China Eastern Airlines (CEA) has a long history in Shanghai, and through a series of domestic and international mergers, has been firmly established as one of the three major air transportation firms in China (China Eastern Airlines, 2016a). Operating in accordance with Beijing, CEA was awarded the Five-Star Flight Safety Award by the Civil Aviation Administration of China and was among the 25 Most Innovative, as well as the Top 10 Corporate Social Responsibility companies in the Chinese edition of Fortune (China Eastern Airlines, 2016a, para 2). Additionally, the airlines maintained its strategic objective for “transforming from a traditional air passenger carrier to a modern integrated air service provider” (China Eastern Airlines, 2016a, para. 2). The primary stakeholder and majority shareholder of CEA is the Chinese government, through China Eastern Air Holding Company, so CEA is a public company, traded on the New York and Hong Kong stock exchanges.
The strategy outlined herein emphasizes the value of leveraging and furthering the momentum of modernizing China Eastern Airlines through continued investments in fleet and customer service technology, operational process improvements and manufacturing, and international marketing. These parameters juxtapose with a set of primary goals which include increasing income, investments and overall expansion. Currently, the primary market for China Eastern Airlines is domestic China, although all of the country’s major airlines and the central government would like to expand its air transportation more internationally (. The Center for Asia Pacific Aviation reported that approximately 82% of CEA’s revenue is from domestic travel, and most of the international traffic was with Japan (Shaoyong, 2019).
This five-year strategy outline overviews China Eastern Airlines’ mission, goals, objectives, and plan of action (China Eastern, 2017c). Beginning with a briefing of the company’s past, present, and future direction, this strategy pinpoints three primary goals and three alternative strategies with one recommendation. The outline includes implementation actions, performance measures, and a pro-forma, five-year forecasted income statement.
China Eastern Airlines is owned by China Eastern Air Holding Company and wholly-owned subsidiaries include Shanghai Airlines and China United Airlines and Juneyao Group which has bid for 5% of China Eastern (Freed & Goh, 2018). China Eastern Air Holding Company is controlled by the Chinese government. The state also has the majority stake in the other dominant Chinese airlines such as Southern China Air and Air China (Freed & Goh, 2018). Protective and supportive policymaking can be a competitive advantage for China Eastern Airlines.
Seeking to compete in the global market, the state-owned enterprise recently released about $2.25 billion in shares and approved a nearly $2 billion bid for 5% ownership by another Shanghai-based carrier, Juneyao Airlines (Freed & Goh, 2018, para. 3). China Eastern Airline’s ability to cooperate with competitors provides a viable advantage in strategic planning for international expansion as it grows alongside the two other major Chinese airlines. China Eastern Airline’s recent transaction of selling off 5% ownership to Juneyao Airlines, a direct competitor operating principally in the same international hub, is significant because it allows cooperation among the competitors which may or may not prove to be disadvantageous to China Eastern. The rationale behind the negotiations submits that allowing Juneyao to own a small percentage will help allay negative competition and improve the options for Chinese residents flying to Japan. Data reveal that the greatest percentage of China Eastern international flights go to Japan, the negotiations indicate the situation helps fund CEA’s fleet (Freed & Goh, 2018). Freed and Goh (2018) indemnify their research noting that “China Eastern said it will use the proceeds from the share sale to fund the purchase of 18 airplanes, 15 flight simulators, and 20 backup engines as well as to boost working capital” (Freed & Goh, 2018, para. 10). The company is diversifying ownership while also reinvesting in its fleet, which is in line with Chinese economic policy regarding public companies that compete internationally.
To keep pace with CEA’s major competitors, China Southern Airlines and Air China, the company must continuously reinvest earnings into the development of their product. For the better part of this decade, China Eastern Airlines has been investing heavily in upgrading its fleet. Between 2010 and 2013, the company spent over $25 billion USD “in list prices” on aircraft and phased out older models (Shaoyong, 2019, paras 3 & 4). Aggressive asset investments and fleet expansions parallel the actions of the three other major Chinese airlines and Chinese government policy. Managing such a quickly growing fleet is costly and the reported operating costs in the 2017 Annual Report that reflect this burden (China Eastern, 2017c).
China Eastern Airlines has been expanding its fleet at a rapid rate, and already plans to keep investing in aircrafts for the future, recently reporting their intentions to introduce 67 planes primarily from Boeing and Airbus to the fleet in 2018, 62 in 2019, and 61 in 2020, (China Eastern Airlines, 2016b, p. 40). Like CEA, the two other dominant Chinese carriers, Air China and Southern China Air, are also under majority ownership by holding companies controlled by the Chinese government, and “pretty much are on the same growth trajectory…plus they’ve all three publicly declared their intentions to keep on placing big aircraft orders over the next 15 years” (Reed, 2018, para. 4 & 5).
The expected growth of the Chinese government’s support for the aviation sector is an essential element of CEA’s strategy. China Eastern Airlines has had a strategy in place for international expansion, but it is a slow transitional process adjusting to the global travel market; nevertheless, the CEO, Shaoyong (2019) had predicted that Chinese aviation would be “on par” with the United States, which has long been the leader in international air travel, by 2030 (Shaoyong, 2019, para. 7). This may be a reality even sooner than Chairman Shaoyong had envisioned.
Reed (2018) noted in his article in Forbes claiming that China Eastern Airlines, Southern China Air, and Air China would all overtake the leading U.S. carriers in the next few years. All three companies intend to order hundreds of more planes and continue aggressive expansion strategies: “That’s a far cry from just 20 years ago, when China’s pathetic little airline industry was figuring out how to operate…back then two U.S. airlines…utterly controlled the U.S.-China air travel market” (Reed, 2018, para. 6). One change to China’s airspace competition is that Chinese governmental policies have restricted the airspace allowed to US airlines, thus increasing the domestic capacity of China’s airlines (Reed, 2018).
While Chinese people are traveling abroad more than ever, the flying frequency of the average Chinese citizen is still less than half the global average (Shaoyong, 2019, para. 25). This presents a major growth potential as expendable income and public interest in travel rises. However, the Chinese economy has slowed in its growth, thus impinging on financial resources for international travel. During the 2008 recession, China’s economic growth and gross domestic product (GDP) expanded in the midst of other countries’ financial stability falling. This catapulted China to a new status as the second largest economy in the world. The expansion has continued every year but has recently slowed. This discussion refers to the indications of China’s slowing growth rate and rising wages, along with the implications for short- and long-term Chinese manufacturing and trading patterns.
According to data in Trading Economics (2019), China is the largest export economy and the second largest import economy. The bulk of China’s exports from the highest to lowest are computers, broadcasting equipment, telephones, integrated circuits, and office machine parts. The products imported into China the most in the same order are crude petroleum, integrated circuits, iron ore, gold, and cars. The majority of China’s trade is with the United States, Japan, Germany, and South Korea (China Economy, 2019).
In a 2019 report from Focus Economics, between 2009-2014, Chinese exports rose at an average of 1.8% annually, and exports increased at 14.4% annually in the same period. Recently, computer exports and crude petroleum imports are dominating Chinese trade. Chinese exports grew by over 20% in 2011, with steady growth between 6-8% from 2012-2014, but, in 2015, exports fell -2.5%, likely marking a new transition in Chinese trade patterns. Chinese imports experienced a greater rise at 25% in 2011, and a harder fall of -14.2% in 2015. China’s external debt rose considerably from 8.6% of GDP in 2014 to 13.2% in 2015, and they began spending international reserves in 2015, which they had been accumulating the previous 4 years. Imports will likely continue to fall in the near future, while exports are expected to remain strong in the medium term (Focus Economics, 2019, various).
Over the past decades, China’s competitive advantage in manufacturing was centered on low-cost labor, however, labor supply peaked in 2012, and growth has stagnated, but, nevertheless, China manages to remain as the world’s second largest economy after the US. But with rising wages, many multinational manufacturers are moving out of China to places with cheaper labor like Vietnam or India, and the bedrock sector of the Chinese economy is under threat. Now, Chinese markets are turning away from low-tech manufacturing and turning to high-tech and services. According to the Economist (2015), Beijing does not want to relinquish China’s status as the manufacturing hub of the world, and plans to implement a program called “Made in China 2025,” with mandates and subsidies aimed to incentivize Chinese manufacturers to upgrade their facilities and promote innovation (Economist, 2015, para 5). One of its programs, perhaps ironically is labeled green initiatives. The irony is that China’s major cities are some of the world’s most carbon generators, polluting groundwater as well as air (Economist, 2015). “Though wages are rising, its labor productivity is far higher than that of India, Vietnam and other rivals, and is forecast to keep growing at 6-7% a year to 2025” (The Economist, 2015, para 7).
Additionally, China’s real estate bubble burst, and despite high rates of household savings, personal fortunes have diminished, so it may be assumed that Chinese households will cut back spending on imports as well as domestic goods and services. Despite rising wages, resulting in downturns in labor-intensive manufacturing, China remains determined to support the manufacturing sector for at least the upcoming decades through structural changes in the economy and government program incentives. While the trade patterns of China’s manufacturing paradigm may be changing, China’s status as the world’s primary manufacturer and exporter is not likely to change soon. However, the slowing growth of China’s GDP should reduce travel expectations.
The CEO of China Eastern Airlines began his career as a pilot. He described his management and strategy style in terms of flying “with a clear strategy and targets”: “When you fly you know your destination and the route you will take. You want to fly the most efficient way possible. That is about controlling risk and managing a dynamic situation” (Shaoyong, 2019, para. 32). The primary goals of China Eastern Airlines are to meet domestic demands and accurately predict and adjust to the actual GDP growth rate while also expanding international marketing and flight network partnerships. Another priority of China Eastern Airlines is to continue close cooperation with the Chinese government, while simultaneously increasing independent capabilities. Finally, the company will continue to make substantial capital investments in the fleet, technology, customer services, and operational process improvement to reduce operational expenses and increase income.
To formulate a strategy, it is important to first analyze China Eastern Airline’s position in the marketplace. Using the traditional strengths, weaknesses, opportunities, and threats (SWOT) methodology, this strategic planning begins with a situation analysis. When developing a project plan, a SWOT analysis provides an overview of the situational environment, allowing for a more effective, focused, and objective-oriented strategy. Ferrell and Hartline (2013) note that a SWOT analysis offers many benefits, including simplicity, lower costs, flexibility, integration, synthesis, collaboration, and efficiency (p. 87). In conducting a SWOT analysis, data is prioritized according to workable categories to be acted upon during the initial planning phases. A SWOT analysis also provides a foundational methodology for monitoring a program’s progress.
Applying a SWOT analysis for improving China Eastern Airlines’ working paradigm, cost-effectiveness, goals, and objectives will assist in creating a more thorough understanding of program criteria for the upcoming five years. The SWOT components are general and analyzing each of these four situational components requires the selection of more specific research methods for determining which areas require more immediate attention to begin implementation of any progressive plan. Selecting those methods will depend on the specific subject and situation, for example, a corporation considering introducing a new product, such as a new fleet of Boeings for CEA, to be situationally analyzed within the SWOT analysis framework.
Strengths of China Eastern Airlines are that the company is expanding quickly, has state support and private investors that position the company for rapid growth domestically and internationally. The company has strong support from the Chinese government as suggested that “governments have already realized the importance of the aviation industry and understand that developing aviation would lead to a better economy” (Shaoyong, 2019, paras 18 & 19). The company also benefits from a diversified range of investors from which to draw capital, as well as a diverse network of strategic partnerships. The company has also established a strong safety record and reputation. China Eastern Airline’s greatest opportunities are to be leveraged with their strengths. China’s expected economic growth and the state’s support of private investing and trading present promising opportunities for a company with assets, capital and partnerships already in place.
China Eastern Airlines is committed to the central government’s integration policies through implementation and cooperation with its Party building protocols. “The Company organizes thorough study and implementation of the Thought on Socialism with Chinese Characteristics for a New Era led by Chinese President Xi Jinping, and the essential spirits of the series of important speeches delivered by President Xi” (China Eastern Airlines, 2017b, p. 27). It is company policy to be knowledgeable about the Party’s constitution, regulations, policies and plans with a year and a half of training. “From April 2016 to December 2017, the Company organized all management personnel to give approximately 600 lectures on Party theories and practices, over 3,600 learning symposiums, and about 8,800 learning and training activities” (p. 27). Education and company cultures are virtually one and the same with governmental procedures and policies.
There is an additional competitive advantage of state cooperation and ownership, so long as the government remains stable and supportive. While the company is primarily public, because it trades on the stock exchange in New York and Hong Kong, its state-owned paradigm creates an interesting hybrid form of control. However, reducing dependency on the state is an overarching objective as commented by Chairman Shaoyong (2019) “government support can make an airline strong, of course, but the aim for any state carrier should be to stop relying on government support” (para. 20). This strength can turn to a threat if the government shifts support to another industry. For example, the state may favor another form of transportation such as high-speed rail and reduce funding for flying.
Evaluating both strengths and weaknesses is essential for creating a fiscally sound industry. The expected increase of the Chinese government’s involvement in the aviation sector is an essential element of China Eastern Airline’s strategy. International expansion that is sustainable is a slow transitional process of adjusting to the global travel market. With majority ownership by the state, the moves made in the international field will be regulated by Beijing oversight. Perhaps one of the weakest points of the company is the high level of dependency on the Chinese government’s support, which can also limit their actions.
Working with government objectives and furthering the state’s policy can be considered a form of public service and corporate social responsibility that benefits the society in which the CEA operates. The development of aviation in a country such as China alleviates poverty by improving the economy as an infrastructure investment which promotes business productivity: “Transport poverty alleviation is one of the most powerful measures of poverty alleviation to enable our people to have a strong sense of fulfillment, playing a vital role in poverty alleviation work in poor areas” (China Eastern Airlines, 2017b, p. 21).
Considering the position of China Eastern Airlines within the global market and domestic political structure, it is clear that ties to the state must be maintained and nurtured. Three strategic options are presented with pros, cons, and financial forecasts, but all options must operate within the framework of China Eastern Airline’s fundamental relationship with the Chinese government. These options must meet domestic demand, reduce operational expenses and increase international revenue in accordance with Chinese governmental policies.
Three long term goals/objectives to increase China Eastern Airlines financial standing and airline profile are (1) meet and not exceed growth in domestic demand. Invest $103,500 in fixed assets; (2) reduce, relative to revenue, operational expenses by 28%; increase income and (3) increase revenue by 9% over the next five years.
The strategic targets correlate to the three objectives outlined in this plan of action. The goals and long-term government policies essential element to the company’s long-term success, balanced with an increasing need for independence in investments and operations. Balancing the state entity’s public service responsibilities and international market struggles through strategically cooperative act ivies is also essential. The first strategic objective of meeting domestic demand is unpredictable based on China’s historical rapid growth and sudden slowdown. The second strategic objective of reducing expenses is viable and profitable. The third objection of international expansion and revenue revving is the third strategic option.
1. Goal: Meet and not exceed growth in domestic demand. Invest $103,500 in fixed assets.
Strategy: Expand fleet and network domestically to compete with China’s carriers.
Pro. China Eastern Airlines has already established a cohesive and expansive domestic network and fleet. China’s rapid growth has greatly impressed the global economy, and the central government is highly optimistic about the future with long-term goals for GDP. While the commitment of the government’s support for growth is favorable, and the state and industry’s expectations are highly optimistic for the increase in domestic demand, diligently conducted an analysis of the state economy and global market are essential to meeting and not overextending investments.
Con. The other major domestic competitors are comparable in fleet size and network, but China Eastern Airlines is slightly overshadowed by Southern China Air based in Guangzhou (Reed, 2018, para. 5). However, economic predictions are unstable, as shown by the country’s sudden slowdown and real-estate crisis in recent years. Rather than ratchet up a dependence on domestic demand, which might waiver for years if the Chinese economy continues to stall, CEA should consider other strategic options.
2. Goal: Reduce, relative to revenue, operational expenses by 28%; increase income.
Strategy: Invest in fleet upgrades, service technology, and process improvements.
Pro. Operational profit could be furthered by investments in operations management technology and process improvement engineering. China Eastern Airlines now possesses one of the youngest fleets in the industry, and this is a major competitive advantage on which to capitalize. Another objective, continuing fleet, and network expansions will continue to generate higher revenues, especially as the international marketing plans mature by 2021. By curtailing creeping operating expenses, the company can maximize the monetization of its forecasted growth. In 2017, the company operated with 98% of revenue cost to operational expenses covering expenses. This strategy involves reducing operating expenses relative to revenue to 70% through investments in technology and operational improvements. This would result in an income increase, from 1,950 million RMB in 2017 to 60,873 million RMB in 2022 (China Economy, 2019, various).
In addition to operational technology advancements, the company should also consider additional benefits of technology upgrades regarding the customer experience. Invest in technology at all points of sale, service, and operation. Invest in Wi-Fi capabilities on all aircraft. China Eastern Airlines should continue investments that improve process efficiencies and ultimately reduce their relatively high operation costs. China Eastern Airlines has already “enhanced tourist experience of transit services by shortening the waiting time for transit and reduced the rate of mishandled baggage during transit” and also “with the improvement of the tourists service information system, time for transit was reduced while the success rate in inter-airline transit increased” (China Eastern Airlines, 2016b, p. 127). To maintain momentum since 2013, CEA should continue capital investments and marketing expansion through strategic partnerships.
CEA’s consolidated income statement reported that the company garnered a total of 109,956 million RMB in revenue and other operating income, which is more than a 5% improvement over the year prior (China Eastern Airlines, 2016b, p. 9). Consider the following chart which depicts China Eastern Airline’s increasing revenue (the green bar) and non-current assets from investments in fleet expansion highlighted with the yellow bar, reflected by the escalating operational expenses which have largely limited profit potential. The numbers are in millions of RMB.
China Eastern Airlines made major capital investments in 2012 and onwards, updating and expanding their fleet while also opening their doors to investors. Although the company has accomplished a total income increase of over 5% each year from 2014 to 2017, operating expenses shown with the blue bar in the chart, that also increased by 9.4% from 2016 to 2017 (China Eastern Airlines, 2017a, p. 7), resulting in operating profits that were even less than 2012. Regardless of operating costs, profits steadily rose from 2013 to 2017, and from 2016 to 2017, pre-tax profit increased by almost a third (China Eastern Airlines, 2017a, p. 7).
Following this strategy, China Eastern Airlines maintains its position at the forefront of fleet technology through continued investments in its aircraft and personnel and increase operational profit through investments in operations management technology and process improvement engineering. Additionally, by reducing operating expenses and investing in operations, logistics, industrial engineering, and process improvements, China Eastern Airlines will continue to increase revenue while also increasing operational profit to 7.5% by 2022 (China Eastern Airlines, 2017a).
Con. Non-current assets and revenues will continue to expand, especially after international expansion marketing becomes more profitable in 2021. However, operational expenses will rise incrementally at marginally higher levels than in previous years. Technological automation allows CEA to expand operations and significantly lower the cost of operating. But cost depreciation will not be realized during the first years of increasing technological innovations, thus the airlines may see a reduction in profits unless it is able to increase its domestic and international exposure for revenue.
3. Goal: Increase revenue by 9% over the next five years.
Strategy: Invest in expanding the international network of destinations and partnership.
Pro. The airline’s most promising potential is by focusing capital investments on international expansion. These international partnerships will increase CEA’s global marketing capabilities. As the companies reach and revenue strengthens, more cash flow will be available for additional financial investments. This strategy generates long-term profitability through revenue and asset expansion. By focusing on growth and marketing, the company also becomes less dependent on Beijing for business.
China Eastern Airlines has a long history of mergers and acquisitions. In the fast-paced growth of aviation in China, CEA benefits by turning competitors into partners. China Eastern Airline’s partnerships with carrier networks will be an essential element of the international expansion strategy. Skyteam has proven essential to the airline’s growth, especially in the surrounding Asian regions. The airline’s destination network expanded by 17% in only two years after the alliance (Shaoyong, 2019, para. 10). Rebranding in 2014 and continued capital investments around 2014 have positioned the country for international growth, and they are now looking to Europe. “In 2017, China Eastern Air Holding Company Limited, the controlling shareholder of the Company, strategically invested in Air France-KLM (China Eastern Airlines, 2017a, p. 137).
Con. While the significant profit increases presented in the previous proposal are highly attractive, the essential element of China’s policy and CEA’s public service require that the company not overly focus on profit and cost-cutting strategies. Rather, it is a time of expansion and investing. China Eastern Airlines can capitalize on the opportunity of international marketing while also appeasing state policy.
Remembering the delicate and dynamic relationship between the Chinese government and China Eastern Airlines, international expansion should not counter politico-economic policies of the Chinese state. In accordance with the central government’s Belt and Road Initiative of transportation network expansion extending across Asia, Europe and Northeast Africa, China Eastern Airline’s global network of over 1,000 destinations covers 177 countries, including every country along the Belt and Road Initiative, “actively developing international routes, and building the Silk Road in the air” (China Eastern Airlines, 2016b, p. 19).
For China Eastern Airlines to continue its upward financial and global flight profile for the forthcoming five years, it would fit with the overall SWOT methodology to implement the three strategic options moving forward, the company can increase its revenue by 9%. Costs to the company are already factored into the equation since the most expensive element is purchasing additional fleet. Other cost components are personnel, flight, mechanics, pilots, ground crew, and fuel, however, these costs will be offset by the income from ticket purchases that will increase based on the extended flight destinations available to Chinese tourists, businesspeople, and executives. Other tourists flying from Japan will have greater access to China’s domestic airports, increasing revenue from Japan, as it continues to be a desired destination for many tourists as well as business flights. In order to properly assess the action plan, measurements and a specific timeline need to be in place.
2018: Build Skyteam’s partnership and reach out to other carriers in Europe and North Africa.
2019: Establish a new network of destinations and partnerships through global alliance.
2020: Implement process improvement plans in all facilities and points of sale.
2021: Equip entire fleet with Wi-Fi and other high-tech services.
2022: Diversify investments and ownership portfolio.
As noted above in the Action Plan, a vital step for evaluating performance and fiscal responsibility is to assess the program is through a SWOT analysis which means assessing strengths for creating a larger fleet, extending destinations, and increasing the airline's global visibility. The timeline for this expansion can be initially laid out for a five-year program, assessing progress throughout with quarterly reports. Implementation of SWOT during each quarterly and annual segment of the five-year plan will help the airlines to realign objectives that are not maintaining the advances required by CEA. If the weaknesses in one area, for instance, increasing international visibility, fails to meet financial projections, CEA can opt out of some of the international market until it has increased its financial assists sufficiently to re-compete with China Air and South China Airlines vying for global competition.
With improvements across the board in technology, process improvement, and operations engineering, the simplified income statement for 2018 to 2022 with numbers in millions RMB.
Profit indicates an increase but political interventions, GDP fluctuations are not static and thus the profits may be short-sighted. The company can cash in on capital investments that are depreciating over the upcoming years. Non-current assets and revenues will continue to expand, especially after international expansion marketing becomes more profitable in 2021. Operational expenses will be maintained with marginally higher levels than in previous years. Technological automation allows CEA to expand operations and significantly lower the cost of operating.
Following this strategy, China Eastern Airlines maintains its position at the forefront of fleet technology through continued investments in its aircraft and personnel and increase operational profit through investments in operations management technology and process improvement engineering. Additionally, by reducing operating expenses and investing in operations, logistics, industrial engineering, and process improvements, China Eastern Airlines will continue to increase revenue while also increasing operational profit.
It is apparent from the data and financial statistics, government policies, and China Eastern Airlines desire to increase its visibility in the domestic and international airline industry, that with the assistance of government policy, shareholder and stakeholder interests, that the airline can become a major player in the flight business. Financial data for a forecasted income statement shows a positive paradigm for success. Its long-term strategy is to devoid itself of the necessity of relying on Beijing for assistance, though the airlines must remain in compliance with Beijing’s policies. However, by application of these strategies as outlined in strategy number three, and indemnified by the financial forecast, long-term profitability through increased flights, thus revenue, provide expansion of assets and financial stability. Decreasing operational expenses will greatly increase profit while focusing on international expansion will generate more revenue and decrease dependency on the central government. Maximizing revenue will be more valuable and useful to the company’s operations going forward.
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