Daily Archives: March 6, 2012

If The Only Budget Airline in China Can Profit In This Global Economy …

… why are North American airlines up sh*t creek with only one paddle?

Every year, another North American airline is in financial trouble, and while a bail out may not be required, usually a bankruptcy and restructuring is, or at the very least a merger (or acquisition) to increase revenue and “balance the books”. I’m a little dumbfounded. Yes, the cost of fuel is rising, as is the cost of labour, but the amount of money flowing into air travel is still near an all time high and with the increasing globalization of our society, that’s not going to change. As a result, the doctor finds it hard to believe that every major airline isn’t as profitable as a well-run bank (and given that banks, more-or-less, “mint” money, it’s pretty hard to lose money as a bank — unless you’re run by people who are the reason us IT folks invented ID 10 T errors). In 2010, only 7 of the top 10 North American Airlines were profitable, and only 3 of these made a profit margin that was respectable. While the average profit for profitable airlines was 3.46%, the average profit for the bottom 4 profitable airlines was a mere 2.06%. To put this in perspective, that was the average net profit of Grocery Stores (NAICS 4451) in Canada in 2008. Or, in other words, you’d see the same return in the lowest margin retail business on the planet as you saw in these airlines. (See the summary in the following table.)

Airline Passengers Revenue (2010) Net Income (2010) Profit Margin
Delta 163 M 31.78 B 593 M 1.87%
United 141 M 16.34 B -651 M -3.98%
Southwest 135 M 15.7 B 178 M 1.1%
American 106 M 22.17 B -471 M -2.12%
US Airways 60 M 11.9 B 502 M 4.22%
Air Canada 32 M 10.79 B 361 M 3.35%
Republic 31 M 2.65B -14 M -0.5%
JetBlue 26 M 4.5 B 86 M 1.91%
Alaska 25 M 3.8 B 251 M 6.6%
WestJet 20 M 2.6 B 137 M 5.2%

That’s why every CEO and COO of every major airline should definitely read this recent piece over on the Knowledge @ Wharton China site which provides a transcript with Wang Zhenghua of Spring Airlines: Making a Low-Cost Strategy Fly High. While the best North American Airline made 6.6% profit, Spring Airlines made 14.7% profit! And he made this profit in a local market dominated by state-owned heavyweights while being the only airline in China that doesn’t use the TravelSky booking service, the state-owned monopoly, to sell tickets. In the article, Wang gives away some great wisdom in the article, which is relevant not just for airlines, but transportation providers in general.

The following are some of the key points Wang makes about Spring Airlines.

Quote Wisdom
Spring Airlines has aimed to offer low fares by operating efficiently and making flying more affordable for the average Chinese traveler. Specifically Spring Airlines has a a cost that is, on average, 30% less than its peer group. Spring Airlines has recognized that the biggest market is in the middle — not the upper class or premium business traveller, as both of these are in decline, or the poor, who can’t afford to fly — and that’s where a smart, budget, enterprise focusses, especially when no one else is doing it well. (It focusses on leisure travellers and price-conscious business travellers, which are the growing markets.)
Low-cost travel is a global trend. A smart company aligns itself to mega-trends, and, when possible, adjusts for current mini-trends (which, in Spring Airlines’ case, is no extras or frills, like meals, that only add to the total cost).
[Low-cost flying] comprises 70% of the short-haul market. That’s why only 4 of Spring Airlines’ 54 flights are (long-haul) international. Don’t invest where the business is not.
Cost-conscious business travellers [are our target customers]. It’s 70% of their business and the logical focus. That’s why they launched a business economy service focussed on this customer segment that offers them food, a special shuttle for boarding, and a seat at the front of the aircraft, which they want and will pay a slightly higher price for.
The nature of this industry is that the relationship between supply and demand is changing constantly and quickly. Demand fluctuates between high and low seasons, weekdays and weekends, and even morning and evening travel. So unlike with other goods and services, consumers’ demand for air tickets fluctuates greatly. Thus, the airline industry needs a more flexible, open market approach to operate.
Some companies actually consider delaying payments — having a so-called “no interest loan” — to be an operating strength. But we never do that because we believe our credibility is our life. Credibility is all you have when times get tough, and can be the difference between life and death.
Be cautious in boom times; face the challenges in the bear times. … It’s just focus and down-to-earth, hard-core efforts that have made us what we are today. Growth doesn’t last for ever, and those that don’t realize this fact are doomed to crash with the market.
Rather than spending heavily on ads, we focus on internal management, and carrying out strict evaluations of our suppliers and running internal training programs. A focus on Talent and Transition, and not Buzz and PR. And just when I thought all trace of good business fundamentals had disappeared! Wang Zhenghua is brilliant. I wonder, could he be China’s Peter Drucker?