E-commerce at Yunnan Lucky Air
E-commerce at Yunnan Lucky Air
Four years after its establishment in 2004, Lucky Air had expanded into a US$104.3 million airline. Lucky Air operated domestic routes from its hub in Kunming, the capital of southwestern China’s Yunnan province. The Yunnan province is a very popular destination and travelers because it is known for its attractive landscape and its multi-ethnic culture in China. Yunnan Lucky Air is a leading competitor in domestic flights all throughout China. Lucky Air was offering low-cost airline options to customers through agents. It copied the U.S Southwest Airlines with the low-cost ticket pricing and efficient short paths. Lucky Air is an efficiency airline and its focus to increase its competitive advantages over other existing Chinese airlines. It is also the fastest growing airline in China with over five million passengers anticipated in 2009, as it also introduces over twenty new routes from the previous year. Even though Lucky Air is top of their class domestically, there are many components it needs to change to help its competitive advantages such as cost efficiency programs, company expansion opportunities, and different market strategies.
Yunnan Lucky Air’s Best Options
Lucky Air had an excellent business model reflecting Southwest Airlines in the United States of America. Since Lucky Air is a domestic airline in the Republic of China they operated on a small scale compared to major players in the market, economically it was sensible to offer low-cost and high-efficiency service to its clients. In 2007 Lucky Air doubled the number of travelers from the prior year by using a low-cost method. Nevertheless, other airlines have also started to offer low-cost fares for domestic routes to their passengers in China. With more entrants, Lucky Air should consider the possibility of taking a risk and focusing on e-commerce.
There were several options that seemed to be good potential for gaining a competitive advantage over its competition. One good option is to capitalize on its IT infrastructure advantage. Lucky Air’s IT operation was backed by a larger organization which had one of the most advanced web portals in China for the airline industry. In 2007, China experienced a 53.3% increase in new internet users from the previous year. Even though the overall internet penetration in China was much less than the US, China’s technology and IT infrastructure were improving rapidly. About 80% of web users where young professionals 35 years old or younger and have the income for traveling but price and customer service was a driving factor in choosing the airline to travel. These customers were focused on the price of the ticket first followed by customer service when shopping for a plane ticket. One advantage for Lucky Air to consolidate its IT infrastructure and influence on its own IT expertise for upcoming opportunities when the internet penetration increases in China. Lucky Air’s website was already the first in the air travel industry to have the capability to use online credit card verification, but this IT leverage through its parent company, Lucky Air can attract more online customers with a redevelopment of their web portal.
Another advantage/ option Lucky Air has over its competitors is an established business model based on the Southwest Airline in the US. As China’s population continue to penetrate through the IT world, and the gap between the two countries narrows, Lucky Air will be able to be set apparat from customer service perspective among others. Chinese could have the option to connect through the internet or smartphones to exercise the exceptional customer service that Southwest experience. They should take the competitive advantages over this information technology-based services where things are growing faster and learned and decided to deploy a successful model of e-commerce which would keep profiting them in the long run. providing the services to their customers as online booking, reduced the cost of domestic or economy travel, fewer charges for cancelation, easily tracking system, immediate booking, etc.
Formulating a strategy for being the first in line to introduce unique standards of customer service, utilizing their IT expertise and advantage like Europe, the US, or any developed country in the world is another advantage that Lucky Air has in China. This is an important advantage as China is investing in the IT infrastructure and the more people are penetrating the internet world each year, Lucky Air has the potential to recruit people to buy tickets by offering then unique customer service. Loyalty programs, early check-in, upgrades, free snacks, priority boarding, extra weight limit and direct communication to customer questions are all possibilities for Lucky Air. Of the total travel market, only 1% was generated from the online travel market, and consumers still depended on customer call centers to confirm payment status. To counteract the risks, it is important that Lucky Air created an effective business-consumer-business model that will do the obvious and draw consumers to their site and make an online purchase of airfare. To draw in consumers Lucky Air will need to focus on Web 2.0, which is the unique feature or features of e-commerce and the Internet coming together as applications and social media technologies. Web 2.0 will allow for a better online experience with inter-human connections, consumer interacted blogs and the staff to constantly monitor the site to provide consumer feedback. Web 2.0 is crucial to providing customer relationship management. Promoting reviews from consumers in regard to destinations and airline experience are important to the consumer can feel they are important enough to expose the truth from other consumers even negative remarks. But the single most important part of focusing on e-commerce is the ability to provide an online experience and advanced technology that enables customer self-service without the need for multiple customer call centers. Customers should be able to pay for fares, cancel fares, use a safe payment method that can verify a credit card, check on the status of flights and use rewards programs (Berenguer, Shijun, Liang, Jing & Wang, 2008).
Another option Lucky Air can use to their advantage is tourism. Yunnan is a very popular destination spot for tourist in China. It is one of the world’s most popular tourist destinations because of its large number of historical and natural scenic attractions. With the development of the Internet, tourism and travel electronic commerce (e-commerce) have flourished in China. Social Media is the next step for Lucky Air’s if it wants to be successful (Laudon & Traver, 2013).
An additional advantage for Lucky Air is the growth of its product portfolio targeted at different customer segments, particularly people who are net savvy. Lucky Air can formulate a strategy for its expansion keeping in mind the Chinese Government’s initiative of upliftment of the aviation industry. The Civil Aviation Administration of China (CAAC) anticipated an annual growth of 15% for air traffic through 2020 and with some government regulations relaxation, there were roughly 780 routes appropriate for low-cost airlines.
Factors Lucky Air Executives to Consider
In 20018 Lucky Air’s executives must decide what is right for their business, customers and the business market. There were many factors the executives have to consider. Cost leadership plan permits Lucky Air to yield at the lowest cost letting then the advantage to gain a larger share of its target market. Airline e-commerce was in its early stages in China but if Lucky Air wants to position itself as a cutting edge in technology, there are a few factors to take into consideration. China’s three biggest national airlines are Air China, China Southern Airlines, and China Eastern Airlines dominated the national air travel, totaling a combined 83.7% market share. Some factors they could take into consideration is to create a Strength, Weakness, Opportunities, and Threats (SWOT) analysis.
The analysis can be done internally by Lucky Air without the additional expense to improve the business. Another advantage of a SWOT analysis is that it concentrates on the most important factors affecting Lucky’s Air business. There are several aspects when developing a SWOT analysis for Lucky Air to be considered. It develops a better understanding of the business model, it lists the weakness and how to address then, similarly, it minimizes the threats, defines the opportunities and how to capitalize on these opportunities and strengths, and finally, it results in business goals and strategies to achieve the goals.
Lucky Air has adopted the low-cost, high-efficiency airline were the key components of the Southwest Airlines business model. By implementing the single type of aircraft, Lucky Air has reduced maintenance and operational cost. Lucky Air’s modest design and inexpensive pricing along with the no seat assignments and no in-flight entertaining were important cost-saving elements. Lucky Air also operates generally in secondary cities to avoid congestion and to take advantage of reducing landing fees. However, unlike Southwest or other low-cost airlines in the US or Europe, Lucky Air can only achieve 5% cost advantage in the Chinese industry instead of 30% in other developed countries. This is mainly due to China’s heavily regulated aviation regulation and other governmental constraints.
The largest cost components for Lucky Air is fuel, aircraft leasing, taxes and landing fees. These elements account for roughly 70% of Lucky Air’s operating costs. China’s airline fuel was supplied by China Aviation Oil (CAO) and the price was set by the National Development and Reform Commission (NDRA). For small airlines, similar to Lucky Air, the fuel had to be paid for un advance until the airline is proven to be established. Additionally, the Yunnan region had a higher fuel price than the national average. Also, route optimization and oil price hedging were prohibited in China. Similarly, the aircraft leasing was controlled by the NDRA and it had a mandated airline growth capacity not to exceed annually by 35%. Lucky Air’s taxes were also an additional burden which ranged from 2% to 10%. Lastly, the landing fees were set by the government and were seen to be rising recently. Regardless of the airport location and the capacity, the landing fees were the same for the location.
Other factors to consider are poor security, high consumers demand and unsophisticated online systems. These issues caused numerous customers to stay away from the online payment option. In China, customers prefer the face to face payment method. Customers reported that transaction security was poor, and the payment systems were either too expensive or unavailable. Only 15.8% of Internet users were online buyers and only 25% used an online banking service. Additionally, the credit card penetration in China was less than 4% when compared to 90% in the US. However, Lucky Air has a significant advantage because one of its biggest strengths is its IT operations. This mainly due to its parent company Hainan Airlines which provided IT support and spent roughly 0.15% of its own net income on IT investments. One option the executives should take into consideration is the IT advantage and allocate additional funds to invest in making it even better. This will leverage the customers to confidently use their online payment system to buy the tickets from the website instead of the third party which is an advantage over the other Chinese airlines who use third parties for online payment similar to PayPal. Other factors the executives should take into consideration to position Lucky Air as an industry leader in the low-cost high-efficiency airline in China:
Expansion plans and business strategy should be revised according to the Chinese market need.
Conducting an analysis of customer profiles, their IT savviness, and changing preferences.
Expansion to non-serviced regions but has huge potential areas
Branding and positioning Lucky Air as the most customer-friendly and digitized airline
Monitor competitors and continue the leverage of the IT advantage
With the government relaxing the regulation, negotiate with other airlines to partner in some regions if out of reach without a partnership
Customer rewards programs to retain and expand the consumer base
Lessons to Draw from Lucky Air’s Experience
There are many lessons learned from Lucky Air one should draw from its current experience and the low-cost airline and elsewhere experience. One lesson is that even though Southwest is a successful business model, Lucky Air recognized that the airlines’ infrastructure and consumers’ habits in the developed countries, like the US, varied considerably from what available in China. That why the executives should re-evaluate its strategy and enhance its business model to continue experiencing growth and success. Luck Air is providing airline services as low-cost because the business model has proven that the public prefers the lower cost service approach for leisure and other travel needs (Yang, 2001).
Because Lucky Air is a small airline they do have some financial advantage. In the US there was significant financial trouble for major airlines after 2001. United and US Airways, for example, both declared bankruptcy in 2002, and Delta and Continental lost nearly $1.8 billion combined. However, JetBlue and Southwest for example survived. The advantage for all the low-cost airlines whether in China or elsewhere is that they are less expensive to operate and more customer-focused which is setting an example to the entire airline industry in how to run a more efficient airline business. JetBlue, AirTran, Frontier, and Spirit have fewer fees which are a key for traveling consumers interested in keeping their fare costs low. Based on this model Lucky Air can position itself as a customer focus and friendly similar to other low-cost airlines in the US. Other than cost, customer service is always going to be a key in the E-Commerce business that people are interested in. Other lessons learned from Lucky Air one should draw from its current experience and the low-cost airline experiences are:
Benefiting the customers by e-commerce to increase the customer traffic.
Investing in technology and developing a website with online payment option
Providing better and improved services to the consumers by allowing cheaper and more customer service options
Considering expansion to other countries and partnering with major international airlines
In conclusion, Yunnan Lucky Air will increase their competitive advantage if they use these specific strategies to make the airline more efficient. Making the airline more cost efficient will attract air travelers resulting in an additional profit for Lucky Air. The use of Lucky Air’s website and directly buy airline tickets from them will keep fares low by making a direct transaction between the customer and the airlines, as well as creating a stronger use for e-commerce. Implementing snack items instead of full meals will also lower the cost for the business. By getting fuel from other countries due to expanding the flying routes, eliminates the high cost of fuel from Yunnan. These elements will surge Luck Air’s growth overall and increase its total revenue. Targeting those customers that are traveling on business trips will increase the demand for seating and give the airline a consistent customer base. This may result in large corporations to partnering with Lucky Air to transport those flying on business. Overall, Luck Air will gain a competitive advantage over China’s competing airlines with e-commerce and growing their company globally.
Benefits from this Seminar and its Impact on Work Performance
This seminar has been both an interesting one and beneficial. I enjoyed learning about the marketing and operation in general but also specific topics and techniques. There are many concepts I can and will use in my daily job. For example, a SWOT analysis is important and interesting. I can utilize this technique in many aspects of my job. I can use this analysis when looking at the departmental actual and forecast number for the end of the year to both analyze and strategize for the following period. This will allow me to set goals for the department and individual team members. Measuring performance is another key concept, I can use this concept to set performance measurement tools for my team and the entire department. Planning Implementation is another important concept I foresee myself using consistently. As the needs and targets change for my department, planning for the new targets and implementing the plan will be helpful. Overall, I also enjoyed the discussion topics and the interactions with other classmates and look forward to implementing some of the techniques I learned and many more I will gain from future seminars.
Laudon, K. C., ; Traver, C. G. (2013). E-Commerce (9th ed.). Upper Saddle River, NJ: Pearson Education
Berenguer, I., Shijun, C., Liang, L., Jing, L., ; Wang, N. (2008). E-commerce at Yunnan Lucky Air. Massachusetts Institute of Technology. Retrieved from https://mitsloan.mit.edu/LearningEdge/CaseDocs/08-076%20Ecommerce%20at%20Yunnan%20Lucky%20Air%20-%20Lehrich.pdfYang, S. (2001, April 24). E-Commerce in Airline Business PDF. Retrieved from http://www.docunator.com/bigdata/1/1367184589_366898c0a3/unpan001219.pdf