The Strategy of Positioning
The Strategy of Positioning
An enterprise that has suffered a loss is similar to an army that has lost a war. What should we do if we’ve lost a war? We cannot just go and fight another war. Instead, we have to reorganize the army, rearrange the soldiers into groups, and reset our objectives. After suffering losses for years, we are faced with similar issues in Air China, such as reorganization and reorientation, which are issues of positioning.
What is the significance of positioning? “Analysis of the Classes in Chinese Society,” the first essay in The Selected Works of Mao Zedong, presents an in-depth analysis of Chinese society. Principally, Mao identified Chinese society as a semi-feudal and semi-colonial society. In his later works, Mao went on to express that the task of the Chinese revolution was to destroy the “Three Mountains” (a Chinese term which refers to Feudalism, Bureaucrat-Capitalism, and Imperialism), and the way to victory was to rise up in arms and adopt the theory of “Encircling the Cities from the Rural Areas.” Also, Deng Xiaoping accuratelypositioned China after the Cultural Revolution as being at “the primary stage of socialism.” Through this positioning, China has established the basic principle of the Communist Party of China (CCP) as “One Center (economic development), Two Basic Points (reform and the opening up policy and the four basic principles),” which has enabled China to emerge rapidly. Without a thorough analysis and a precise positioning of the Chinese social order, it is impossible to plan out a set of theories, principles, guidelines, and policies for the development of the Chinese revolution, as well as for social and economic development. Precise positioning is of vital significance for a political party, a nation, or an enterprise.
But how do we position ourselves precisely? The key is to place due emphasis on the objective analysis of practices, in order to seek truth from facts, and to fit these practices with the practical situation. On this basis, one should also attach importance to studying and learning from historical experience and lessons, which include lessons drawn from our own experience as well as others’. Recalling our own past experience, we will never make the same mistake again; observing others’ experience, we must be sure to avoid committing similar errors. Learning includes both the lessons drawn from mistakes and the experience gained from success. Enterprise management is not just about learning by trial and error. It is also about learning from others’ experience, which is more time-, energy-, and cost-effective.
A more important point is that an enterprise should be positioned with the future in mind and issues should be analyzed with a strategic vision. A Chinese idiom goes: “You should not just pull the cart with the head lowered. You should also look up to be attentive to the road condition.” A good leader must consider the trend as well as the overall situation. Otherwise you will always lag behind others.
An enterprising leader must endeavor to become someone capable of strategic thinking through the continuous accumulation of experienceand practice. In this complicated world, the leader must be able to see problems through at once, and solve them with just one move. The leader does not have to be an expert, but must be a generalist. A scientific way of thinking helps us recognize the essence and orientation of things. Good leadership is rooted in observation rather than judgment and decision-making. Observation is the basis for correctly assessing the problem.
For an army to win a war, the commander should first have a clear understanding of the battlefield before he can formulate the correct strategy. In the same vein, if an enterprise has suffered a loss, it is most likely caused by a strategic mistake resulting from a slight error in the enterprise’s positioning. Precise positioning is the foundation of enterprise strategy. Only when this is achieved with our sights set, can an enterprise make the best use of its resources and capabilities, like a bullet that is shot with unfailing accuracy.
On November 10, 2001, China officially announced its entrance into the World Trade Organization (WTO) during the fourth Ministerial Conference of the WTO held in Doha, Qatar. It took 14 years and four months for China to become a WTO member.
I was just as excited as my fellow Chinese. However, my professional instincts soon got me thinking. The WTO entry was, without a doubt, an important event that would impact the development of the Chinese aviation market. How in future would Air China adapt its strategy to the new situation under a free sky?
Being new to civil aviation, I sat up late into the night, poring over all major management cases of world aviation enterprises, looking for an answer.
A few days later, a message posted in the online forum of Air China attracted my attention. A friend of the message writer had recently flown back to Beijing from Tokyo with Pakistan International Airlines (PIA) because the ticket was less expensive. A round-trip ticket cost only RMB 3,600 (tax included), the same price as Iran Air. Out of curiosity, he conducted an online research and the result took him by surprise. The Beijing–Tokyo route was served by as many as eight companies: Air China, China Eastern, Japan Air, All Nippon Airways (ANA), PIA, Iran Air, United Airlines, and Northwest Airlines!
This message went straight to Air China’s weakest point. “China’s being in the WTO will stimulate the Chinese aviation market” was the cheer heard everywhere, but Air China, the country’s largest international flight operator, did not share this excitement.
We had to face the embarrassing reality: since 1990, the European air routes and American air routes of Air China had suffered an overall loss. In the face of fierce competition from foreign aviation companies, Air China’s share in the market of international air routes had witnessed a sharp drop to 36 percent. Chinese passengers made up 40–50 percent of flights operated by foreign aviation companies, and this percentage was still increasing, especially after China joined the WTO.
Air China’s losses on its European and American routes were clearly caused by several objective factors. A key factor was that Air China’s overseas ticket sales were conducted in U.S. dollars or euros, and the continuous appreciation of the RMB in those years resulted in billions-of-RMB exchange losses. Another factor was that, in terms of passenger composition, more than 86 percent of passenger tickets for Sino–U.S. air routes were sold in the United States, while more than 70 percent of passenger tickets for Sino–European air routes were sold overseas. Air China’s market distribution, which mainly depended on overseas passengers, led to its competitive disadvantage. On top of that, according to global standards, Air China lagged behind in terms of software and hardware configurations, as well as sales management.
However, this was not the most fundamental problem. Whether you use a lance or broadsword is not the decisive factor in winning a war. To overcome Air China’s management difficulties, the fundamental issue was to fully understand and grasp those rules that governed the management of international air routes.
My mode of thinking as a soldier first prompted me to figure out the allocation of “military power” in this management war. Air China had links with 36 countries and regions, and while its business extended to overseas air routes, its performance on the domestic routes, which might be considered as the inner area in a battle, was inadequate. Was this a fundamental mistake? In other words, was the loss of international air routes a result of powerful foreign competitors or was it our own mistaken strategic allocation?
In the past, when the planned economic system prevailed, there was no clear borderline between the functions of government and enterprises. In accordance with the government plan, Air China was positioned as an international company, mainly responsible for international passengers and cargo transport. To some extent, this impacted the development, competitiveness, and branding of Air China as a company capable of providing passengers with convenient services. Moreover, it was actually impossible to transport passengers from domestic routes to international ones through an air hub, without having a share in domestic markets and networks. Thus, it was also almost impossible to expect Air China to become an enterprise with a global brand or to realize its status as an international company.
Back then, the domestic air routes were clearly Air China’s weakest points. In 1990, Air China made up 37.6 percent of the domestic market, but the percentage dropped to less than 15 percent later on. Not only did China Eastern and China Southwest Airlines begin vigorous expansion, but newly founded local companies, such as Hainan Airlines and Shandong Airlines, were also swift to grab their market shares. It was due to this unbalanced market structure that Air China, in the face of fierce competition from foreign aviation companies, could not establish its local advantage. This reminded me of the “base area” theory that played a vital part in the CPC-led revolution. Mao Zedong established the first rural revolutionary base area, and boldly concluded that, “a single spark can start a prairie fire.” Back then, when the revolutionary cause in Jing’gang Mountain was experiencing severe difficulties, Mao deliberated on such issues as the amount of grain production in the Daxiaowujing region, the number of guns in Lianhua County, the export of tea, and the import of salt. It was because of this way of thinking that the “single spark” finally “started a prairie fire.”
One classic rule for playing Chinese chess is to “first protect yourself before you fight for victory.” This backs Mao’s theory up. Universal rules govern the development of all things. Whether you can grasp them depends on your ability to summarize, draw inferences about other cases from one instance, and reason by analogy. The crux is to apply the rules to your study and career.
Through research and study, the leaders of Air China agreed that the reliance on international routes at the cost of domestic ones was a severe problem in Air China’s past development and positioning. “When the river is flooding, the tributaries are also flooding, and when the tributaries are dry, the river must also be dry.” Compared with the mature networks operated by European and American aviation companies, which covered domestic as well as intercontinental routes, Air China’s international routes were inadequate. They seemed like a river with no source. As a result, Air China could not satisfy their passengers’ needs for convenience and efficiency.
Currently, China is still a developing country. We are a latecomer in the arena of international politics and economics. What principles should we take into account? In fact, many of our concepts and measures have already been practiced long in developed countries. By studying the global industry in terms of experience and lessons, we can find a shortcut to success.
During the Spring Festival of 2005, a journalist with The New York Times requestedan interview with me. In the previous year, Air China’s profit had accounted for 56.6 percent of the Chinese air transportation industry’s total, and this climbed to 124.8 percent in 2005. “It is seen by others as a miracle!” He wanted to figure out the secret. As Air China was a listed company, I turned down his request in view of regulations on the disclosure of information.
However, his sharp responses and observation helped him find a topic on which we could communicate. A few books on the rise and fall of world aviation companies lying on my desk aroused his interest. How did Ansett Australia go bankrupt? Why did ANA as a newcomer outstrip Japan Air? What led to the bankruptcy of so many once glorious grand aviation companies in the history of the commercial aviation industry? In a seemingly casual conversation, he successfully figured out Air China’s development strategies in those years.
History repeats itself. The bankruptcy case of Pan American Airways alerted us to the imbalance between Air China’s domestic and international routes. Pan American Airways used to be a mega aviation business, boasting the longest air routes and the longest history in the United States. At its peak period, it had more than 70,000 employees, more than 770 airplanes in a variety of models, and a network covering more than 100 cities in 50 countries. It should be noted that at the beginning of the 21st century, China’s civil aviation industry merely had a total fleet of only 262 airplanes. That is, Pan Am was once three times the size of the entire China civil aviation industry. Despite the fact that this company enjoyed governmental support and monopolized a large number of international routes, it still collapsed in the late 1980s. What a surprise to the whole world! One factor behind this was that in 1978, the United States passed the Airline Deregulation Act, allowing all aviation companies to compete at any acceptable market price on any route. As a company that only operated international air routes and no domestic ones, Pan American Airways had its foundation destroyed.
I always believe that enterprises, regardless of their size, should have correct and clear strategic planning. The details of such planning may vary with the scale and grade of each company, but all items in corporate decision making that have a bearing on the foundation, overall situation, and future development, fall within the domain of strategic planning. The primary task of a company manager is to keep a firm grip on all these factors.
So, how could we achieve it? Numerous cases ranging from individual enterprises to national ones told us that to learn from others’ mistakes and act in the opposite way is a simple yet effective method. This is a method of vital importance to everyone. Even though we may not be able to find the best direction right away, we can at least pick out the losers, study their lessons, and avoid making their mistakes. This will also help us best judge our current position and prepare us for future development.
The history of Japanese industrial development illustrates my views on this. After World War II, in a short span of just 30 years, Japan, an island country torn apart by war and short of resources, worked an economic wonder that amazed the whole world. In various dissertations on the Japanese economy, such factors as lifelong hire, corporate value, Total Quality Control (TQC), among others were identified as the key to the rise of Japanese enterprises. But in my opinion, one principal factor is missing in these studies. It is the Japanese enterprises’ readiness to learn from others’ experience that ensured their correct positioning and efficient strategic management.
Take the automobile industry as an example. At the end of the 1960s, Japanese automobiles poured into the European and American markets and achieved amazing success. This was directly due to the failure of the European and American automobile industries. Despite rocketing oil prices, GM, Ford, and Chrysler, the commonly known “Big Three” in the Euro-American automobile industry, continued to manufacture large, fuel-heavy vehicles. That is also why they suffered a tragic blow during the oil crisis. In comparison, Japanese automobile companies swiftly adjusted their development strategy to develop small and fuel-efficient automobiles, enabling them to win over the market.
Air China had to plan ahead by optimizing its network and resources. This also explains why it established the strategic framework of placing equal emphasis on international and domestic air routes, and supporting international air routes with domestic ones.
Strategy implementation needs to be supported by tactical movements. What first came into our minds was that Air China needed a fulcrum in the domestic market. A solid hub and base needed to be established in order to reorganize the formerly loose domestic and international route network. Only in this way could a competitive edge be formed, on the basis of economies of scale.
This idea took shape because of Air China’s practical learning spirit. A few years ago, a popular notion in China was to learn by trial and error, which was meant to encourage reforms and innovation. For Air China, however, I always stressed that we should not only learn by trial and error, but also from others’ experience. If somebody has already explored the way ahead, then just follow it. The key issue is to know how to learn from others. For those enterprises that are young and weak, this is a practical and effective approach to follow and emulate, if they want to catch up with industry leaders.
In fact, as the competition within the global aviation industry gets fiercer, all major airlines have implemented the hub strategy, and developed hub-based air route structures. Currently, most of the world’s 20 leading aviation companies have their own hub-and-spokes networks, while all the world’s 20 leading airports, such as Frankfurt Airport for Lufthansa Air, and Washington Dulles International Airport for United Airlines, are aviation hub ports. These facts fully illustrate that in the 21st century, the basis of the aviation industry will be the hub airports, while the center will be the hub routes. Hub development will be the entrance ticket for aviation companies to participate in global competition. This is the fundamental rule for the development of the aviation industry in the new era. Naturally, Air China should also learn from others’ experience.
At the same time, the construction of a hub could alter the rules of the game for the domestic aviation market back then, which was of fundamental importance for the development of Air China’s domestic market. If Air China had competed with other aviation companies solely on the basis of newly added air routes, it would have been left even further behind. After the establishment of the hub, the competition over routes, which extended from one point to another, evolved into a race for the whole network. This helped prevent the cutthroat competition between aviation companies on overlapping routes, and enhanced Air China’s superiority in terms of hub cities.
In this way, competition turned into competition and cooperation. Through cooperation, Air China was able to realize a “great leap forward” in domestic competitiveness. After all, Air China strengthened its domestic air routes with a view to better managing its international trunk routes after gaining a good footing. It was impossible to construct a domestic network through Air China’s efforts alone, because of limited resources. If various aviation companies were to appropriately position themselves in the market, through cooperation in areas such as code share and joint operations, they would achieve a win-win situation that would definitely stimulate the Chinese aviation market, strengthen the competitiveness of China’s backbone carriers, and ultimately enhance the position and competitiveness of the Chinese civil aviation industry in the global market.
Beijing was the obvious choice for Air China’s primary hub base construction. Air China is based in Beijing’s Capital International Airport. At that time, three major economic zones had emerged in North America, Europe, and East Asia/Southeast Asia. Accounting for 90 percent of global GDP as well as global trade, these zones played a decisive role in the global aviation market. Beijing was strategically located at the junction of Asia–Europe and Asia–America routes, enjoying a geographical advantage as an international aviation hub, capable of attracting European and American air routes operated by both domestic and international airlines. Therefore, it was highly feasible to turn Beijing Capital International Airport into an international and domestic aviation hub.
Of course, experience is conditioned by certain circumstances. Just as the old saying goes, “Since things change as time goes by, the rules have to change to fit them.” We must take into consideration our own situation when we are learning from others. I studied the data provided by the management department of Air China, and found that in 1999, the passenger flow between China and Australia should have been around 350,000 people. However, the non-stop capacity of the China–Australia routes back then was less than 150,000 seats per year, and no one airline—not Air China, China Eastern, or China Southern—could ensure a daily flight to Australia.
The reason behind this was that passengers were attracted to aviation hubs in Southeast Asian regions such as Singapore, Bangkok, and Hong Kong. While a large number of passengers traveled to a third location to effect flight transfers, the routes operated by domestic companies were caught between the devil and the deep blue sea. Why couldn’t we have a share in this extensive market? The answer was simple: Beijing Capital International Airport had not formed an economy of scale. That is, without our own aviation hub, our international routes would never have the long arm to reach such markets.
For a long time, people in China had a feeling that the United States was benefiting more from the Sino-U.S. negotiations on air traffic rights. This was an unavoidable problem. In April 2001, fifty-four flights per week were allowed on either side. On the Chinese side, we invested in a capacity of less than 30 flights per week, while the American side not only used up their entire traffic rights, but also kept demanding for new flights and new carriers.
What led to the huge difference? Apart from software, hardware, and passenger structure, the key reason lay in the fact that the United States had the most mature aviation hubs and networks. By contrast, our airports could only satisfy local demand. Through a tight integration of international routes within their domestic network, American aviation companies managed to cover the whole American region with international trunk routes. With the help of hub and aviation alliances, American airlines acquired supreme advantage in the share of flights departing either from the United States or from China.
However, the construction of an aviation hub required a close coordination of various parties, ranging from government and civil aviation administration to market entities, such as airports and aviation companies. These institutions needed to act together. But how did all these parties manage to reach a consensus?
For various historical reasons, many airports in China were designed to function as terminal airports and thus could not meet the demands of aviation hub operations and flight transfers. A considerable amount of investment was required to improve the take-off and landing capacity of runways, emergency management capability, transfer of passengers and luggage between terminal buildings, comprehensive ground transport system, and cargo-handling efficiency.
The Chinese mainland was surrounded by five passenger/cargo hubs: Narita (Tokyo), Kansei (Osaka), Hong Kong, Singapore, and Bangkok, as well as the Manila cargo hub and the Seoul Incheon international aviation hub which opened in 2001. These hubs posed a serious threat to both Chinese aviation companies and Chinese airports. In other words, they had already formed a ring barrier standing in the way of the development of the Chinese civil aviation industry.
Under such circumstances, in January 2000, Beijing Capital International Airport issued its H-share in Hong Kong and became a listed company, raising a large amount of capital for airport reconstruction and upgrading. In the same year, the Civil Aviation Administration of China (CAAC) issued the tenth Five-Year-Plan for the development of the Chinese civil aviation industry. The plan clearly specified the construction of three hub airports: Beijing Capital International Airport, Shanghai Pudong Airport, and Guangzhou Baiyun International Airport. Since then, construction of Air China’s Beijing hub base has been accelerated.
At the same time, Air China kept itself busy, strengthening the network design centered on the Beijing hub and boosting the sale of joint-ticket products. Through these efforts, Beijing now serves as the link to Europe for 15 domestic cities. Fourteen cities are connected via Beijing to Vancouver and Los Angeles, and 15 to Australia. Flights arriving from Europe can be linked to more than 14 domestic cities within the same day. Air China has released 139 more joint-ticket products to meet the demands of the market, as well as 266 virtual domestic airline links.
Over the past few years, Air China has continued to attach equal importance to the development of its domestic and international markets. It has pushed forward the strategy that takes Beijing as the hub, Shanghai as the portal, and Chengdu as a regional hub. Today, Air China boasts a global aviation transportation network that is linked with domestic trunk routes as well as branch ones, fully supports international routes with Beijing as the hub, and focuses on the Yangtze River delta, Pearl River delta, and Chengdu–Chongqing economic zone for strategic development. In China’s fast-growing transfer market, Air China chalks up the lion’s share with its swift and convenient service. In Beijing Capital International Airport, China’s biggest and busiest aviation hub, Air China also holds the leading position. With the approach of the 2008 Beijing Olympic Games and the utilization of the third terminal building, Air China, as the officially appointed passenger transportation partner of the Olympic Games, will see its status and strength in Beijing Capital International Airport further consolidated.
A coin has two sides. We must be able to see the advantages and disadvantages of a situation at the same time. Take the construction of an aviation hub for instance. Although it is of considerable importance to the development of aviation companies, the weaknesses of hub airports are self-evident. Passengers need to transfer, which is time-and energy-consuming. What is more, an aviation company’s air routes must reach a certain level before the airline succeeds in outnumbering others, in terms of transfer opportunities for passengers. The power of hubs can be measured by the number of routes linked with it. A considerable weakness of Air China was its lack of domestic routes, a position that was hard to fix in a short time, if it depended on the redistribution of the original flight capacity. This was a problem that needed to be solved by the strategy of placing emphasis on both international and domestic air routes. How could Air China further strengthen the scale and power of its domestic routes?
In March 2002, the State Council ratified the Civil Aviation System Reform Program. Air China, the China National Aviation Corporation (CNAC), and China Southwest Airlines announced their merger and reorganization. The reorganization opened the door for the Chinese civil aviation industry to implement the strategy known as, “large enterprise, large group,” and at the same time created the conditions for Air China to further implement its hub strategy and distribute its domestic network.
Here I must digress to brief readers on the development of the Chinese civil aviation industry. The deficiency of Air China in resource allocation was, to some extent, a reflection of the underdevelopment of the Chinese civil aviation industry. For more than half a century since the founding of the People’s Republic of China (PRC), the Chinese civil aviation industry had been plagued by problems, such as the small scale of the enterprise, dispersed transportation capacity, high debt ratio, unfair competition, and reluctance to establish a modern corporate governance framework. The depression of Air China was in fact largely due to the simultaneous working of these problems.
To solve these deep-seated problems, the Chinese civil aviation industry threw itself into system reforms. In 1987, a management system reform was launched, with a view to separating aviation companies from administrative bureaus and airports. In the 1990s, domestic aviation companies launched shareholding reforms one after another, introduced competition mechanisms, and established the modern corporate governance framework. With the acceleration of China’s pace on entry to the WTO, the key issue that needed to be addressed was how to reorganize and integrate the Chinese civil aviation industry, and build up aviation companies with global competitiveness.
The Civil Aviation System Reform Program laid out the guidelines, goals, principles, and main content for the continuing reforms in China’s civil aviation industry. In accordance with the Program, CAAC conducted another round of reorganization within aviation transportation and service assurance enterprises directly under its umbrella. As a result, Air China, CNAC, and China Southwest Airlines finally joined forces.
The new Air China that emerged out of the reorganization inherited the entire aviation traffic rights and the business of the three companies and was referred to as a “giant.” For all the employees of Air China, this was a historic event. China Aviation Group Company and a new Air China came into being, and its scale, resources, and comprehensive strength was considerably elevated, ushering in a new era for the development of Air China.
It is fair to say that the acquisition of resources, especially key and rare resources, is a precondition for the development of an enterprise. This is particularly so for the civil aviation industry, which requires huge capital for the purchase of airplanes and engines. This usually results in problems such as an oversized, indirect financing ratio, heavy long-term debt, and clear risk loss in exchange rates. Once the reorganization was made clear, Air China’s leadership organized several rounds of research on related issues, worked to acquire more resources such as air routes and markets, further optimized its financing structure, and lowered its debt and exchange rate risks. In a sense, the reorganization was a landmark for Air China in terms of resource acquisition.
At the end of the year 2000, and before its reorganization, Air China had 12,027 employees, owned 75 transportation airplanes of various models, and operated 115 routes, of which 44 were international and 71 were domestic. The total assets were valued at RMB 38.3 billion.
Before the reorganization, CNAC was very powerful, and had made long-term progress in overseas markets, especially in the Chinese Hong Kong, Macao, and Taiwan regions. It owned 43.29 percent of Dragon Airlines’ shares, emerging as the single largest shareholder. Other than that, it also controlled 51 percent of shares in Air Macao. CNAC Zhejiang Airlines, its wholly-owned subsidiary, owned eight transport airplanes and operated 46 air routes. CNAC held shares via investment in 58 enterprises. In December 1997, National Aviation Co. Ltd. under CNAC was listed on the Hong Kong Stock Exchange as the first aviation red chip stock. By the end of 2000, CNAC had total assets worth RMB 9.13 billion, and had 1,451 employees.
Before the reorganization, China Southwest Airlines (hereinafter referred to as Southwest Airlines) used to be the largest aviation company in western China. By the end of 2000, Southwest Airlines had 9,277 employees, owned 38 airplanes of various types, operated 180 domestic and international air routes, of which eight were international and 172 were domestic. The total turnover volume of domestic transportation and the number of routes ranked second in national civil aviation. Its assets totaled RMB 13.24 billion.
To be honest, from the perspective of comparative advantage, the integration of Air China, CNAC, and Southwest Airlines could be counted as the best exercise that took place within China’s civil aviation industry. Air China owned certain brand and scale advantages, but due to historical reasons, its capital structure was not realistic enough, and it suffered from a high asset-liability ratio, limited domestic routes, and unsatisfactory economic performance. CNAC had established its presence in Hong Kong, Macao, and Taiwan, and had a strong financing ability and high management efficiency. However, because of its exceptional positioning, it exhibited such weak points as a lack of professional aviation experts and a small scale of operation.
Southwest Airlines experienced rapid growth after its founding. It had many domestic air routes as well as an effective quality management system. However, various complicated factors such as the unique Tibet Plateau routes led to high management costs, a high asset-liability ratio, and unsatisfactory economic results.
After the merger, the new Air China owned a total of 118 airplanes, and ran 395 domestic and international routes. The scale of its fleet witnessed a 65.3 percent leap, the resources of employees and routes doubled. Its total turnover volume of passenger, cargo, and mail transportation accounted for 31.9 percent, 21.6 percent, and 29.1 percent, respectively, of the national total. Its transportation income ranked among the top 30 of the 265 member aviation companies of the International Air Transport Association (IATA). In other words, it had developed certain advantages of scale.
In terms of market distribution, the new Air China had the largest share of international routes. When it came to the domestic market, it had successfully gained access to the southwestern and eastern Chinese market. A vast network had taken shape that linked up with domestic trunk and branch routes in support of international routes with Beijing as the hub, and the Yangtze River delta, Pearl River delta, and Chengdu–Chongqing economic zone as its bases. This created positive conditions for the equitable allocation of capacity and the establishment of the Beijing aviation hub. The post-reorganization CNAC (Group) operated 2,880 domestic flights, a rise from the ante-reorganization figure of 2,472. Transfer flights jumped from 380 per week to 680. The control capability over the domestic market had been greatly enhanced.
In terms of fleet composition, aircraft models were quite uniform. After the reorganization, Air China was able to effectively coordinate aircraft maintenance, staff training, reduction of aviation material storage, and increases in airplane utilization. The aircraft models of Air China, Southwest Airlines, and CNAC Zhejiang Airlines were basically the same, mainly consisting of Boeing and Airbus. Just by sharing aircraft materials for Boeing 737 and Airbus 319, the company could save more than US$3 million. At the same time, through an overall planning of resource allocation, the management costs and financial costs of the new Air China were further reduced.
The public response to this reorganization was not that optimistic. Just as the three major aviation group companies were starting operation, the Civil Aviation Resource Net of China (www.carnoc.com), the most influential website on the industry, conducted an online survey. The question asked was, “In your opinion, what will happen with the three major aviation companies going into operation?” The result showed that only 19.5 percent of our fellow industry colleagues felt optimistic, believing it would save the Chinese civil aviation industry. About 64.7 percent of the respondents believed that nothing new would evolve from it. Another 15.8 percent believed that the move would only cause disorder for the civil aviation industry.
What are the effects of reorganization? Without a doubt, they are dependent on whether the reorganization is timely and is thoroughly carried out. The reorganization of the industry was designed to optimize and integrate domestic civil aviation resources so as to make the industry powerful. This conformed to trends of development and competition in the international aviation market. The challenge was how to speed up the reorganization, rapidly turn advantages to strengths, and achieve a great leap forward in the core competitiveness of Air China.
However, the post-reorganization China Aviation Group Company had 25,000 employees and owned total assets worth RMB 59 billion. These assets were distributed in diverse regions such as northern, southwestern, and southern China, as well as Hong Kong and Macao, making it extremely hard to integrate and allocate.
To accelerate the reorganization, the China Aviation Group Company adopted a three- step strategy. Firstly, China Aviation Group Company was established through consolidated financial statements. The assets of the three parties, share rights included, did not go through asset evaluation. Instead, the assets were transferred gratis after being sanctioned by the Ministry of Finance.
Secondly, internal reorganization began, and main businesses were separated from supporting businesses. After the founding of the China Aviation Group Company, the name of Air China Limited was kept, but the main businesses and supporting businesses of the three parties were separated. The main businesses of aviation transportation and the related assets were transferred to Air China Limited. Air China Limited’s logo became the standard emblem. This was how the main transportation businesses were integrated. The supporting businesses were reorganized by other methods, and were universally managed by the China Aviation Group Company. The special aircraft business was managed by the China Aviation Group Company, and was subject to independent accounting.
The third step involved the effort to appropriately deal with historical issues step by step. At the same time, the development strategy for the main and supporting businesses was further worked out, and efforts were redoubled to strengthen capital operations and tighten corporate management.
The year 2002 saw a smooth flight path. On January 1, 2003, the new Air China operation system was put into effect. All Air China flights began to use the code of CA and adopted the 999-code transportation certificate, while pilots and crewmembers donned their new uniform. On July 28, the integrated operations of Air China, Southwest Airlines, and CNAC Zhejiang acquired the certification of CAAC.
Few people have understood even till this day that Air China’s success was largely due to its reorganizing itself ahead of others. This forward-looking move has enabled Air China to gain more initiative to further integrate its corporate resources and culture through internal management system reforms.
After the acquisition of resources, the next question was how to scientifically and systematically improve resource allocation. As resources were limited, whatever we did, we had to center on our core business, and do our best in what we were good at, and what was considered most important. One major discipline for the People’s Liberation Army (PLA) requires us to be fully prepared before any fight, to concentrate superior power to destroy the enemy, and to pit one man against ten in strategic terms, while using ten to attack one in tactics. In this way the chances to win would be a lot larger. As an enterprise, we should first study the market trends in the context of core businesses, and the observable trends would guide our resource allocation and investment.
This is a very important principle in strategic positioning. It is also the precondition in competition for using our advantage to attack the enemy’s weakness. For example, Air China applied this principle to the prime domestic routes which had a large passenger flow and promised strong profitability. Air China adopted the measure of dense flights to ensure a high market share. It had 16 flights on the Beijing–Shanghai route or one flight in less than one hour. This made it very hard for our competitors to win, even though they had been allowed to operate new flights. It was like a flock of chickens crowding around a plate to eat from it, while the other chickens could only walk around helplessly outside the circle. No matter how many times they went around, there was no way that they could squeeze into the inner circle. With dense flights in prime routes, Air China suffered the least when the whole industry experienced a capacity reduction.
Another example is our corporate positioning that emphasizes the recognition of mainstream passengers. We place more focus on business passengers, who have a higher level of loyalty and a lower sensitivity toward ticket prices. This passenger group fits in well with Air China’s operation structure, which is centered on hub cities and trunk routes. To meet their demands, Air China has invested a total of RMB 700 million to improve the facilities of the passenger cabin, leaving its competitors even further behind.
It is a commonly known fact that resource investment must be based on the characteristics of an enterprise itself. Will this investment fit into the special demands and competition characteristics of a particular market segment? If not, the enterprise might lose the chance to gain further development. Over these years with Air China, I have been repeatedly asked to consider certain investment projects. Some projects were truly attractive, but did not match the positioning of our enterprise. I will summarize my views in this respect using two sentences: There is no terrible industry, only bad management. There is no terrible program, only bad management.
Air China has never hesitated to acquire at any cost those resources that comply with the company’s strategic direction and help sharpen its competitive edge. In the spring of 2004, Air China took a series of astonishing integration measures. We became the biggest shareholder of Shandong Airlines, one of the four major local airline companies, at a cost of RMB 560 million. The purchase took the whole industry by storm.
The guidelines for the reorganization of China’s civil aviation industry in 2002 were to “seize the big groups and ignore the small ones,” as well as to create a favorable environment to help the core aviation companies gain the upper hand in global competition. This means that for a long time to come, the Big Three will dominate the domestic aviation market, while other small aviation companies will find their market shares dwindling day by day.
This was also reflected in the policies at that time. Let me take the limitation on transition cities as an example. In the first half of 2003, CAAC began to limit the transit flights of all aviation companies that were not based in the following nine cities—Beijing, Shanghai, Guangzhou, Shenyang, Kunming, Xi’an, Urumchi, Chengdu, and Wuhan. In October, the limitation was expanded to more cities such as Dalian, Chongqing, Xiamen, Haikou, Shenzhen, and Hangzhou. The trunk route operation and the network coverage of local aviation companies had been significantly restricted. From 2002, a group of local branch route aviation companies began to lose money one after another. At one closed-door industrial meeting, the president of a local airline complained to me, “I hardly see any living space!”
For Air China, however, this meant another opportunity. After the first round of reorganization, the southwest branch of Air China controlled the western market, while Shenzhen Airlines (Air China held 25 percent of its share equity) competed in the southern China market. But Air China’s competitiveness was quite weak in the eastern China market, which is huge in scale and high in potential. Shandong Airlines caught our eye. Back then, Eastern Airlines made up 35 percent of the Shandong market, while Southern Airlines’ share reached 20 percent. Air China seldom tackled the routes in Shandong and its surrounding market except for a few routes to Jinan and Qingdao. The way ahead was clear: A merger with Shandong Airlines was a shortcut to enhancing Air China’s overall competitiveness in Shandong.
Since its operations began in 1994, Shandong Airlines had established a “three-ring-flight” operation pattern and maintained a sound performance. It owned four regional Saab, ten CRJ200, and nine trunk route Boeing 737 airplanes, and operated more than 100 routes in total. The three rings refer to the flights between Tianjin, Qingdao, Yantai, and Dalian around the Bohai Sea; the flights around the Pearl River through Guangzhou, Shenzhen, and Zhuhai; and those along the Yangtze River. Through this three-ring flight pattern, Shandong Airlines successfully dodged the competition with principal aviation companies and established its unique route network.
However, due to various reasons, Shandong Airlines gradually descended into a period of loss making. Therefore, the Shandong provincial government and the shareholders decided to introduce strategic investors. Opportunities for a merger were ripe at that time. The eastern China market, which included Shandong, became a place that was eagerly sought after. Many aviation companies expressed their interest in a merger with Shandong Airlines.
Air China fully demonstrated its sincerity and confidence in becoming a shareholder of Shandong Airlines to the Shandong provincial government. If the cooperation were successful, Air China promised that it would transfer some of its international routes to Shandong Airlines, thereby opening Shandong’s sky link to the world. At the same time, Air China would also conduct an overall integration with Shandong Airlines in other aspects. First, besides the international air routes, Air China would help Shandong Airlines get more traffic rights, such as traffic rights for flights departing from Beijing. Next, in terms of fleet integration, Shandong Airlines could expand its Boeing 737 fleet, which had a higher operation rate, while Air China could help manage the operations of part of Shandong Airlines’ CRJ fleet. After that came the integration of sales. With the help of Air China’s sales network and the advantages of Air China’s Frequent Flyer Program, Shandong Airlines would increase its ticket sale as well as its market share. Last but not least, Air China would transfer the ground agency business in Qingdao and Jinan to Shandong Airlines, and would offer part of the Boeing 737 repair and maintenance business to Taigu Airplane Repair and Maintenance Company under Shandong Airlines.
This blueprint was in the favor of all parties. On February 28, 2004, China Aviation Group Company, Shandong Economic Development Investment Company, and Shandong Airlines Group Company finally reached an agreement on the share transfer of Shandong Airlines. By purchasing 22.8 percent of Shandong Airlines’ B-share and holding 48 percent of its share rights through capital transfer and increase, Air China became a major shareholder.
Through cooperation, the two parties would enjoy over RMB 100 million in mutual benefits from the market. Through resource sharing, Shandong Airlines was able to cut more than RMB 10 million in costs each year. Beyond the practical economic gains, this merger further increased Air China’s resource advantage and core competitiveness.
Following the merger, the new Air China completed its domestic strategic distribution. The deal was a well-calculated move in Air China’s expansion endeavor. Compared with the previous reorganization, this was merely a minor victory but the extended network thus achieved would further galvanize Air China’s series of strategic realignment measures.
Three moves can save your life in a game of Chinese chess. Many people, who have kept a close watch on Air China’s series of “battles,” still wonder where the strategic thinking came from for such strategic moves as placing emphasis on both international and domestic air routes, establishing hubs, and integrating aviation resources.
Actually, whatever you do, you should first get an overview. Correct concepts are based on correct thinking. Enterprise management is like combing your hair: it is a process of managing your thoughts from top down. As a manager, if you can grasp the overall situation and think through the most essential parts, specific questions on operations will be readily solved.
So what is the right way to think and manage correctly? This question appears mysterious, but it will no longer be so if you shift your attention to some simple questions: What does an enterprise do? What does your enterprise do? What should you do as an enterprise leader?
What does an enterprise do? The most fundamental function of an enterprise is to create wealth. Without making a profit, an enterprise is not functional. Air China laid down its strategy with the objective of enhancing its profitability. The establishment of the Beijing hub and the reorganization of three big aviation companies are like zuo yan1 while the merger with Shandong Airlines is like guan zi.2 The ultimate purpose is to control the whole game or lay the foundation for Air China to earn long-term profit.
I always say that strategies are correlated. From army to enterprise, the environment and the role have changed but my task is still management, and my goal is still to increase organizational competitiveness. Both roles require a grasp of the situation and strategy. Whether I can achieve it depends on my cognitive abilities. A man’s way of thinking determines the result of his actions. After all, it is a philosophical proposition.
During the reorganization of three big aviation companies, one night I happened to be reading “On Protracted War” (1938) by Mao Zedong, and I was deeply impressed by the following passage:
Thus, there are two forms of encirclement by enemy forces and two forms of encirclement by our own—rather like a game of Go. Campaigns and battles fought by the two sides resemble the capturing of each other’s pieces, and the establishment
1 A Chinese chess term, literally “make an eye,” which means to place stones into an eye-like shape in order to occupy a winning position.
2 A Chinese chess term, referring to the last struggle before a game is over.
of enemy strongholds and our guerrilla base areas resembles moves to dominate spaces on the board.3
Didn’t this conclusion also apply to the situation we faced in Air China? Of course, the clever arguments of Mao were not meant to refer to the specific issues relating to an enterprise, but they pointed out a correct way of thinking. This concerned the long-term goal as well as the fundamental interests of an enterprise. In this sense, thinking is far more important than a theory or an excellent strategy.
At the same time, Air China’s series of measures on the distribution of its main aviation business also offered me more food for thought. Corporate positioning is not once-and-for-all. It always needs to be fine-tuned, supplemented, and developed in the light of specific circumstances. You can’t simply set the positioning, and believe that this position will be acceptable forever. If you do, you will most definitely pay for this wrong thinking sooner or later.
In practice, corporate positioning can be approached in four ways. The first is to define the corporate characteristics, which mainly refer to the products that a company offers, such as public utilities or competitive products. This will help set up the right development strategy. The second way is to understand industrial direction. The main direction, which is governed by industrial trends and the company’s resource condition, needs to be carefully planned. The third way is to differentiate the various levels. Typically, an industry consists of numerous levels of market and a company must know for sure the coverage of its business module in the industrial market and the extent of the upper- and lower-stream chain of the industry. The fourth approach is to assess your own competitive
3 Translation based on “On Protracted War,” Selected Works of Mao Tse-tung; http://www.marxists.org/reference/archive/mao/selected-works/volume-2/mswv2_09.htm. (Accessed November 2007)
position. A company must have a clear judgment on its own market capabilities and future forecasts. The company executives, in particular, should think strategically, and appropriately position the company’s core business.
The development goal set for a company should not be vague and insubstantial. It must be specific, and neither too tough nor too easy. It should be attainable through the joint efforts of all employees. If not, the goal can neither inspire the employees nor establish a unified corporate culture.
After the reorganization, China Aviation Group Company set three period goals in 2003. The first goal was to become the leading company in China. The second was to be the leading aviation company in Asia. The third was to be listed among the leading aviation companies in the world. Back then, we faced fierce competition in the domestic market, the enterprise suffered consecutive losses and net assets fell to just RMB 2 billion. Despite these adverse circumstances, we managed to jump out of the narrow circle of local competition, and guided our employees to set their sights on the future and the world market, in order to foster the enterprise’s ability to compete with global aviation giants. These three goals enabled Air China to become a powerful competitor in the upper echelon of world aviation companies.
The vision of a manager decides the future development of a company. To be an industry leader, as a Chinese idiom puts it, one has to look in six directions and listen to sounds from eight directions all at once and think strategically about the industry’s development trends.
In the new era, Air China’s strategic positioning can be summed up in a sentence: strive to become a world-competitive aviation company that is well recognized by mainstream passengers as well as the most valued and the most profitable company in China. Passengers in the aviation market are mainly divided into two categories: business and leisure. Business passengers are our main target in view of Air China’s operational structure, which is centered on hub cities and trunk route flights. In terms of demand, business passengers travel at a very high frequency and demand quick and smooth transfers. They are also more conscious of service quality. These are what we should grasp to get ourselves recognized by mainstream passengers.
Over the past few years, Air China has made constant efforts to improve its level of service. It invested RMB 680 million and RMB 30 million to upgrade its business class cabins and in-flight entertainment systems, respectively. Also, Air China worked on varying its in-flight food and beverages to better suit flights to different regions, so as to satisfy the needs of first and business class passengers. Air China implemented the Frequent Flyer Program and the Frequent Flyer Company Program strategies, and extended relations with Frequent Flyer strategic partners in related service companies both at home and abroad. These measures have won over top-quality passenger groups for Air China. At present, business passengers make up 72 percent of Air China’s passenger transportation.
In terms of the domestic market, Air China figures most prominently in key cities and on high quality routes. Of its 82 major competitive domestic air routes, Air China has 56 routes with seat values that are higher than its competitors. In 2005, it gained 960,000 Frequent Flyer Program members, pushing the total membership beyond 4 million. This index ranks above all other domestic aviation companies, indicating a wide recognition of the Air China brand among business passengers.
All operating activities of a company should be profit-oriented. Long-term losses will result in the failure of a company. From a long-term perspective, what counts most for a company is not the specific amount of profit it generates but its profit-earning ability and quality. This is where scientific development methods come into play. Over these years, Air China has faithfully practiced systematic development concepts and pursued substantial growth. It has also come up with a guiding policy that seeks to maximize profit, improve human resource quality, and work toward all-round corporate growth. As a result, these seemingly abstract concepts have been effectively played out in reality.
Competition among modern enterprises now operates in the context of economic globalization. This is also why we have set the goal of striving to become a world-competitive aviation company. For a long time, people have clung to a mistaken understanding of civil aviation, believing it to be a monopoly industry under strong governmental control, which is not the case. Today, more than 100 aviation companies from home and abroad are competing in China’s vast airspace. The Chinese aviation industry has aligned itself with international standards, becoming one of the most fiercely competitive industries in China’s national economy. As such, Air China must have a global perspective.
In recent years, Air China has made quite a few important strategic decisions that have created wide social concern. For example, why did Air China choose to be listed in both Hong Kong and London at the same time in 2004, instead of issuing its A-share first and H-share later? Why did it choose Cathay Pacific Airways as its strategic investor? Why did it pick All Nippon Airways and Temasek Holdings (Singapore) as its shareholders in the name of financial investors? In fact, all these moves were made with the aim of building an international brand image to pave the way for its participation in global competition. In June 2006, Air China signed a Memorandum of Understanding with Star Alliance, the biggest aviation alliance. At present, while maintaining bilateral cooperation with 86 aviation companies all over the world, Air China is also going through the procedures required for eventually joining Star Alliance. This will play a positive part to promote Air China’s international presence and further increase its business income while keeping costs down. In addition, Air China concluded a share exchange agreement with Cathay Pacific Airways, approving a 17.5 percent cross-share holding. Dragon Airlines was merged into Cathay Pacific. At the same time, the two parties’ joint operation of routes from the Chinese mainland to Hong Kong has altered the competition pattern of the Asia-Pacific aviation market. All these have mapped out an eye-catching strategic blueprint for Air China to complete in the future world aviation market.