Internal and External Assessment – China Eastern Air Holding Company

1.0 Introduction China Eastern Air Holding Company (CEA) is one of the three major airline companies in China, which headquartered in Shanghai. At the end of September 2012, China Eastern owned total assets of about 108.5 billion RMB, which included more than 400 large and medium-sized and had over 60,000 employees. (CEA, 2014) As an official member of SkyTeam, CEA builds its flight network from Shanghai, which convergences with the Union, included 187 countries around the world and more than 1000 cities. CEA services the world’s 70 million passenger trips each year, which ranked among the world’s top 5 passenger traffic. Since 2009, CEA with a new attitude usher in a new development, named “China’s civil aviation safety Five Star Award”; topped the Fortune magazine “Most Innovative Chinese Companies Top 25”, was named the international brand agency WPP “Top 50 most valuable brands in China”. (Anon., n, d.) The major purpose of this report is to discuss the China Eastern Air Holding Company strategy, which included external analysis (PESTLE analysis), internal analysis (SWOT analysis), and so on. As a company, business strategy is playing an important role in firm development and success. In the report, it also will include in strategic options and recommended strategies. 2.0 External Analysis 2.1 PESTLE Analysis External analysis included in PESTLE and five forces. The PESTLE framework categories environmental influences into six main types: political, economic, social, technological, environmental and legal.(Johnson, et al., 2012, p. 21). Politics highlights the role of governments. The china political background is conducive to state-owned aviation company, which included in China Eastern.

Aspects of domestic routes, no one aviation company except for three state-owned aviation companies can apply to a private airline to fly the main routes in 2005 to 2007, these routes are the all the high-quality airlines. Internationally route, national policies biased in favor of Air China, most of the international routes are concentrated in the hands of Air China. China Eastern Airlines and China Southern Airlines in this regard are at a disadvantage. The background to the rapid development of private aviation industry, but the China internal policy was biased in favor of oligopoly. And the development of private airlines has been almost impossible. Economics refers to macro-economic factors, which included world economy and domestic economy. The global economic growth sustained, global economic growth in 2014 of 3.7%, compared with 2013 growth of 0.7%. Advanced countries economies from 1.3% to 2.2%, which indicates that there will be new opportunities in advanced countries. ( World Economic Outlook, 2014) China’s economy will maintain steady and rapid development in recent years, with GDP growth of around 8% and the consumer price index rose about 4.8%. Economic Development of the entire aviation industry is just beginning in China. In addition, world oil prices also affected the cost of flying. The cost of fuel is the biggest cost in CEA. Social influences include changing cultures and demographics. In this case, due to changing lifestyles and values, aircrafts have become one of indispensable transportation in China.

More and more customers are choosing aircraft as transportation because it is efficient and convenient. The development of the aviation industry, especially the cheap airline industry, is a significant opportunity.

More importantly, the air ticket is no long luxury, but also more civilians. Technological influences refer to innovation. The information technology makes it easier for passengers to buy tickets online reservation. This technological improvement helps firm to increase the number of air travelers. The aircraft manufacturers, airport facilities, information technology impact on aviation industry technical environmental. Improving airport facilities, such as a passenger check-in desk, luggage facilities, shuttle vehicles, etc., which increasing customer satisfaction and promoting the development of the entire industry. Environmental stands specifically for green issues.

The company improved the aircraft type, flight routes and route optimization enhance DOC (direct operating costs) control and environment management, according to the flight plan accurate refueling and other means to save our fuel consumption. It not only reduced the fuel cost, but also reduced the carbon emission to protect the environment. Not only that, the CEA also cut down the disposable supplies and the number of magazines. (CEA, 2014) Legal embraces legislative constraints or changes. The main issues are preferential airport rights for some carriers and restrictions on mergers for the airline industry. For example, CEA hopes to establish bases in Beijing but there are multiple barriers from other airline company and local government. 2.2 Five Forces Analysis Porter’s five forces framework affecting the industry attractiveness is: the threat of entry, the threat of substitutes, the power of buyers, the power of suppliers and the extent of rivalry between competitors. Through the five forces, the company will know their external environment and understand which part needs to improve.

The five forces indicate that the advantages and disadvantages in the whole environment. 3.0 Internal Analysis 3.1 Enterprise Resource Analysis CEA mainly engaged in public air transport, general aviation operations and sale of air transportation and related products and so on. (CEA, 2014). In addition, CEA also involved in a wide range of import and export of aviation, financial services, aviation food, travel ticketing, hotel, real estate property, advertising media, machinery manufacturing and other industries, has formed a new pattern diversify. CEA flights include Airbus A300, A320, A330, A340, Boeing 737, Boeing 767, MD-90 and CRJ-200, ERJ-145, a total of 238 aircraft, the main operating base for the Shanghai Hongqiao International airport and Shanghai Pudong International airport, there are other important base Kunming International airport, Xi’an Xianyang International Airport and so on. 3.2 Enterprise Capability Analysis The CEA as the hub of airlines main income comes from the passenger and freight transport, CEA began to focus on running the network routes. Currently, CEA has nearly 250 aircraft, 293 domestic routes and 80 direct international routes. Rely on network operators, CEA will direct route between the existing city criss-crossing associate, meet the transport needs of the market and travelers. CEA explore the potential and use of existing resources, which achieve maximum benefit. 3.3 VRIO Analysis The VRIO framework determines the competitive power of a company’s resources and capabilities. The overall competitive power test is moderate for CEA because the resource and capability is the moderate value; the resource and capability are rare; the resource and capability is not hard to copy; the firm’s policies and procedures are organized to support the exploitation. The CEA resources are limited in China, other companies hard to get their resources, but the low-cost airline is impacting on the other airline companies and sharing the market shares. 4.0 SWOT Analysis SWOT summaries the strengths, weaknesses, opportunities and threats likely to impact on strategy development.

Through the SWOT, it can clearly indicate that the strategy’s strengths, weaknesses, opportunities and threats, which will help companies to know themselves strategies. There are many strategic issues in CEA. The major issues are the cost is too high, and limited at domestic and international development, which is difficult to develop. 5.0 Strategic Options 5.1 Cooperative Strategy 5.1.1 Horizontal integration CEA and Shanghai Airlines completed merger in 2010. This is a successful procedure for CEA. It not only consolidated their stronghold of CEA, CEA also made them more competitive in the last years. The merger has two advantages. On the one hand, CEA can get local market share and build a base. On the other hand, CEA can get more resources in a short time and enhance its competitiveness. Thus, CEA can merge another lol airlines business, like as merge the Shanghai Airlines. 5.1.2 Vertical integration (Equity fuel supply companies) Fuel costs are a major component of airline costs, for example, 40% of the total fuel costs in CEA whole cost. If fuel prices continue to rise, it will further increase the cost of pressures airlines. The China’s fuel supply companies are large state-owned enterprises, the CEA cannot merge the fuel supply. However, CEA can consider equity participation; it also can help CEA to reduce the fuel cost. Because CEA can enjoy discounts when CEA buy flight fuel. It will make the CEA more competitive in today’s high fuel prices. In cooperative strategy, vertical integration will reduce cost and horizontal integration will help CEA to develop the domestic and international market.

The cost of fuel is the biggest cost for an airline company, thus, reduce the cost of fuel is the most important in a company. If the CEA cooperate with the fuel supply, it will cut down more money on the cost of fuel. The merger is a good way to explore a new market and consolidate an old market. It will help companies to get more market shares and improve awareness. 5.2 Cost-leadership strategies Cost-leadership strategy involves becoming the low-cost organization in a domain of activity. (Johnson, et al., 2012, p. 112). Low-cost providers must have the resources and capabilities to keep costs below those of competitors. Input costs are important in cost leadership.

For example, CEA reduce the types of aircraft. CEA has seven kinds of models, 1050 routes, which will inevitably lead to higher costs of the huge variety of aircrafts. Kinds of civil aviation fleet are the core of aviation hardware resources. Too many kinds of aircrafts will lead to high cost of maintenance. Complex models of aircrafts are the main cause of the high cost airlines.

Thus, CEA should adopt a single model and short range, high-density routes, which provides adequate financial security. China’s civil aviation aircraft utilization is very low, with an average aircraft utilization rate in the advanced world airlines around 9.8 hours. Improved aircraft utilization, it not only reduce the need for the number of aircraft, but also reduce the number of occupied capital in order to effectively reduce costs. In addition, the rational use of regional aircraft is important to the CEA route network improvement. CEA can use the mid-size aircraft as regional aircraft in order to guarantee adequate attendant circumstances and give full play to the small regional aircraft effect. In the cost-leadership strategy, to reduce the kinds of aircraft will cut down the cost and to use the mid-size aircraft to fly regional airlines, which will get more profit for a company. These two strategies will make the CEA profitable. 5.3 Best-cost strategy Best-cost providers must have the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals. CEA can provide the cheaper airline tickets and promotion tickets. Through this way, CEA could provide the same price tickets as the low cost airline, as well as provide the best service.

The consumers must buy CEA tickets because it provides the best service with the low price. This strategy will improve attendance in each airline, it will get more profit. In the meanwhile, the cheaper tickets will help CEA get more market shares in their new routes because customers will be chose the cheaper tickets in the same routes. 6.0 Recommended Strategy For any company, it owns the limited resource and energy for a certain period, and it cannot choose more strategies to operate together. Therefore the implementation of the strategy should first be necessary to elect from alternative strategies. Thus, I consider that the cost-leadership strategy is the best strategy for CEA now. Cooperative Strategy is a perfect strategy, but merger need for a long time to operate. At the short time, it hard changes for anything for a company, and it needs to integrate for a long time. Best-cost strategy also is a good strategy, but it is not a long-term strategy. The cost-leadership strategy is to take advantage of the enterprise avoid or mitigate the impact of external threats. Through the merger, CEA received a huge of resources; however, these resources are not really playing a role. If CEA cannot full use of these resources, these resources will affect the development of enterprises. These resources as inside restricted need to become the outside strength. In addition, company staff mobility, and operational confusion, CEA has been to optimize the internal management of the development strategy. 7.0 Conclusion China’s aviation market entered a rapid development period; the performance of the airline has been the turning point.

With a high level of CEA actively promote strategic cooperation will help CEA and improve their management, operations and profitability. CEA is one of the three major airline company in China, which shouldering responsibility for the development of the aviation industry in China. Through this analysis, we can clearly see the CEA have strengths, weaknesses, opportunities and threats, as long as the Eastern able to choose the right strategy, I consider that China Eastern Airlines will be able to a leader in the Middle East aviation industry for a long time. 8.0 Reference List Anon., n.d., About China Eastern, China Eastern Airlines, [Online] Available at: https://easternmiles.ceair.com/about/zjdh/t2013812_11832.html. [Accessed 14 April. 2014] Anon., 2014, China Eastern Social Responsibility Report on 2013. China Eastern Air Company, [Online] Available at: https://pdf.dfcfw.com/pdf/H2_AN201403260005322096_1.pdf. [Accessed 14 April. 2014] Johnson, G., Whittington, R. & Scholes, K. (2012): Fundamentals of Strategy, 2nd edition, England: Pearson Education. World Economic Outlook, 2014, International Monetary Fund, [Online] Available at: https://www.imf.org/external/pubs/ft/weo/2014/update/01/pdf/infographic.pdf. [Accessed 14 April. 2014]

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