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China Eastern Airlines - Alliance Analysis Report


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Oneworld & China Eastern Airlines.

A more in-depth look in points made in my previous presentation on China Eastern - Alliance Analysis.

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China Eastern Airlines - Alliance Analysis Report

  1. 1. -781050-944880<br />China Eastern Airlines (MU) – Alliance Analysis Report<br />1905034290<br />Module title: CA3007C, Strategic Management in the Aviation Industry<br />Module leader: Nicholas Coleman<br />Assignment title:Airline Alliances and Future Opportunities<br />Student: Adam Marriott 06008442<br />-666750743585<br />Table of Contents<br /><ul><li>Introduction3.
  2. 2. China Eastern Overview4.
  3. 3. Key Facts & Overview 4.
  4. 4. China Eastern Key Destinations and Route Development4.
  5. 5. Oneworld Overview6.
  6. 6. Overview6.
  7. 7. Route Network6.
  8. 8. Benefits of Joining an Alliance8.
  9. 9. Advantages China Eastern offers Oneworld8.
  10. 10. Route Network8.
  11. 11. Government Bypass9.
  12. 12. Shanghai Airport9.
  13. 13. Advantages Oneworld offers China Eastern 10.
  14. 14. Cost Savings10.
  15. 15. Alignment of Policy and Procedures10.
  16. 16. Code sharing 11.
  17. 17. Star and SkyTeam12.
  18. 18. Star12.
  19. 19. SkyTeam12.
  20. 20. Market Conditions13.
  21. 21. Hurdles to Overcome15.
  22. 22. CAAC Approval15.
  23. 23. Restructuring & Cost15.
  24. 24. Sponsorship & Antitrust16.
  25. 25. Conclusion17.
  26. 26. Bibliography 18.
  27. 27. Introduction</li></ul>The main aim of this report is to illustrate the various variables involved for China Eastern Airlines (MU) to join a Global Airline Alliance, in this case Oneworld. An overview of MU and Oneworld will give an easier understanding of how both parties could complement each other if they were to join forces. <br />MU stands ultimately alone in commercial aviation, being the last of the three main Chinese Government Airlines to not be part of a Global Alliance, a distinct disadvantage to have as competing Airlines continue to move to become a single entity. MU continues to mainly operate within the Chinese Domestic market with very few routes out of this niche, an Alliance would ultimately feed more passengers through its Chinese Shanghai hub onwards to equally lucrative domestic routes. An association with an established reputable Alliance will not only boost passenger numbers but will also provide global coverage and brand recognition worldwide. China Southern and Air China already take full advantage of these benefits through their own Chinese Hubs providing proof that a Chinese Airline can benefit considerably from Alliance partnership. <br />MU is not the only party to gain from joining the Oneworld Alliance, Oneworld lack a main Chinese domestic carrier in its Global Network. By adding MU, Oneworld becomes far more competitive against its Alliance rivals Star and SkyTeam who are both considerably larger and have already gained much exposure of the Chinese Domestic route network through China Southern and Air China. <br />The body of the report will provide analysis on the following subjects:<br /><ul><li>How could MU and Oneworld benefit from a partnership?
  28. 28. Why is MU better suited to Oneworld opposed to rival Global Alliances?
  29. 29. A detailed analysis of the current market and the possible future market if MU was to join Oneworld
  30. 30. What hurdles does MU have to overcome to become a fully fledged Alliance member?</li></ul>In summary the report will conclude on whether a MU and Oneworld partnership is feasible for the current and future market. <br /><ul><li>China Eastern Overview
  31. 31. Key Facts & Overview
  32. 32. Figure 1 - CITATION pla10 l 2057 (, 2010)
  33. 33. 375285048260One of the three largest Airlines in China by fleet size and the primary air carrier serving Shanghai – Chinese/Global Hub, 2010 Shanghai World Expo, Financial centre
  34. 34. Co-operation with American Airlines (Oneworld), Air France (SkyTeam), British Airways (Oneworld), Qantas (Oneworld) and Cathay Pacific (Oneworld) offering over 300 destinations CITATION Fly10 l 2057 (Fly China Eastern, 2010)
  35. 35. Not an Alliance member however, keen interest to join into SkyTeam or Oneworld. Announcement to be made in April. CITATION Chi10 l 2057 (, 2010)
  36. 36. Recent merger with Shanghai Airlines (Star Alliance Member) with it becoming a MU subsidiary allowing for a boost in traffic and cost-saves CITATION Chi10 l 2057 (, 2010)</li></ul>To look at competitors, both China Southern (SkyTeam) and Air China (Star) are part of major Alliances giving China Eastern disadvantages including, a higher cost base, lack of a global frequent flyer programme, and a distinct missed opportunity for global brand coverage and recognition. <br />MU Chairman Liu Shaoyong – ex China Southern CEO, moved China Southern into SkyTeam Alliance. CITATION sky07 l 2057 (, 2007) However, MU is far better positioned to move into Oneworld to fill the Chinese gap in the Alliance and reduce overlapping and any antitrust problems that may arise. <br /><ul><li>Figure 2 - (, 2010)China Eastern Key Destinations and Route Development</li></ul>3268980207645<br />MU primarily focuses upon the Chinese Domestic routes with its main hub of operations out of China’s financial capital Shanghai. MU offer 330 domestic routes and 80 international routes (largely code-shared with other Airlines). Co-operation with a global Alliance would allow all member Airlines to exploit Shanghai as an international hub and allow for a greater partnership in terms of frequent flyer programmes. <br />A list of key international destinations can be found below in figure 3 which shows an already strong case for further co-operation within an Alliance. The current routes coupled with the benefits an Alliance brings would strengthen not only MU but each participating Airlines. Room for growth into further destinations e.g. Shanghai - Los Angeles onwards towards domestic USA routes allowing for further feeding into Shanghai and domestic route pairings within China.<br />Figure 3-1143095885<br /><ul><li>Oneworld Overview</li></ul>4251960209553.1 Overview<br />Oneworld Alliance is currently positioned as the 3rd largest Airline Alliance after Star and SkyTeam. Founded by British Airways, American Airlines, Canadian Airlines, Cathay Pacific and Qantas in 1999 its statement is ‘To generate more value for customers shareholders and employees than any Airline can achieve by itself’<br />Figure 4 - (, 2010)<br />3.2 Route Network<br />Oneworld like other Alliances offer a large network that allows for each of its member Airlines to operate on the premise that they can all work together to feed passengers throughout the world through the incentive of frequent flyer programmes. As global as Oneworld is as an Alliance, a gap within its network remains with mainland China and domestic routes largely un-served. With China continuing to be a growing power with propensity to travel in line with economic growth and the potential of travel on China’s sheer population it makes a partnership with MU an imperative for Oneworld to remain competitive. <br />598170114300<br />Figure 5<br /> <br />Potential for MU to work within the Oneworld Alliance can be shown below in figure 6. Oneworld operate in four major markets but lacks a distinct Chinese partner with Cathay Pacific serving just Hong Kong. <br />Figure 6 - (, 2010)<br /><ul><li>Benefits of Joining an Alliance
  37. 37. Advantages China Eastern offers Oneworld
  38. 38. Route Network </li></ul>876301415415In general the main advantage MU offers Oneworld is the domestic route structure within China and its placement in the world. “The underlying philosophy of the Airline Alliances ... Is not so much an emphasis on more effective use of resources ... But rather an overall reliance on the strategy of location CITATION Abe01 p 4 l 2057 (Abeyratne, 2001, p. 4)Oneworld at present does not have the same level of coverage as rival Alliances in China and therefore has a large destination hole within Asia. This becomes apparent in the Oneworld route maps in figure 7. <br />Figure 7 - (, 2010)<br /><ul><li>Government Bypass</li></ul>China is a communist government controlled country this also applies for the Civil Aviation sector of the country. “The reason for Airlines banding together is to share an otherwise wasted market which is still regulated by bilateral government negotiations” CITATION Abe01 p 3 l 2057 (Abeyratne, 2001, p. 3)The CAAC (Civil Aviation Administration of China) the governing body of Aviation within China imposes the following regulation for foreign carriers: <br />“(h) Effective March 25, 2010: an additional 21 weekly frequencies<br />(f) Effective March 25, 2011: an additional 14 weekly frequencies<br />(g) Effective March 25, 2012: an additional 14 weekly frequencies” CITATION sta07 l 2057 (, 2007)<br />China Eastern bypasses the bilateral agreements put in place by CAAC; as for foreign carriers there is opposition and a protection mentality to protect government owned Airlines. Foreign route development in China is non-existent. A partnership with Oneworld is the best way to overcome a route black-hole for foreign carriers, while code-share agreements exist there is a lack of real co-operation that would allow for cost saving and better position for China Eastern and Oneworld competitively. <br />4.1.3 Shanghai Airport<br />240030762635Shanghai Airport is currently the 3rd busiest Airport in China and the busiest in terms of international passengers. Having the largest proportion of international passengers poses the largest opportunity for Oneworld the frequency share China Eastern has at Shanghai Airport can be shown below in figure 8. <br />Figure 8 - (, 2009)<br />Shanghai Airlines recently merged with MU and is currently part of the Star Alliance providing key Shanghai capacity for MU. If MU is to join Oneworld, Shanghai Airlines will be forced to leave Star and also join Oneworld as an affiliate member. Damaging the power of Star and boosting Oneworld’s China presence further, a prime opportunity for market gain and strength in the Shanghai region for Oneworld.<br /><ul><li>Advantages Oneworld offers China Eastern
  39. 39. Cost Savings</li></ul>MU would benefit from the advantages of sharing assets such as sales offices, maintenance and operational facilities, IT, sharing of lounges, ground personnel and a greater economy of scale on various purchases such as catering allowing for big discounts. All these factors directly benefit MU allowing for cost savings to allow for a more efficient Airline and essentially a more profitable Airline.<br />The passenger is also to benefit from MU becoming a Oneworld member with key points including: possible lower prices through cost savings from sharing, shorter travel times, faster mileage rewards, increased brand awareness, extended and optimised networks through code sharing agreements, wider range of Airport Lounges at the accredited Oneworld standard, round the world tickets allowing for Shanghai to become a stopover rather than a final destination, ease of flight booking with no need to search for connections from competing Airlines and ultimately more destinations and departure times for any shared route with Alliance members. <br /> <br /><ul><li>Alignment of Policy and Procedures</li></ul>Alliance groupings form tight economic relationships between each of its members. This promotes co-existence which can help to rid of the product differentiation (an advantage to MU which lacks an established international brand image and brand recognition) allowing for the passenger to expect a continuation of high quality service offered by other Alliance members, therefore, reducing the anticipation of flying with an unfamiliar carrier such as MU. <br />Airline strategies can be complimented to each member opposed to countering each strategic move. Allowing for MU to establish itself with greater ease into international markets by understanding the various local strategies of an area and the competitive advantages some strategy would have in new area. <br />Ultimately, an alignment of policies and procedures will help MU and Oneworld members work together to develop solutions that can be applied throughout the industry and to share best practice.<br /><ul><li>Code sharing </li></ul>‘Code sharing between two Airlines is essentially two different Airlines posing as one, sharing or rotating aircraft crew and responsibility’ CITATION Abe01 p 7 l 2057 (Abeyratne, 2001, p. 7)<br />The benefits for is a bigger access to a much larger passenger base with extensive code shares enabling MU to gain publicity through Oneworld member websites e.g. booking a flight from Seattle to Shanghai can be booked through one Airline opposed to having to book two separate flights if a connection is needed. The marketing benefits for MU allow for co-ordinated baggage handling, schedules, use single check-ins and agree legally which Airline is responsible for the passenger for the entire journey. There is also the advantage of higher convenience, higher quality of service and time saving from a more efficient and stress-free experience. <br />Oneworld can ideally offer an added layer of protection against China Southern and Air China in an already competitive market. Giving a credited reliable route network that can be utilised by both parties and allow for a greater co-operation that cannot be achieved through operating as a separate entity. <br /><ul><li>Star and SkyTeam</li></ul>China Eastern would not fill the route niche in Star or SkyTeam due to both Alliances containing major Chinese Airlines. Star – Air China, SkyTeam – China Southern. A result of severe overlapping on routes would occur.<br /><ul><li>444246014605Star
  40. 40. Air China already catering for the Alliance within China domestically giving MU no opportunity to offer a niche in the Alliance.
  41. 41. Shanghai Airlines is part of Star giving a slight incentive to MU to gain membership but has no role in the choosing of Alliance Membership as it is merely an affiliate of MU.
  42. 42. SkyTeam
  43. 43. China Southern is a major rival in the Chinese domestic market; it would not compliment MU routes and lead to major antitrust problems with possible domination on routes with increased frequencies through code-shares.
  44. 44. 454533098425
  45. 45. Anti-trust regulator CAAC may prevent MU joining due to over dominance with China Southern domestically.
  46. 46. MU Chairman ex China Southern CEO, moved China Southern into SkyTeam – may be inclined to do the same for MU. Previous experience may play a role in this decision however, there is no just cause for MU to join SkyTeam and the likely hood of it ever being accepted on the grounds of anticompetitive behaviour is very low.
  47. 47. Market Conditions</li></ul>Currently the Chinese Domestic Airlines are coming out of the worst recession and loss of profit in decades with MU and rivals put under intense pressure. China Eastern was given a seven billion yuan ($1.03 billion) bailout. China Southern Airlines' parent has also received three billion yuan, but Air China has received no bailout because it is in relatively strong shape. CITATION Chi097 l 2057 (China bucks the downturn , 2009)<br />The current market dictates that there needs to be a shift in wastage and a change into a more cost efficient restructured MU. To do this MU have in recent times cut management between 10% and 30% allowing for greater efficiency and ultimately a reduction in costs over the coming years. CITATION chi09 l 2057 (, 2009)<br />The greatest reduction in costs and increased efficiency would be through co-operation which, would allow MU to regain ground on China Southern and Air China by joining Oneworld. By doing so MU will become a more competitive and strategically important Airline globally and domestically as shown in 4.2 Advantages Oneworld offers MU within this report. <br />1878330294640<br />MU would give more power to Oneworld over Star and SkyTeam allowing for a considerable gap to finally be filled in Oneworld’s route network. A strengthened Alliance would allow for a more competitive Alliance, this is especially true due to the exponential growth in Chinese passenger numbers in the past 3 years, this can be seen in figure 9 with clear potential in the future. <br />Figure 9 - (, 2010)In 2008, China’s airlines flew 192 million passengers. Last year, this figure jumped to just over 230 million.Ultimately the main objective for MU joining Oneworld is to achieve a fairer, more competitive Asian market for passengers and MU alike allowing for an increase in choice. <br /> <br />-41910723265In short an Oneworld partnership would help sustain the growth needs of China with added security to help MU weather the global recession. The extent of the recession on Commercial Aviation and the near economic collapse of the financial sector can be shown below in figure 10. <br />Figure 10 - (, 2010)<br />Recessions’s come and go and lessons are generally learnt from each of them, when the global market regains confidence figure 10 is likely to look very different with growth between each market area returning.<br />The future market outlook from an Oneworld partnership would result in: MU brand image boost, more attractive frequent flyer programme for business/first class, and ease of use for passengers travelling to China. These points alone coupled with the cost savings made would allow for MU to become more competitive in the Chinese market and gain a foothold in the Global Market. <br /><ul><li>Hurdles to Overcome
  48. 48. CAAC Approval</li></ul>MU would need CAAC approval for joining Oneworld, The CAAC imposes regulations on domestic and international routes, air fares, jet fuel prices, aircraft maintenance, and air traffic control, among others. While these regulations are necessary to ensure safety in the industry, they also limit the flexibility of MU to respond to competition, lower expenses, and adapt to market conditions. An Alliance membership would require a closer international co-operation that would almost bypass CAAC priorities.<br /><ul><li>Restructuring & Cost</li></ul>Restructuring of management and service is needed to enter Oneworld; a higher quality is expected with integration of frequent flyer programmes. <br />Currently MU is credited with being a 3 Star Skytrax member CITATION Sky10 l 2057 (Skytrax, 2010), showing that the Airline is currently service-wise up to standard as fellow members British Airways and American Airlines are both 3 Star Skytrax members also. MU will have to incur costs to ‘sync’ with other Alliance members more so. Flight synchronisation will be a high cost with possible sacrifices of ideal slot times may have to be made to be able to successfully have connecting flights with other Alliance members. <br />IT systems will have to be changed and synchronised with other members to ensure that familiarity continues throughout Oneworld. While this cost may not be inherently large at first glance, the overall cost may rise considerably when MU factor in the time it may take to change IT systems and the subsequently retraining of staff to use the new system. <br />Oneworld Lounges and Oneworld branding would also be a cost that MU will have to pay for, with lounges either being refitted or built from scratch to largely cater for a more unison approach for the Alliance. By keeping the Alliance uniform with each lounge being to a similar standard ensures that there is a level of familiarity and service that is maintained throughout the Alliance network.<br />Membership fees are also a large cost to become part of an Alliance, with monthly or yearly fees being imposed upon an Airline for the privilege and overall upkeep of the Alliance. This cost is largely not enclosed towards the public and varies from each member. However, it is essential to ensure that advertising, marketing and the overall upkeep of the Alliance is sustained. <br />7.3 Sponsorship & Antitrust<br />Sponsorship from an existing member is needed to be accepted into an Alliance “American Airlines parent AMR Corp is in advanced talks with China Eastern Airlines to bring it into the Oneworld Alliance” CITATION reu10 l 2057 (reuters, 2010). This is to ensure that MU is invited and therefore welcomed into the Alliance as opposed to selling itself to the Alliance. It offers a greater success rate to becoming accepted as a fully fledged member. <br />Antitrust is not a major issue for Oneworld membership as MU would not be teaming with one of the big three Chinese Airlines. However, the CAAC and government bodies may impose similar regulations to ensure that competition is kept fair for all three major Chinese Airlines. If MU was to join SkyTeam or Star which already has Chinese Domestic carriers, a larger threat would come from possible antitrust problems. This is not the case for Oneworld making it the ideal candidate for MU.<br /><ul><li>Conclusion</li></ul>There are distinct advantages with gaining membership in Oneworld for MU with costs and route development being the primary incentive for MU. For Oneworld the incentive is slightly different, it is merely filling the gaps of an already near complete global network. The importance of China globally as an economic power justifies that filling this gap is an imperative and necessary for Oneworld to remain competitive against Star and SkyTeam. <br />The Oneworld frequent flyer programme will see the real benefit from membership; with an increase of 1.3billion Chinese citizens (just short of doubling Europe's Population). The potential for business is truly immense. At the present rate, the growth of an increasing middle-class is fuelling the propensity to travel within China and Internationally. <br />MU is to make an announcement within April 2010 on which Alliance they will eventually join and will eventually team resources with Alliance members to make full membership a reality. With the Shanghai World Expo to be a major boost for travel to China the need to strike for Oneworld is very near, it would be seen as a missed opportunity for Oneworld with no Chinese Domestic Airline of their own. To miss on this major event and the inevitable Aviation power-region that China has become and will continue to grow into. Failure to gain MU would not only be a terrible move for Oneworld but for each of its Alliance members. <br />Side Note – It has been announced within this week April 16th-23rd that China Eastern Airlines is to join SkyTeam Airline Alliance in 2011 CITATION fli10 l 2057 (, 2010). I personally see the partnership to not be as justified as Oneworld membership. SkyTeam already has China Southern Airlines within its network allowing for domestic routes within the Alliance network. Having a second major Chinese domestic Airline in its network only promotes overlapping on routes. While this may seem a distinct advantage in terms of giving the passenger ideally more choice when choosing a route, with increased frequency, it does not promote competition. I will not be surprised if the CAAC was to block or perhaps impose rules on to China Eastern and China Southern on the grounds of anti-competition with a duopoly of frequency compared to Air China. <br />I still believe that joining Oneworld was the better choice on the grounds of giving both parties optimal competiveness globally.<br />Word count: 3300 <br />Bibliography BIBLIOGRAPHY (2007, November 15). Retrieved March 2010, from, April 17). Retrieved March 2010, from, 01 10). Retrieved March 2010, from, April 16). Retrieved April 2010, from Retrieved March 2010, from (2010). Retrieved March 2010, from Retrieved March 2010, from Retrieved March 2010, from, Feb). Retrieved March 2010, from Retrieved March 2010, from, R. I. (2001). Aviation Trends in the New Millennium. Aldershoot: Ashgate.China bucks the downturn . (2009, 06 17). Retrieved from (2010, March 18). China Eastern-Shanghai Airlines merger may boost profit. Retrieved March 2010, from China Eastern. (2010, March). Retrieved March 2010, from (2010, Feb 24). Retrieved March 2010, from reuters: (2010). Retrieved March 2010, from (2007, July 09). Retrieved March 2010, from<br />