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External Analysis of China Southern Airline

Nyamweya is a Kenyan scholar who has done many years of research on a diversity of topics

China Southern Airlines

China Southern Airlines

This hub focuses on analyzing the external macroeconomic factors that influences the strategic decisions made by China Southern Airline within the airline industry. While discussing these factors, the author has also explained how the particular factors have affected the airline industry. The different macroeconomic factors have either a direct or an indirect impact to the operations of the airline industry. Since Southern China Airline operates internationally, certain market conditions may trigger either an increase or decline in its market performance. These market conditions are discussed in the subsequent parts.

3.1.1.2.Interest rates

Interest rates also known as the cost of capital poses a huge impact on the airline industry. It should be considered that not all aircrafts purchased by an airline company are obtained directly from the manufacturer. Rather, some of the aircrafts may be borrowed or leased from third parties. When interest rates rise, they will consequently lead to an increase of lease payments as well. Apparently, the high rate of lease payments will degenerate into decreased profits for the airline industry when the demand for flights is assumed to be constant.

Another concern in the rise of interest rate is the associated rise in prices. When the cost of operation goes up because of borrowing or any other factor, this cost may be passed on to customers. The higher prices may subsequently make customers to find cheaper alternatives. On the other hand, continuing to charge low prices despite an increase in the cost of operation will mean making low profits if any.

3.1.1.3 Regulation and Policies

Generally, the airline industry in the global perspective tends to operate in a highly regulatory environment. These regulations are applied in all the routes and destinations that an airline flies. The regulations are also with regard to the airline’s business partners, the price of its service and product offerings, the slots it uses at the airport and the cost of infrastructure it pays[1].

The airlines security and safety is another sector, which is intensely regulated. In recent perspectives, the environmental effect of the airline industry has also been subject to policies and regulations. These regulatory requirements in the security and safety sector have mandated most governments around the world to develop a number of security measures. These measures are aimed at fighting the risk of illegal immigration, terrorism activities among other issues. Airline firms have continued to engage with various governing bodies and national governments in ensuring security and safety in their operations while at the same time, aiming to cause limited inconvenience to passengers[2].

Contrary to many other countries, China has established policies to encourage local and foreign investment in the country. The opening of the market by China has subsequently initiated a new era in China’s business environment. This has tended to catch the interest of investors in various business sectors including the air transport market[3].

The shareholding of local airports and airlines has been unrestricted to approximately 35% to 49%. There is also no much restriction on cargo handling services and related housing. Southern China Airline, the national airline industry and its operational efficiency have been inspired by the favorable policies and foreign investments. Further, the continuous reforms and deregulation have given airline entities new rights in operating in a free market environment[4].

3.1.1.4 Currency risk


China Southern Airlines expenses are denominated both in the local and foreign currency. This is because it operates on both a local level and internal perspective. In the financial year 2013, 81% of revenue from passengers from domestic market. On the other hand, only 16.8% of passenger revenue was obtained from the international market while 2.4% was achieved from the regional markets including Taiwan, Macau and Hong Kong. This implies that for this company, their local markets are more viable when compared to international or regional market. Nonetheless, CSA is currently strategizing on entering into international markets. These markets include Moscow to Guangzhou, Mai Chiang and Bali. Moreover, China Southern has increased its frequency to Brisbane, London, New Delhi and Auckland. The company’s expenses including jet fuels, maintenance, aircraft borrowing and other operations are major denominated in USD. However, some expenses that occur within the local market are conducted in Chinese currency (Cederholm, 2014).

China Southern Airline relies on speculation in future market for foreign currency transactions. In this system, the company seeks to make up profit future market transaction with the loss generated in the current foreign transaction.

3.1.1.5 Social Factors

Most airlines in the world are experiencing the issue of consumer decline as well as changes in preferences, and behavior. This owes to a global economic downturn. Because of this aspect, consumers from individual, business, and premium categories have preferred to cut down their travel expenses. These have negatively affected businesses in the airline industry. The confidence of passengers on airline companies has also declined. Moreover, customers are also seeing holidays as essential and not a luxury and most of them are cutting travel expenses during such times[5].

It is because of this that Southern China Airlines have strategized on finding the lowest possible pricing for its services. The low price strategy was initiated due to increased demand for clients who wanted airline services that were affordable for them. Indeed, the company has been able to realize this objective since they now have many clients wishing to travel at low cost[6]. Although other airlines could claim that charging low cost is not sustainable, it could not be meaningful to charge high fees and have to travel with half full or empty aircraft. Similar to other markets, the low of demand and supply also works in the airline industry. In this sense, it becomes necessary to reduce prices to the level where they will get enough clients to buy the tickets[7].

In order to retain customer confidence, Southern China Airlines have incorporated effective security and safety measures in its network. The department will also cover all the cargo terminal users, passengers, staff accommodation, and the company facilities. In addition to these function, the department will also investigates fraud, theft, misappropriation of resources and security breach against the interests of the clients and the organization[8]. These measures have worked to improve client confidence on the company.

3.1.1.6 Environmental Factors

The airline industry has also to address environmental issues related to air pollution, noise, water, waste management, land and so on. The noise from aircrafts has a potential of disrupting or affecting the normal life of people living near the airports. Aircrafts, rod traffic used to access airport, and vehicles at the airport emit pollutants such as fine particles, air pollutants, nitrogen oxides, hydrocarbons, and carbon monoxide. Creating an airport ultimately entails taking some land away from former uses. Specifically, this could affect heritage and landscape and wildlife habits[9].

Some of the challenges in the airline industry include climatic changes, waste management among others. Policy makers and governments around the world are increasingly creating policies and regulations that are focused at eliminating growth of emissions and other pollutions by airline companies. All airlines are expected to meet a broad range of international, national, and local environmental policies.

China Southern airlines have incorporated security and safety strategies, which have subsequently given them a favorable image in the society. As part of its security and safety measures, China Southern Airline has established a security and safety department in ensuring that passengers are assured of the safety and security. This department is mandated to oversee all security and safety issues in its network. Moreover, the department will also cover all the cargo terminal users, Chinas passenger’s staff accommodation and the company facilities. In addition to these functions, the department is also tasked with responsibilities of investigating fraud, theft, misappropriation of resources and security breach against the interests of the clients and the organization. China Southern Airlines has also hired a private security group to safeguard its security interests[10].

3.1.1.7 Fuel Price

The fluctuating tendency of fuel prices has had a drastic impact on the airline industry. In most cases, the cost structure and pricing in the airline industry is determined by fuel prices. In the event that when the change to the price occurs, airlines have to make drastic changes to align with the specific changes. During the mid 2000, a drastic increase in oil prices had a negative impact on the airline profit. In generating extra income, many airlines introduced fees for items that were previously free such as food, blankets, and checked bags[11].

Interestingly, China Southern Airlines have always worked on sustaining a low price strategy. In doing so, the company considered providing minimum frills on some of its services. The preposition of China Southern Airline is based on no frills where the airline services are kept at low cost. The minimum frills preposition is grounded on the assumption that there are no other hidden costs other than those of the purchase price. For instance, administration or service fees and so on. The product offering by this company is highly minimized. For instance, free services that are common in other airlines such as food, drinks, snacks and so on, have to be bought by the client on board. Additionally, third parties with regard to bookings are eliminated since bookings are made online

[1] Henkels, E.2013. Airline Industry Overview, Available from

http://www.columbia.edu/cu/consultingclub/Resources/Airlines_Eric_Henckels.pdf

[2] Stanford, Edu. 2014.The airline Industry, Available from http://adg.stanford.edu/aa241/intro/airlineindustry.html

[3] Shih-L. S.,Feng, L. B., Jie, C. B., & Chenghu Z., B.2009. China’s airline consolidation and its

effects on domestic airline networks and competition. Journal of Transport Geography 17 ,293–305.

[4] Yahua Z., and David,K.R. 2008. China’s airline deregulation since 1997 and the driving

forces behind the 2002 airline consolidations. Journal of Air Transport Management 14, 130– 142

[5] Henkels, E.2013. Airline Industry Overview, Available from

http://www.columbia.edu/cu/consultingclub/Resources/Airlines_Eric_Henckels.pdf

[6] China Southern Airlines. 2015. Company Strategy, Airliner World: 17. March 2015.

[7] Gary, A.2009. Principles of Marketing, Pearson, Prentice Hall, New Jersey, ISBN 978-0-13-239002-6, ISBN 0-13-239002-7

[8] China Southern Airline. 2015.Company Profile, [Online] Available from http://www.flychinasouthern.com/

[9] Friends of Earth. 2009. Pie in the sky, [Online] Available from

http://www.foe.co.uk/resource/briefings/econ_aviation.pdf>.

[10] Anne G., Peter F. 2008. Aviation and Tourism, Implications for Leisure Travel, ASHGATE,

England.

[11] Uwagwuna, BA Christian. 2011. How the Macroeconomic Environment of the Airline

Industry Affects the Strategic Decision of Boing Vs Airbus, ISBN 978-3-640-89394-2

Comments

Silas Nyamweya (author) from Nairobi, Kenya on May 08, 2021:

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