment-friendly. Finally, another cost reduction is the company could be creating call centers to handle booking and customer service questions, by doing so the company would avoid paying travel agent commissions “which is 2% of its total costs.”
The IT operation that Lucky Air has that is backed by Hainan Airlines which had one of the most advanced web portals in the Chinese airline industry. Is the key to achieving all the tips and the strategies that are suggested in this project. If Lucky Air uses its growth capability in order to gain more development in Chinese e-commerce and to position itself on top of its competitors.