How Do You Solve A Problem Like Air Macau

How do you solve a problem like Air Macau ? (Part II) A turn-around plan from BetterWings.net

Index
Recap of the “problem” Air Macau is facing
Analysis of Air Macau’s marketing and operating environment
Strategies to revamp its business model and revitalize Air Macau

The Problem
Air Macau derives 70% of its revenue from cross strait transit traffic between Taiwan and Mainland China
Political landscape has changed and that revenue source is going away as airlines from Mainland China and Taiwan offering direct flight between the two sides starting Aug 30, 2009
Air Macau faces bankruptcy unless dramatic actions are taken to re-invent the company
For a detailed analysis, please see part I of this document at:
Blog posting: How do you solve a problem like Air Macau Part I
http://bit.ly/yACKi

Analysis of Air Macau’s Operating and Marketing Environment

Political Factors
SAR’s Air Traffic Rights with the Main Land
Even though Macau and Hong Kong are parts of China, but as Special Administrative Regions, their airlines need to negotiate air traffic agreement before serving mainland China markets, the same rule apply to main land airlines who would like to serve Macau or HK
Passengers need to clear customs when traveling between these regions, however, it is a fairly easy and routine procedure for Pearl River Delta area residents
These restrictions have limited the abilities of HK and Macau based airlines to expand into the fast growing mainland China market
Hong Kong, Hong Kong
Facing the rapid rise of Beijing and Shanghai as new transportation and economics hubs, Hong Kong government has lobbied heavily with Chinese central government to protect HK’s economics center and air transport hub status
Due to its proximity to HK, any efforts by Air Macau to further attract either mainland traffic or international traffic will likely be met with resistance from stake-holders in Hong Kong and Beijing

Political Factors (continued)
Air Macau Enjoys Plenty of Air Traffic Rights out of Macau but Under-Utilize Them
As a special administrative region of China, Macau has signed its own bi-lateral air traffic rights agreement with 49 countries , often with more flexible terms than those between Mainland China and foreign countries
However, Air Macau only serve 4 foreign destinations within Asia, there are no long-haul international services to Europe, America, Australia & Africa
Air Macau has traffic rights to serve 37 mainland China destinations , however, it only serves 7 at the moment
Based on an agreement with the government, Air Macau enjoys a 25 year monopoly concession to operate air services out of Macau International Airport

Macau is a Tourist Destination with a high-income Economy
Macau:
Tourism based economy, much of it geared toward gambling
The highest-volume gambling centre in the world ( that is right, it is bigger than Las Vegas)
Sands Macau – largest casino in the world
Wynn Macau, Venetian Macau, MGM Grand Macau
A high income economy with GDP per capita of US$28,436 (2006), average growth rate 13% after hand-over to China in 1999
Strong economic and trade relations with EU, especially Portuguese-speaking countries
Ranked 21 st by World Tourism Organization in Year 2006
About 25 million incoming visitors in 2007, 50% from mainland China, 30% from Hong Kong
Macau is an offshore financial centre, a tax haven and a free port

Competitors in the Region
Competitors
Cathay Pacific ( One World airline alliance founding member)
Well managed flag carrier of Hong Kong, serving 58 destinations in 27 countries, a respected brand among international travelers
Dragon Air ( One World member)
A Hong Kong based airline serving 29 destinations in 11 countries in Asia Pacific region with extensive network in Mainland China and high name recognition for quality services
Hainan Airlines Group
The Hainan Island based HA group, the fourth largest among mainland airlines, has high ambitions in expanding its international profile and controls HK based Hong Kong Airlines & HK Express Airways
Shenzhen Airlines
The airline serves 85 domestic Chinese destinations from its home base in Shenzhen, which is only a short ferry ride away from Macau
China Southern Airlines ( Sky Team member)
Asia’s largest airline by fleet size and passenger carried
Serving 121 destinations in 31 countries and regions, however, its presences in Europe Oceania and North America are weak

Allies
Allies
Air China ( Star Alliance member)
Flag carrier of mainland China, serving 185 destinations around the globe
The world’s largest airline by market capitalization, second largest airline in China (after China Southern) by fleet size
Air China owns 51% of Air Macau
Air China is based in Beijing, with operational hub in Shanghai, Hangzhou, Chongqing, Tianjing and Hohhot, however, it has a relatively weak presence in southern China.
Viva Macau
A long-haul, low-cost carrier based in Macau
Serving 7 destinations in Japan, Indonesia, Vietnam and Australia
Viva Macau has to cooperate with Air Macau since the latter holds all the air traffic rights from Macau

Macau’s Short Distance to HK Poses Both Challenges and Opportunities Travel between the west bank of PRD (Macau, Zhuhai) and HK relies on water transport It is a 60 min ferry ride between Hong Kong and Macau Macau Airport HK Airport

Macau Airport’s Catchment Area is Not Just Macau itself, It Is The Whole Pearl River Delta Region Macau, Zhuhai, Shenzhen and Hong Kong are tightly linked by ferry, highway, rail and helicopter services Zhuhai Shenzhen Hong Kong Macau PRD year 2005 GDP US$221.2 Billion Growth 6% higher than China as a whole Pearl River Delta of China

A Bridge Will Profoundly Impact on Air Macau’s Business Model
The planned Hong Kong-Zhuahi-Macau bridge will connect the west side of Hong Kong to Macau and Zhuhai.
Construction is expected to start in 2011 and complete in 2016.
After the 29 km bridge is built, it takes only 35 to 40 minutes to go from Hong Kong to Macau and vice versa.
The bridge will fundamentally change travel patterns:
Macau will become a viable air travel destination for PRD visitors
For both international and mainland China visitors to Hong Kong, Macau could become their first stop to the region
Shenzhen Hong Kong Macau Zhuhai

Summary: A SWOT Analysis (Page 1)
Strength
Macau itself is a high income economy with a strong tourism/gambling industry
Macau is also a Special Administrative Region of Mainland China, one of the world’s largest and fastest growing economies.
Air Macau holds a monopoly position in the Macau air transport market
Air Macau also enjoys air traffic rights to many mainland China and international destinations, a lot of them are not yet utilized
Air Macau has a strong ally in Air China, who is also Air Macau’s majority owner
Unlike many mainland Chinese airlines, Air Macau has a multi-cultural English speaking work force
Because of its history, Air Macau also has strong ties to Europe through Portugal
Weakness
Macau is not a regional business center
Macau’s economy relies too much on gambling, therefore have limited appeal to other types of travelers
Most travelers to the region are attracted to Hong Kong and only visit Macau as an after-thought
Air Macau is not well managed airline
No vision, no ambition
Relied too much on Taiwan-Mainland stop-over traffic
Many air traffic rights are not utilized
Does not have a strong brand
Product and services are generic, not inspiring
Can not compete with better managed Hong Kong based airlines
No meaningful alliance for its air transport business

Summary: A SWOT Analysis (Page 2)
Opportunities
After Macau’s handing-over to China, the SAR reformed the gambling industry, resulting in growth of the industry and more influx of tourists
As part of the world’s largest and fastest growing economy, Macau stands to gain from the rapid development of both the mainland and Hong Kong
Regarded as the “southern gate of China”, Macau is in a strategic position to link up China and the rest of the world, not just Taiwan
Macau’s close proximity to Zhuhai and other PRD cities enables Air Macau to catch not just local traffic, but also PRD air traffic
The planned Hong Kong – Macau bridge will enable Air Macau to carry air travelers who intend to visit to Hong Kong
Threats
The commencement of direct flight between mainland China and Taiwan means will dramatically reduce demand for Air Macau’s connecting flights
Both Cathay Pacific and Dragon Air are well positioned to take advantage of booming Chinese economy
Dragon Air has an extensive network linking HK and many mainland China cities, it also enjoys a great brand image among mainlanders
Many business travelers prefer to take Cathay Pacific when coming to China over other airlines in the region
Chinese airlines are growing fast, both in fleet size and market share. China southern, Shenzhen and Hainan Airlines are targeting same market that is Air Macau’s “home turf”
Any volatility in Asian economy, especially that of Hong Kong, will negatively impact on Macau’s tourism and gambling industry

Proposed Strategies for Air Macau

Objectives of Air Macau Turn Around Strategies
Find alternative revenue sources to replace revenue lost due to the start of direct flights between mainland China and Taiwan
Improve Air Macau’s market competitiveness by
Exploring opportunities to offer new product and enter new markets
Re-launching the Air Macau brand so that it can better distinguish itself from competitors in the regions among air travelers
Positioning Air Macau to compete effectively with Dragon Air and Cathay Pacific
Establish a new and sustainable business model so the airline can continue to grow

Strategy No. 1 Develop Macau O-D Markets (1)
Develop air traffic that originates and destines for Macau
More than 25 million people visit Macau each year, yet most of them arrived by land or water. People fly into Zhuhai and Hong Kong, and then transfer through bus or ferry. Make them fly to Macau directly!
How?
Air Macau should provide direct air link into more mainland Chinese cities, it already has the traffic rights, use them.
Work with Tourism Macau to offer incentives to passengers who fly to Macau directly
Win support and concessions from bureaucrats who are eager to improve local “foreign investment environment” by having an “international” flight to Macau at smaller cities.
Since Air Macau’s A320 might be too big to sustain twice daily flights to smaller mainland cities, regional jets should be considered

Strategy No. 1 Develop Macau O-D Markets (2)
Expand Macau Airport’s catchment area beyond Macau
Encourage residents of nearby cities in PRD region to use Macau airport for air travel by:
Offer long haul international flights out of Macau at lower prices
Offer hassle free ground or sea transportation for airline passengers
Establish local check-in facilities at nearby cities, facilitate luggage-free boarding process
Macau

Strategy No. 2 Look Beyond Taiwan for Traffic
Air Macau used to connect Taiwan to China, now it is time to connect the world to China!
Most international travelers arrived in China via three entry points: Beijing, Shanghai and Hong Kong
Capacities on flights to these three connecting points have not been able to keep up with the demand
There is a need and market to add a fourth point and Macau is an excellent choice
Air Macau enjoys extensive air traffic rights to 49 countries and 37 mainland China cities, most of them not currently utilized, why not connect these markets? These traffic will more than make up for those lost from the Taiwanese markets

Strategy No. 3 Build Alliances On Three Fronts (1)
Join Star Alliance
Air China, Air Macau’s majority share holder, is a Star Alliance member
There is no Hong Kong based Star Alliance carriers, and there is no Star Alliance member airlines in the whole Pearl River Delta region
One World – Cathay Pacific and Dragon Air
SkyTeam – China Southern Airlines
Star Alliance passengers arrived in Hong Kong and continue on to mainland China and South East Asia destinations have to use non-Star carriers
After become a Star member, Air Macau will be able to attract international travelers, especially frequent flyers to stay in the Star system, therefore share the traffic and revenue

Build a closer strategic partnership with Air China
Air China’s main hubs are in Beijing and Shanghai, its presence in southern China is weak
Air China has been trying to strengthen its position in PRD region by buying into Cathay Pacific, with limited success and lots of political resistances
Air Macau should position itself to be an strong alternative
Based outside mainland China, Air Macau can position its brand image to be similar to that of Dragon Air or Cathay Pacific
Establish Macau as a convenient entry point to mainland China, feed international, regional traffic into Air China’s Beijing/Shanghai hub from southern China, taking advantage of Air China’s extensive mainland China network
Distribute Air China passengers coming in from its Beijing hub to the south of China, Macau and Hong Kong
Help Air China strengthen its standing within Star Alliance

Build a strategic partnership with casino operators
Cross promotion
Air Macau passengers get discounts and other amenities at casinos
Casinos patrons get special low fares & perks with Air Macau
Loyalty program
Connect Air Macau’s frequent flyer program and casinos’ frequent customer program
Allow people to redeem miles for gambling chips and vise versa
Profit Sharing
Provide limited and controlled gambling on board flights to and from Macau, at the airport and in the frequent flyer lounge
Invite casino operators to invest in Air Macau

Strategy No. 4 Differentiate From Competition
Traditionally, Macau has been attracting different kind of visitors than Hong Kong.
If Hong Kong is the business center of the region, Macau is no doubt the center for leisure travelers / gamblers.
Accordingly, Air Macau should design its product offering to appeal to leisure travelers while keep business travelers in mind
Air Macau should strive for comparable service levels to Dragon Air and Cathay while keeping fares at least 15% lower than competition
Lower fares is possible because of Air Macau’s lower costs: ground handling, takeoff and landing, human resource
Make no mistake, quality and character of service are of paramount importance, Air Macau is not Ryan Air
Package air fares with hotels and Casino credits

Fleet Planning
Depending on the revenue replacing strategy Air Macau adopts, its fleet will need to be expended an rationalized
A detailed top-down or bottom-up fleet planning analysis based on traffic and economics data will be required to determine the model and number of aircraft needed, but that is beyond the scope of this document
Strategy Type of Aircraft Candidates Develop Macau O-D market, direct air link to smaller mainland cities Regional Jets Bombardier CRJs, C Series Embraer E Jets Chinese ARJs Long haul international flights out of Macau Airbus product due to family commonality with existing fleet A330 A340 Connecting the world with China Both RJs and long haul Airbus jets All of above

Marketing and Branding
A fundamental change in business strategy needs a strong and effective marketing campaign to get the message across, to create buzz and awareness among targeted customer base
TV and print ads to advertise Air Macau’s new services in PRD region and targeted mainland China markets
Create a brand image that is associated with excellent air service, affordable fares and a viable alternative to other transport means
Leverage the internet and social media to supplement traditional ads
Twitter, Blog, online discussion boards and Facebook

Sales & Customer Service
Reduce distribution cost by selling more tickets online
Redesign Air Macau website to streamline the online booking process
Adopt e-tickets
Enable frequent travelers to redeem miles online
Leverage Air China Sales Channels around the globe
Adopt passenger self-serve technology
Check-in online
Boarding pass printing kiosk at the airport
Self-serve luggage drop-off at the airport
Roaming airline agents armed mobile technology to assist passengers when needed

Summary
Strategies to expand Air Macau’s revenue source and revamp its business model
Connecting 2 nd and 3 rd tier Chinese cities with Macau by direct air link, developing local O-D air traffic
Look beyond Taiwan, flying long-haul international routes
From Taiwan connector to World connector: become the fourth entry point into mainland China for world travelers
Build strategic alliances with Air China and other Star Alliance airlines, joint forces with casino operators for cross promotion efforts
Expand and rationalize fleet based on business strategy
Strategies to strengthen Air Macau’s competing abilities
Position the airline as a premium airline on a budget
Re-launch the Air Macau brand through media blitz and social media
Streamline sales channels and enable passengers to self-serve

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How Do You Solve A Problem Like Air Macau

by ipresent on Sep 11, 2009

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