The HNA group China Airlines Essay

The HNA group re-launched its commercial carriers under a new entity: Grand China Air; their strategy was to create a brand where its four major airlines (Hainan, Shanxi, Xinhua, and Chang’an airlines can compete globally. They have delivered very good financial returns and have expanded throughout the Chinese market in a relative short period of time.

HNA is not a governments entity. this allowed them to expand very rapidly by increase the size of its equity from stock markets around the world considering the Chinese state run companies are being heavily funded by the government. HNA’s fundamental lies in the free-market system. This shows in the company’s core values and they are continuously investing money for the most innovative business practices.

The expanding Chinese economy has made the state-run companies to pursue international markets and focus on large metropolitan areas of china. HNA has continuously focused on remote areas of china, and took measures to secure domestic markets when competition left for major cities. The economic circumstances in china has made possible for an airline company to invest in local governments and actually see quantitative returns in a relative short period of time.

Competitors of HNA has a strong support from the government. This creates an incentive for these companies to practice risky business, since they are not fully liable of their actions. It is impossible for HNA to beat competition on price alone. These companies are heavily invested in international megacities cities and large domestic cities. When they underwent their new identity: Grand Central Air, Chen had planned expansions and launches to Africa, Europe, as well as the US; the company worked extremely close and built relationships with central and local officials and they committed to continuously show positive results.

HNA needs to stick to their core plan to develop local Chinese markets, while the Chinese economy continues to expand. They should also concentrate resources on international destinations that are new to china; and emphasize less on major international hubs due to stiff competition.HNA will need to lobby for an equitable treatment from the Chinese government. This ideological shift has already began taken place; HNA needs to co-operate with other companies in a similar position as them and bring this issue to the government.

The HNA group re-launched its commercial carriers under a new entity: Grand China Air; their strategy was to create a brand where its four major airlines (Hainan, Shanxi, Xinhua, and Chang’an airlines can compete globally. Their target is to be a world-class airline and to be a world-class company. Their mission was to be a unique player, while seizing opportunity and continuously to grow. Their capitalist and free market principles has had success despite being positioned in a regulated Chinese market.

This report will examine the general environment of HNA and its Industry; its competitive model and its direct competition. The second half will focus on the HNA group by highlighting its strength , competitive edge and its weaknesses. This report will be summarized by a recommendation guide for HNA.

General Environment & Industry Driving Forces

“The Big Three” was managed by the Civil Aviation Agency of China (CAAC), funding for the Big three was never an issue; all three carriers were recognized globally, domestically; they had a lot of traffic volume, routes, and fleet. The government did not fund the HNA, they sold their shares in return for investments for expansion. As a result, HNA cannot position themselves in term of cost leadership. The CAAC’s heavy hand over the control of price, competition is not based on price. Engaging in a possible price war with competition is not rational in present circumstances.

The open skies agreement enabled growth for travel; prior to this agreement, airlines could not fly over the country of China. By having this agreement, this allowed American carriers to fly to more remote provinces as well as they established a schedule to increase the U.S airlines with flights to enter China.

In the narrative of the case, there was a strong emphasis on the local development program. The economic circumstances in china has made possible for an airline company to invest in local governments and actually see quantitative returns in a relative short period of time.

The 2001 September 11 terrorist’s attacks had a setback in the airline industry in the years 2001-2002, as well as there was the widespread of SARS happening around the same time. Of course this did not only affect HNA group with Grand China Air, but rather affected all Chinese air carriers. They were also able fight through the global crisis and still generate strong financial revenue.

It was also said that China was going to be the world’s most desired destination for international tourists by 2020.This is a big factors surrounding HNA, as they began operations in remote Chinese destinations; which one happens to be a subtropical resort town.

In 2008, the airline industry found themselves facing challenges; the fuel prices were getting too high and this resulted in traffic declining for many airlines. As fuel prices were continuously rising, passengers were then surcharged by 20% to protect the airlines profits. In 2009 the oil prices were rapidly increasing, the Chinese airlines were unable to force any major price increases on their passengers; this has an impact for the airlines to be profitable in 2008.

Competitive Model

Most new entrants positioned themselves as a no frills, budget airlines that focus their efforts and pricing advantages; in order to enter the industry, they had to own at least 3 planes. The most direct threat came from Spring air; they became an attractive company to investors due to the fact they introduced innovations that allowed them to control their costs.

Most passengers preferred to have a customer-oriented strategy; they would rather go to regular carriers that provided catering services then go to low cost carriers. This was a huge advantage for the HNA group, as they focused primarily on value-added service to its customers.

The HNA group competes with “the Big Three,” essentially, these are three major airlines in china that already have loyal customers and have global recognition; it holds one of the country’s flagship carrier: Air China.

Based on the previous four sections, it can be said that the rivalry within the Airline Industry is relatively moderate; although the Big Three has dominated major areas; the HNA group has a different approach to gain global recognition as well as they had various different routes than the Big Three.

Competition

The HNA Groups major competitor is “the Big Three,” which is favored by the CAAC; they are provided with more resources then other carriers do. The “big three” includes:

Air China

Air China was the country’s flagship carrier; they were the selected carrier to join the star Alliance, which gave them the opportunity to build relationships with global airlines. They had a total of 220 aircrafts, 212 of those were dedicated to passenger service

China Southern Airlines

The CSA was China’s largest airline when it comes to traffic volume, domestic routes, and fleet; they serves most of the economically developing cities in southern China. The CSA has 5 subsidiary airlines: Xiamen, Shantou, Guangxi, Guizhou, and Zhuhai Airlines. They saw cargo operations, a helicopter company, air catering, and a flying college. They had a fleet of 332 aircraft that averaged 6.37 years, as well their strengths were that it serviced two of China’s major hubs: Beijing and Guangzhou.

China Eastern Airlines

The CEA was the second largest airline in China, and majority of their revenue came from domestic and international routes; they entered code-sharing agreements with Air France, American Airlines, Korean Airlines, as well as other domestic partners. The company had a fleet of 197 passenger aircraft and 11 freighters for cargo; one weakness is that they had a failed merger with Singapore airlines, and had setbacks ever since.

Competitors of HNA has a strong support from the government. This creates an incentive for these companies to practice risky business, since they are not fully liable of their actions. These competitors can engage in price wars, secure deals with suppliers at a subsidized cost and other practices that may hurt HNA.

HNA is active in taking advantage of competitors actions. When CEA gave up its Xi’an fleet to concentrate on Shaghai-beijjing, HNA built the route and took action. China’s federal government’s involvement in HNA’s competitors are arguably affecting their bottom line. The free market system approach by HNA has enabled them to receive equity at a larger scale than if they were a government entity. Their established ties with provincial governments has had positive affect within the industry.

The main competitors of HNA are divesting in domestic remote markets to enter towards international fronts. They are also playing major roles in the Shanghai-Beijing market

The Company: Strength’s & Competitive Advantages

The HNA group was unique in the sense that their management style was extremely different than other airlines; they don’t belong to the state-owned system. The HNA group are following the free market system on a federal government level, by restricting themselves to government involvement. This system arguably provides a some flexibility, but they might be

When they underwent their new identity: Grand Central Air, Chen had planned expansions and launches to Africa, Europe, as well as the US; the company worked extremely close and built relationships with central and local officials and they committed to continuously show positive results. They had destinations that “the Big Three” did not fly to, as well as they partnered up with Hong Kong airlines as well as the Hong Kong Express Airways to gain access to popular roots; not only did they gain more growth by doing so, they expanded their overseas destinations to:

– India: Mumbai
– Belgium: Brussels
– Germany: Berlin
– Hungary: Budapest
– Russia: Krasnoyarsk
– U.S: Chicago, Seattle, and Boston

Their training system was intense; they trained their staff in global management, strategy, and service; Chen believed that international experience and skills would result in competing internationally in an effective manner: he sent his senior staff to learn the Six Sigma Strategy at Harvard, Japan, and other countries to learn their latest management styles; this enabled them to perform better as they were able to learn business strategies of international companies and adapt what they’ve learned to their own. This allowed management to stay up to date and efficient. The six‐sigma management program was so successful that the HNA group managed to save 307 million dollars throughout the organization

The HNA group also adopted a strong company culture; Chen believed that every manager should have a combination of western and eastern culture, experience, and a concentration in business and leadership. There were four principles: 1. Spirit culture – strive for perfections, excellence and loyalty 2. Behavioral culture – employees should be kind, thoughtful, obey the law, and make contributions 3. System culture – reinforce operational processes, set up systems to work more efficient, systematic and accessible. 4. Substance culture: defend the corporate brand, values, and the company identity.

These sound management policies might only be possible because of restricted ties with the federal government. In the local government front, they took advantage of the expanding Chinese economy be being one of the first airline carriers to invest in sustainable infrastructure.

Weaknesses & Disadvantages

HNA will need to positions itself by defining a clear target market. They will need to start thinking in terms that resources are not infinite. They cannot serve every front of the civil aviation business related to china. There was no significant sign , in the narrative, that HNA are continuously pushing efforts to promote the resort cities. HNA needs to push this market even further by even catering international customers to domestic resort markets in china, or even south-east Asian resort cities in near-by countries.

Facing strict Chinese state regulations. They are competing against government subsidized companies. This puts them into a disadvantage.

Recommendation

I agree that The HNA group has done their best to seize an opportunity as a unique player in the industry. They have a strong corporate culture that attracts global and domestic recognition even though they are not government owned.

HNA should stick to their core business model; develop provincial aviation infrastructure, while the Chinese economy is expanding at an unprecedented pace.

Competition are strongly emphasizing on international markets and busy Chinese metropolitan areas. While it is very wise for HNA a gain a market share in Shanghai, Beijing, they still need to continue their focus on the domestic Chinese markets; as they can secure smaller markets and reap its harvest in the future.

If they want to be part of international market, they will need to focus their resources on international markets that are not within the 15 biggest metropolitan areas in the world( their competitors will have competitive edge in terms of price.) For example, instead of Toronto, they should focus on Montreal, Instead of Sydney , they should try Melbourne, Instead of Los Angeles, they should focus of Phoenix etc.

They should also invest money to lobby against state owned enterprises. The Chinese government in playing the role of favoritism, which is no doubt hurting HNA. De-regulation policies are already taking action in China, HNA needs to push for a shorter time period to state officials and government bodies.