China Airline Industry

Airline Industry

The dominant characteristics of what consumers look for in the airline industry include safety record of the airlines, competitive pricing, availability of direct flights, quality of service (both on the ground and in the air), comfortable seating with in-flight entertainment, mileage program and partnership alliances. The airline industry continues to be a large and growing industry, especially due to economic growth, world trade, international investment and tourism over the last 2-3 decades. Travel for both leisure and business purposes grew strongly worldwide due to continuous globalization. In addition, governments are encouraging tourism to their countries due to economic and social benefits that tourists bring to their countries. In fact, some countries have gone to the extent of eliminating any requirements for any visa to visit the country on short trips.

The airline industry has deregulated since about half a century ago, which has led the industry in various stages of expansion and consolidation as airlines work through the right balance on how to manage a profitable business and grow with the economy demand. The 'open skies' agreements have introduced more opportunities for airlines to establish alliances and partnerships, expanding their networks and coverage to reach customers. Air travel sees the highest growth in Asia/Pacific region, which is expected to grow by 9% per annum due to fast-growing economy and rising purchasing

power. As the economies of developing countries grow (i.e. China, Asia Pacific nations, India, etc.), more and more people can afford to travel, especially with the introduction of low-cost carriers (LCCs). This is a positive outlook for CAL.

Porter's 5 Forces Analysis on the Industry

Rivalry among competing sellers - CAL's biggest and most direct rivalry would be EVA Air, also a Taiwanese carrier. There are two major political parties in Taiwan, and CAL is more closely linked to the incumbent "Blue" Kuomintang (KMT) whereas EVA Air is more closely associated to the opposing "Green" Democratic Progressive Party. CAL and EVA Air each have subsidiary domestic airlines, Mandarin Airlines and Uni Air, respectively. Both airlines share similar degree of geographic coverage, product and services (i.e. cargo) diversity, staffing and corporate culture, similar pricing model, as well as run a vertical integration operation. CAL is also facing growing competition from other international and regional airlines and LCCs.

Competitive Pressures from Suppliers - In terms of the jet airline market since 1990s, there are only two main manufacturers, which are Boeing or Airbus. The purchases of aircrafts are sometimes tied in with political trade arrangements between countries and would vary from different government administration. As such, CAL has limited bargaining power against its limited suppliers. In terms of labour, repair and maintenance, insurance,

in-flight food and beverages, etc., CAL would have higher bargaining power over its suppliers due to CAL's sizeable volume and that there are only two key airline players in Taiwan. In fact, some suppliers have now been vertically integrated into CAL's operations and costs can be better controlled and supply-chain can be improved.

Competitive Pressures from Buyers - By 2007, CAL has captured 1/4th of total aviation market in Taiwan. Due to low switching costs to substitutes or competitors, airline consumers have higher bargaining power, especially with so many international airlines flying to/from Taiwan. CAL's Dynasty frequent flyer program and the convenience provided by Chinese-speaking staff would incentivize consumers to continue to fly with CAL. With the launch of new LCCs around the region, CAL would encounter more competition in its pricing model and may need to find other ways to differentiate its services from other airlines in order to avoid losing its current clientele. Moreover, due to increasing global travel and the demand for easy international connections, CAL would need to partner up with other airlines to provide convenience to its passengers to avoid losing out to competition.

Potential New Entrants - As Taiwan already has two national airlines, there would be very limited incentives for new entrants due to limited upside profitable benefits from starting this business, not to mention the high regulatory, legal, and

financial costs associated with starting an airline business. However, there could be new entrants in the low cost carrier segment as there is none from Taiwan at the moment. As short-haul routes continue to increase due to rising fuel prices, more tourists would choose to travel around the region instead of going on long-haul flights to Europe or North America. Given such, there are still opportunities to be tapped into in the regional travel market.

Substitute Products - Due to improved road and rail services network in Taiwan, CAL suffered losses from domestic operations in 1980's. Similarly, due to the launch of the new Taiwan High Speed Rail, similar to the Japanese shinkansen bullet trains, the demand for domestic flights have taken a further hit. This has forced the closing of