Modelling competition in the Chinese Airlines market – Dissertation Sample

For a long time the airline industry has found itself struggling not just in terms of profitability, but also in customer satisfaction and loyalty. The industry has been dominated by subsidized national monopolies and suffering from over-capacity. Despite what is often portrayed in commercial advertising, airline travelling has become utilitarian, uninspired and outright customer unfriendly [Gustafsson, 1998].

The last few years have witnessed the globalization of airline competition, partly as a consequence of deregulation. The commercial airline industry in the USA was deregulated in 1978 [Rhoades and Waguespack, 1999]. A growing trend towards deregulation has affected the competitive structure of the world airline industry. Studies had concluded that regulation forced carriers to accept low, uneconomical load factors and prevented carriers from establishing economies of scale that would lower costs (Caves, 1962; Jordon, 1970).

China Airlines has grown rapidly since it launched in 1959 with just two amphibious airplanes. Today its fleet has grown to include more than 50 Boeing and Airbus aircraft [China Airlines]. Currently the biggest threat of Air China industry is not just the malignant price war between local airlines but from the international market. China is becoming the new battleground for U.S. carriers [US Airlines]. Currently the total real strengths of the whole Air China, basically can't match with American airline mutually. Recent academic analyses of internal air transport markets in the United States and European Union have been dominated by a shared focus on the effects of liberalization, competition and globalization [Goetz and Graham, 2004].

Few researchers have argued that globalization and liberalization have resulted in excessive air traffic growth and wasteful competition. Globalization in general has encouraged free trade and increased competition, achieved through world-wide processes of deregulation and the removal of trade barriers. This study will provide an in-depth qualitative study of airline operations of domestic Chinese Airlines will be carried out to understand the economic market behaviour of these carriers in comparison to its US rivals. In the domestic industry the prices are regulated by the Board.

In a regulated framework once a particular fare is approved, all carriers are not allowed to change that fare. With fares the same, the carriers try to rival one another’s service with respect to type of aircraft, departure time, number of flights and flight amenities such as food, liquor and movies. The board does not regulate the industry with respect to the service characteristics, and the competition between carriers is therefore solely based upon service provided. In response to the competitive challenges arising due to the deregulation of the airline industry, the leading international carriers have adopted a range of strategies to maintain and create competitive advantage.

According to theory, the effectiveness of strategies depends among other things on industry conditions such as the intensity of competition (Porter, 1980). As these structural variables are likely to change in the course of time, the effectiveness of strategies should change as well. The industry trends and competitive strategies of some of the major airline companies will be examined through different case studies with the view of proposing a model for enhancing airline competitiveness in a turbulent global environment. Such a model will serve as a guide or road map as the carriers work their way through the chaos and will help in establishing a successful future of the airline industry in China.

2. Aims & Objectives of the Project

The main aim of this project is to analyse the strategies of China airlines competing with US airlines with the view of proposing a system dynamics model for the existing competition in the Chinese airline market. Another objective of this study is to cite the major areas of concern for Chinese airlines due to the increased competition from international airlines.

Competition in the Chinese domestic market is partly a consequence of increased competition on international level, and partly due to government deregulation. This project will examine the main competitive challenges currently facing the Chinese airlines industry, taking into consideration both global and domestic dimensions, and the strategic response of leading carriers to these challenges. Brief case studies of the competitive strategies of leading Chinese national and regional carriers will be carried out and compared with the US airlines. The issues examined in this project will help in establishing a clear link between competitive challenges and strategic response to those challenges. Therefore, this project will also look at the hurdles faced by the Chinese international as well as domestic airlines with a view to propose strategies to rectify such situations. Additionally this project will also provide with accurate, up-to-date, research-based information about effective strategies and main competition policy issues.

3. Research Background

Airline Industry trends and competitive challenges

In this section the author will briefly mention some of the current trends related to the Airline industry also elaborating the major competitive challenges taking into account both the global as well as Chinese dimension.

Long Term Growth: Despite continuous difficulties faced the industry, long term growth prospects for the airline industry remains to be good. This can be attributed to the increasing globalization of business, closer economic ties among countries and opening up the market for new entrants as in the case with China and Europe. China's aviation market will remain one of the fastest-growing markets [Peoples Daily]. This trend will tend increase passenger volumes through the next decade although the actual change may be constrained by the air traffic control problems and airport congestion.

Deregulation: The gradual trend towards more ‘open skies’ is one of the most important developments currently affecting the competitive structure of the world airline industry and specifically in China. The industry has long been highly regulated by national governing bodies, in bilateral and multilateral agreements which have limited competition and controlled market access to a significant extent. This liberalisation process will have a major impact on the competitive structure of the Chinese airline industry. In the US, deregulation encouraged the entry of many new competitors. This flurry of new market players resulted in a price war which left many companies in a weak financial positions leading to a wave of mergers and acquisitions. This has left the US airline industry more concentrated than ever before. Hence the Chinese market has to take the cue from the US market and move forward accordingly.

Global Competition: the last few years have witnessed the globalization of airline competition, partly as a consequence of deregulation. The leading international carriers are engaged in competitive battle covering the main global routes linking Asia, Europe and North America. US mega carriers (American, Delta and united) have expanded into Europe and the Far East.

Privatization: The removal of state support has forced many companies to become much more customer/service oriented and to introduce cost control measures to improve efficiency. It has also provided them with greater flexibility to expand international routes, further globalizing competition. Privatization is also becoming an important issue in China expressing interest in more efficient and customer- oriented carriers which will add to the competitive pressures currently being faced by the industry.

Congestion: The extent to which the process of air deregulation will stimulate more open competition is severely constrained by congestion. In many countries the air-traffic control system is already overstretched and many of the major hub airports are operating at full capacity. Slot access is therefore a crucial aspect of competitive strategy in the industry.

Overcapacity: As a consequence of the above trends, there is significant overcapacity in the world airline industry, resulting in a large reduction in passenger load factors.

Technology: the rapid pace of technology change is having a major impact on the competitive structure of the industry.

Electronic-ticketing – Airlines have devised cards that allows some staff members to travel without a paper ticket. Such corporate cards can be pre-loaded with a certain number of trips or an unlimited number of trips for a predefined period of time for a particular route [Lasse et al, 2004]. >From the point of view of competition and economic efficiency, the acceptability of these rebate schemes may hinge on whether they are linked to corresponding cost savings. Such electronic ticketing (e-ticketing) is growing relative to conventional travel with paper tickets.

Computerised reservation systems – The computerised reservation systems are essential facilities in the marketing of air travel services. Improvements in computer Reservation systems have become crucial to achieving high load factors.

Aerospace Technology: Improvements in Aerospace technology leads to the development of larger, more fuel efficient aircraft.

Modeling Airline Competition

In practical terms, competition can be measured in a number of ways: The number of airlines in a market, Membership in alliances, Control of slots at a main airport and many others [Button, 2003]. In deregulated airline markets, carriers are free to choose the values of any of the above given variables affecting their profits. Airlines must design strategies that involve many dimensions, and must incorporate in their strategies the responses of their rivals (both actual and potential). Modelling airline competition is an attempt to describe these strategic interactions and to explain how airlines make their choices [Olivier Renard].

The author reviewed different models of competition like ecological model of competition, Michael Porter Five Forces Model, Diamond Model, System Dynamics Model etc in the airline market. It is beyond the scope of this study to explain all the reviewed models but after critical review and analysis of the strategies and models the researcher is the view that the system dynamics model will be best suited for this study. The primary advantages of the system dynamics model are best explained by Lyneis (2000) as described below.

1. System dynamics models can provide more reliable forecasts of short- to mid-term trends than statistical models, and thus lead to better decisions.

2. System dynamics models provide a means of understanding the causes of industry behavior, and thereby changes in industry structure, as part of an early-warning or on-going learning system.

3. System dynamics models allow the determination of reasonable scenarios as inputs to decisions and policies.

D'Este and Meyrick (1992) distinguished quantitative variables (e.g. frequency, cost), which could potentially be measured and compared in an objective manner, and qualitative variables (e.g. marketing, tradition, etc.) which were more subjective. Given then the range of pertinent choice variables it is important when studying competition to capture the impact of most of these factors, trying to include the qualitative factors which may be difficult to measure. Some of the variables that may play an important part in modelling competition in the Chinese market are listed below.

Service Quality – Successful service quality strategies are generally characterized by customer segmentation, customized service, guarantees, continuous customer feedback, and comprehensive measurement of company performance [Sultan and Simpson, 2000]. Knowing accurately what customers prefer, successful service companies are able to give customers exactly what they want by customizing the product or service, to surprise and “delight'' them (Porter, 1980; Albrecht, 1992).

Numbers of passengers – Number of passengers traveling in a year are determined by the total departing seats. The year 2004 experienced a growth of 22% in total departing seats in China. According to an annual report on China’s industrial development, total passenger traffic in that year increased by over 20% to reach 103.8 million passengers [Airclaims]. In fact Mainland China is now second only to the United States in terms of total scheduled departing seats.

Capacity: There are a number of ways capacity may be defined: theoretical capacity, practical capacity, normal capacity, master-budget capacity and actual capacity (DeBruine and Sopariwala, 1994; McNair, 1994).

– Theoretical capacity is the denominator-level concept based on producing at full efficiency all the time.

– Practical capacity is the denominator-level concept that reduces theoretical capacity by unavoidable operating interruptions such as scheduled maintenance time, shutdowns for holidays, and so on.

– Normal capacity is the denominator-level concept based on the level of capacity utilization that satisfies average customer demand over a time period (2–3 years) that includes seasonal, cyclical, and trend factors.

– Master-budget capacity is the denominator-level concept based on the expected level of capacity utilization for the next budget period (typically one year).

– Actual capacity is actual usage of current production capacity.

Workforce – The workforce of an airline company constitutes of the employees like mechanics, crew members, pilots, airport crew etc. Workforce can play an important role to remain in competition as adding or removing of workforce takes time and should be done according to market trends. For example post 9/11 airline companies were cutting back workforce to reduce costs so that they can remain in competition. Similarly when Europe and China started deregulating the airline market was attracting more and more workforce to gain the maximum market share during the boom.

Ticket Price: Whatever the competitive model, restrictions always have a negative impact on the price level. As expected, the more the tariff is bound to restrictions, the lower the price [Giaume and uillou, 2004].

Frequent flyer programmes – Almost all major airlines offer their travellers a carefully designed frequent flyer programme (FFP) in which ‘Discounts’ are granted not in the form of money, but in the form of free services and also in order to obtain free flights, customers need to surpass certain thresholds in terms of travel purchases [Lasse et al, 2004].

4. Problems and scope

One of the main problems while trying to model the competition in the Chinese airline market is associated with time. Due to time restrictions the correctness of the model developed cannot be evaluated. Usually a time frame of 3 to 4 years is required to establish the validity of the developed model. Secondly, In order to build and suggest an efficient Model a lot of unbiased and reliable data will be required which will depend on the willingness of airline companies to provide the data.

The scope of the project will largely vary according to the rate at which the information comes in. If more and more information (primary data) can be collected at a fast rate then accuracy of the model will increase greatly and more number of variables may be included in the model.

5. Research Methodology & Analysis

Research Methodology:

A good research methodology is a general plan of how the researcher will go about answering the research questions considering the sources to collect data and the constraints that one might have (access to data, time, location and money, ethical issues etc). It should reflect the fact that the researcher has thought carefully about why a particular strategy has been employed. A collection of methodologies will be used to carry out this research. Both primary and secondary data will be collected for this purpose. The secondary data will comprise of data from literature reviewed from books, journals, Internet and the annual reports of the companies while the primary data will take the form of information/results collected from questionnaires and surveys. There are different research strategies that one might employ. They are: experiment, survey; case study, grounded theory, ethnography, action research, cross sectional and longitudinal studies, exploratory, descriptive and explanatory studies. Out of all these, the researcher has chosen the Survey strategy for the research. It is a common and popular strategy in business and management research. Through this a large amount of data can be collected in an economical way.

A three stage triangulation research method will be used in which interviewing of small groups will be followed by a detailed questionnaires, testing quantitatively a much larger sample of customers and staff. This method of qualitative and quantitative method, advocated by Burns and Grove (1997) is a relatively new approach and is often called the triangulation method.

Phase 1: Phase 1 will involve an investigation of the competition in the Airline market in an inductive (phenomenological) manner. This will involve an analysis of the Chinese and US airline market and interviews with key actors in the market. The first stage of the research will comprise of collecting secondary data from the literature review. According to Sharp and Howard (1996), two major reasons exist for reviewing the literature. First, the preliminary search helps to generate and refine the research ideas. And secondly, a critical review is a part of the research process. Like most research projects, literature review will be an early activity in this research. After the initial literature search, the researcher will be able to redefine the parameters more precisely and undertake further searches, keeping in mind the research objective and goal. The literature review will help in developing a good understanding and insight into the previous research done on this topic and the trends that have emerged. This will provide the researcher with an in-depth insight into various issues concerning the operation and structure of the airline market.

Phase 2: Phase 2 will investigate competition in a deductive (positivist) manner. This will involve:

(i) A rigorous sampling exercise involving a representative sample of decision makers engaged in the Chinese airline market,

(ii) Development and pilot testing of a questionnaire

(iii) Personal interviews with decision makers using a structured questionnaire

(iv) Survey data analysis using various input-oriented modelling techniques.

Case study approach is supposed to be the most appropriate research strategy for the fulfillment of the aims and objectives of a particular study. “A case study is a detailed examination of one setting, or one single subject, or one single depository of documents, or one particular event [Bogdan and Biklen, 1982].” Therefore, in this phase the next stage of research will comprise of short listing of the airline departments where the case study will be carried out. The first criteria will be selecting those carriers which have a good market presence. Structured and semi structured interviews will be held for the purpose of the case study. The predominant advantage of the interview is its adaptability. An adept interviewer can follow up ideas, probe responses and investigate motives and feelings which the questionnaire can never do. The way in which a response is made can reveal valuable information [Bell, 1987].

There are a few disadvantages as well. Interviews are time consuming and expensive and therefore only a small number of people can be interviewed within a span of time [Bell, 1987; Hussey, J. and Hussey, R., 1997]. Therefore, along with Interviews, questionnaires will also be used to collect data which is less expensive and less time consuming than conducting interviews and very large samples can be covered.

Phase 3: Phase 3 will involve again investigating competition in an inductive (phenomenological) manner. This will involve taking the results obtained in Phase 2 and further investigating these (by way of some more interviews).

Research Analysis:

For effective analysis, it is necessary to interpret the data collected from the telephonic/face-to-face interview from the perspective of the ‘interviewed’ (i.e. the customer and staff members). For an in-depth analysis, phenomenological research methodology developed by Schutz (1972) will be used in order to gain a better understanding of their experiences with different airline carriers. Schutz suggests that the sources of socially-acquired knowledge can be seen as four ideal types:

i. The eyewitness: someone who reports after observing something in the real world.

ii. The insider: someone who, because of his relationship to a group is able to report some event, or the opinions of others, with the authority of sharing the ideas with others.

iii. The analyst: someone who shares and collects the information from the above two and organizes that information in conformity with that system of relevance; and

iv. The commentator: someone who shares and collects information in the same way as the analyst and presents that information in the form of recommendations and critics.

After taking the interviews, a large quantity of interview notes, tape recordings, jottings or other records will be generated. There are many models available for the analysis of the phenomenological data. But the most promising one, which is chosen for the analysis, is the one proposed by Hycner (1985). According to him, the analysis requires the researcher to read the transcripts; identify themes; confirm the accuracy of the interpretation and produce a final summary. Thus the information will be analyzed accordingly and a brief summary will be prepared. Validity will be obtained by the two phase triangulation method, in which, after the analysis of the interviews, the summary will be used to refine the preliminary questionnaire, this, in turn will be submitted to a larger sample of similar customers and staff members.

6. Dissertation Plan

1. Phase 1 : Literature Survey

Client should put the time frame according to his/her requirements

Phase 1 will involve an investigation of the competition in the Airline market in an inductive (phenomenological) manner. Enhance current knowledge about what constitutes foreign and domestic competition and main competition policy issues. Study the motives to deregulation and its effects.

2. Phase 2: Case Studies/Surveys

Client should put the time frame according to his requirements

Phase 2 will investigate competition in a deductive (positivist) manner. Prepare questionnaires and Interview questions. Prioritize the list of airlines to be surveyed. Start the case study which may comprise online interviews, telephonic interviews, face to face interviews, surveys through online questionnaires and paper based questionnaires.

3. Phase 3 : Interviews/Surveys

Client should put the time frame according to his requirements

Phase 3 will involve again investigating competition in an inductive (phenomenological) manner. This will involve taking the results obtained in Phase 2 and further investigating these (by way of some more interviews).

4. Analysis of case studies/Interviews/surveys

Client should put the time frame according to his requirements

After taking the interviews and surveys, a large quantity of interview notes, tape recordings, video clips, questionnaire results and other records will be generated all of which will be analyzed. There are many models (There can be many ways of linking between different parts of discussions or observations) available for the analysis of the surveyed data. The most promising one will be chosen for effective analysis and to interpret the data collected from the interview/surveys from the prospective of the ‘interviewed’.

5. Propose Model and Strategies

Client should put the time frame according to his requirements.

After an in depth analysis of case studies, a system dynamics model will be proposed for the existing competition in the Chinese airline market.

References

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