Strained Political Relation

This case deals with the problems faced by Taiwan-based full service airline, China
Airlines Ltd. (CAL). Much of its trouble was attributed to its poor safety record in the !!"s
that severely tarnished its brand ima#e besides lowerin# passen#er traffic. $n addition to this,
analysts felt that faulty pilot recruitment policies, lenient fli#ht crew trainin# process, la%
maintenance systems, hi#h cost operational structure, inefficient corporate culture, and the
cost-cuttin# policies of the mana#ement which sacrificed safety standards added to its woes.
The strained political relations between mainland China and Taiwan which prohibited the
airline from launchin# fli#hts to routes in China only compounded its problems.
The Low Cost Threat
1) Fuel price.
&uel price has been the dominant driver of airline financial performance over the last
three years. Accordin# to analysis, airlines responded by improvin# their efficiency of fuel
use and also by improvin# labour productivity. 'orld dependent on the fuel lar#ely and the
rise in the fuel prices impactin# the decisions of the countries and this topic (il prices still
matter to the health of the world economy. )i#her oil prices since !!! partly the result of
(*+C supply mana#ement policies contributed to the #lobal economic downturn in ,"""-
,"" and are dampenin# the current cyclical upturn- world ./* #rowth may have been at
least half a percenta#e point hi#her in the last two or three years had prices remained at mid-
,"" levels.
Today0s airlines face many new problems. The historical trends show the true story of
what is happenin# in the airline industry. There are many factors that contribute to these
problems and $ncrease in fuel rates1cost is one of them. 'ith the current political disputes in
+astern +urope and the unrest in the Middle +ast, the cost of oil is li2ely to rise as is the
unstable nature of this resource and industry in #eneral.
'hy does the airline industry which is always sensitive to price chan#e ta2e no action this
time3
The 4outh-west Airline Company disclosed that now it was the pea2 period for
tourism, and the number of airline passen#ers had 5ust revived a little. $f we raised the tic2et
price at this time the passen#ers would scare away. 4everal transportation companies also
mention that the domestic transportation is sta#nant recently, and it would be further
overwhelmed if the airline raised price now. Therefore under the present condition of fuel
price sur#e, the airline should minify the loss throu#h mana#ement stren#thenin#, cost
lowerin# and efficiency improvin#, but not simply raise the price.
$ncreases in fuel prices affect the airlines in two ways6 the cost of fuel has an obvious
and direct impact on the cost of operation, and fuel cost increases have repeatedly tri##ered
economic recessions, which in turn result in a substantial decline in demand for air travel and
air car#o. Chan#es in cruise speed, use of fli#ht simulators, sophisticated fli#ht plannin#
systems, increasin# load factors and the introduction of newer, more aerodynamic aircraft
desi#ns combined with modern en#ine technolo#y, are all recent success stories. Airlines
continue to loo2 at every possible facet of their operations to further improve fuel efficiency
throu#h measures li2e ta%iin# on one en#ine, delayin# startup and push bac2, removin# all
discretionary wei#ht, and usin# #round power instead of on-board au%iliary power units
while at the #ate.
These and similar measures are increasin#ly bein# used where commensurate with
safety considerations to save fuel and, not incidentally, to reduce emissions. )owever, as of
today our options for further dramatic improvements on the order of what we have been able
to achieve over the past few decades are limited.
2) Shrinkage of High!nd "e#and for $ir Tra%el
/(T0s analysts believe that the collapse of hi#h-end demand at the end of ,""" was
not simply another cyclical chan#e, but rather an important structural chan#e driven by a
powerful combination of economics and technolo#y. 'hile leisure travelers have always
chosen an airline primarily based on price, there is #rowin# evidence that business travelers
have become si#nificantly more price sensitive. &or many, the chan#e is li2ely to be
permanent. To#ether, the economic downturn be#innin# in the latter half of ,""" and !1
en#endered some ma5or chan#es in business travel purchasin# habits. 7ecause cuttin# travel
bud#ets became a corporate imperative, businesses embraced lower cost travel alternatives,
includin# low-cost air carriers.
Many trips that would have been routine 5ust a few years a#o simply weren0t ta2en.
Consider how many fewer trips you ta2e today durin# the course of a ma5or transaction than
even a few years a#o. That0s because your clients are more attentive to such costs and
because it is so easy to e%chan#e redlined documents electronically. 7usinesses in every
sector made similar chan#es in their travel patterns, substitutin# web conferencin# and other
technolo#ies for face-to-face meetin#s.
&) !#ergence of a 'ew Cadre of Lowcost Carriers.
The new #eneration of 8.4. low-cost carriers 9 li2e :et7lue, AirTran, and &rontier 9
are bi##er and better than the previous #eneration of LCCs, most of whom ultimately failed.
&lyin# on a low-cost carrier #enerally used to mean infre;uent service on a#in# airplanes
across a limited networ2. <o lon#er. LCCs now offer convenient schedules, state-of-the art
aircraft, and amenities that meet or e%ceed those offered by the =full service> airlines. This
competitive challen#e has forced pre-dere#ulation airlines 9 we now call them =le#acy>
carriers -- to ta2e a hard loo2 at their business strate#ies and reduce costs wherever possibl
and third, the increased transparency of alternative airline offerin#s and less e%pensive
itineraries made possible by the internet and other technolo#ies.
(thers Pro)le#s*
Septe#)er 11th* 2++1 Traged,.
The $mpact of the 4eptember , ,"", terrorist attac2s on th 8.4 continued to hamper
the airline business. America constituted CAL0s main operational mar2et in relation to both
car#o and passan#er services. )owever after the attac2s, CAL had suffered ma5or losses of
84? ,.@ 7illion due to a AB drop in passan#er traffic.
(ctober !, ,"", Taipei, Taiwan - +ver since the be#innin# of year ,"", the #lobal
recession has hit hard on airline industry. *assen#er traffic was lower than e%pected and air
car#o mar2et also shran2. All the ne#ative factors caused operational difficulty amon# airline
companies worldwide. $n addition, The terrorist attac2 on 4eptember th and the war
between the 84 and Af#hanistan have caused hi#her insurance cost and further recession in
airlines. $n mid-4eptember, the dama#e done by a severe typhoon in Taiwan also reduced the
demand for Taiwanese passen#ers to travel abroad. All the ne#ative factors contributed to the
decrease of passen#er and car#o revenues and profitability in China Airlines in the third
;uarter.
China Airlines therefore announced to reduce its financial forecast for ,"". *re-ta%
profit was reduced from ori#inal <T? @.,C billion to <T? .@D billion, a AD.!EB decrease.
(peratin# revenue was lowered from ori#inal <T? D!. billion to <T? D".C billion.
*assen#er revenue was e%pected to be <T? F@.A billion, a ,.ADB decrease, while car#o
revenue was revised to be <T? ,@.AE billion, a ,,.@B decrease.
The ma5or cause of this forecast revision was the less-than-e%pected performance of
third ;uarter. $n the summer of ,""", China Airlines #enerated <T? , billion profit. /ue to
the recession, the third ;uarter this year did not match last yearGs level. Althou#h the
economic recession will han# around in the fourth season, the traditional hi#h season of air
car#o traffic, the #rowth of hi#h yield passen#er traffic and the effective fuel hed#in# and
cost control policy will enable China Airlines to reach the revised financial forecast.