Proof of the bad performance of China Eastern Airline

Proof of the bad performance of China Eastern Airline

            China Eastern Airline Corporation is one of China’s three largest airlines both by fleet size and carriage. Its headquarters are at Shanghai Pudong International Airport.  China Eastern Airlines runs domestic, regional and international passenger, cargo and mail services. It also provides services in pilot training, aircraft repair and maintenance, flight simulation, provision of air catering and airport ground services (Doganis, 2006). In the past, China Eastern Airline has reported good economic performance. For instance, in the year 2004, it had a profit before income tax of about 650 RMB million.  However, in the past few years, there has been a decline its performance. For instance, at the end of the year 2008, it reported a loss before tax of about 15,256 RMB million. China Eastern Airlines is performing poorly when compared to it two biggest competitors, China Airline and China Southern.

Since the year 2005, China Eastern Airlines has performance been falling. In the year 2005, it made a net loss before tax of 528 RMB million compared to its competitor Air China which made a profit before tax of   3,374 RMB million. In the year 2006, it had a loss before tax of 3,338 RMB while its competitor Air China made a profit of 3,305 RMB million. The company experienced some improvement in its performance in the year 2007, making a profit if  378 RMB million, however, when this is compared with that of China Southern Airline, which reported a Profit before tax of 2,879 RMB million, the performance is still dismal. In the same year, Air China made a profit of 3,935 RMB million.  In the year 2008, China Eastern Airlines experienced its worst performance ever reporting a net loss before tax of 15,256 RMB million. Its competitor, China Southern Airlines made a net loss before tax of 4,724 RMB millions while Air China made a loss of 10.977 RMB Million.  When a comparison is made on the annual performance of the three airlines, in the last three years, China Eastern Airlines had the worst performance. In a period of three years, it reported a profit only once. In the other cases, it made losses while its competitors were making profit. Its failure to make profits compared to its competitors is the most basic proof of its poor performance.

In the year 2008, the global airline industry suffered significantly because of a number of reasons. This led to a fall in revenue levels and increase in operational costs. Most airlines in China reported losses in their operations. However, of the three biggest airlines, that is, Air China, China Eastern Airlines and China southern Airlines, China Eastern Airlines made the largest amount of loss. This is shown by both the quarterly and annual results reported by the three companies. For instance, Air china made a quarterly loss of 1.97 billion Yuan. China Southern Airlines made a quarterly loss of 830 million Yuan. Chinese Eastern Airlines made a quarterly 2.33 billion Yuan in the same period. The fall of in the performance levels of the company has been caused by both internal and external factors. The internal factors are those which emanate due to structural failures in the company while the external factors are those which affected the industry as a whole.

The main reason for the poor performance of the company has been poor management. The company has is the recent past suffered with the public questioning the integrity of its management. Members of the public have lost confidence in the company because of a number of occurrences. For instance, there is the case when a number of its planes of its planes returned to base leaving thousands of travels stranded. Although the management blamed the weather for return, investigations showed that the weather was appropriates for flights. The result of this incident was immense negative media coverage and protests from clients. This has led to the fall in trust in the company by clients leading to fall in passenger levels hence fall in revenue. Poor management has also led to a number of protests from its employees, which has helped tarnish the image of the airline. For instance, the company experienced protests from pilots involving salary, benefits and managements issues (Doganis, 2006). There was also the incident on April 7th when one of its flights from Haikou to Nanjing was delayed. Although the management the weather was to blame for the delay, the passengers were of the view that the company’s staff were in a strike. The bad image has contributed to the poor performance.

A company’s staff is critical in the development of any company. For a company to succeed, the staff has to be motivated. However, in China Eastern Airlines, this is not the case. Due to poor management, there has been major staff discontentment. The company has experienced a number of strikes in the recent past. Staff lack passion in their work and cite many reasons for this. The Management team is unstable with regular changes in the company’s boardroom. In the recent past, the company has experienced regular high level reshuffling. This has resulted to the loss of confidence in the company by both the staff and the companies’ clients. For instance, in the last ten years, the company has had six management teams, four chairmen and six general managers. The frequent change affects the policies and structures of the company. This because every team comes up with its own polices. The frequent change in policy result to the poor performance. The company’s staff also claims that the management is authoritarian operating like the government. They state that their views to help improve the company are never considered in decision making. These inefficiencies by the management result in the poor performance of the company.

Another reason for the fall in the performance of the company is because of brain drain. China now has many privately owned airlines which in a bid to improve their operations, are poaching the best personnel from other airlines especially the government owned. China Eastern Airline has lost its critical employees to these fast rising private airlines. The private airlines have flexible procedures and motivational mechanisms which are attractive to staff. These private airlines also give their employees better pay have better relations between staff and management (Doganis, 2006). This has seen China Eastern Airlines loss its staff to the private airlines. The loss of its experienced staff means that it has to recruit and train new people to fill up the vacancies. The loss of staff to the private airlines also limits its operations and performance.

The poor performance has also been as a result of poor service provision by the airline. The airline has experienced a high rate of late arrivals or poor on time arrival rate and low service satisfaction. Compared to its two competitors, it has the number of cases involving flight cancellation. It has had a number of cases involving planes returning to base immediately after take off. The effect of this has been the loss of trust and preference in the company’s services. China Eastern Airlines has seen its passenger and cargo levels fall which can be attributed to the poor service provision. The fall in demand of its services trigger the fall in performance due to reduced revenues.

In the recent past, there have been a number of occurrences that have heavily impacted the Chinese airline industry. Although the factors affected the airline industry as whole, China Eastern Airlines was most affected compared to other companies. The occurrences increased its decline in performance. A major occurrence was the economic downturn, which had two effects. The economic downturn reduced the volume of international trade and the number of passenger travels. The economic downturn and the severe global financial crisis affected the economies of most of the countries the airline serves. The economies of these countries experienced immense recession. These led to a drastic fall in the demand for global air transportation market. The economic downturn led to the fall of demand for air services which the airline greatly depends on for its revenue. The economic downturn also reduced international trade. The reduction in international trade led to the reduction in cargo and mail traffic, which ultimately reduced the revenue earned from cargo and mail traffic. China Eastern Airline has experienced great reduction in its revenue levels due to reduced passenger and cargo volume resulting to the poor performance.

Another reason why China Eastern Airline has experienced a decline in its performance is due to increased competition in both the Chinese and global air market. The increase in competition has seen the decline in both its passenger and cargo traffic. The fall in the passenger and cargo quantities have caused the fall in revenue levels which ultimately reduces the companies’ performance. Another reason that has caused the fall in revenue levels is natural disasters that have hit China in the recent past. China has been hit by different calamities such as earthquakes, the severe winter that was experienced last year and other unexpected occurrences. A number of earthquakes hit China in the year 2008. There was the Sichuan earthquake, which was one of the worst calamities ever experienced, Panzhihua earthquake and YingJiang earthquake. It also experienced blizzards and the unrest in Tibet, which led to a 70% drop in the number of visitors to the region. This leads to the decrease in passenger traffic.

These factors which can best be described as external factors have had more impacts on Chinese Eastern Airlines than its other competitors. They have triggered a fall in its domestic and international operations leading to a loss and decline in its performance. For instance, its domestic total passenger traffic volume experienced a 0.39% drop in the year 2008 as compared to the year 2007. This caused a fall in the revenue level by about 1.70%. China Eastern Airline has also experienced a fall in its performance due to the decrease in regional passengers’ volume by about 7.47%. The fall in number of passengers who led to the decrease in of revenues by about 8.36%. The company faced immense competition in its Hong Kong routes, which are its highest regional revenue earners (Doganis, 2006). This saw the passenger capacity of the company fall by 10.  Other sources of revenue such as cargo and mail traffic volume fell 7.242% to 2.420 million tones-kilometers. This led to the decline in revenues from these activities by about 2.32% to 5,358 million. Because of the decline in revenue levels, there is fall in performance.

In addition to the fall in revenue levels, the performance of the company has also been negatively affected by the increase in the level of operating expenses experienced in the company. China Eastern Airlines has seen its operating costs rise above normal in the recent past. The rise in operating costs has been caused by a number of reasons and occurrences. For instance, compared to the year 2007, the Companies total operating costs rose by about 32.49% to RMB56, 828 million in the year 2008.The increase in total operating expenses occurred due to a number of varied reasons. There was an increase of about 22.30% in amounts spent on fuel. The increase in the expenses was caused by the increase and frequent fluctuations in worldwide oil prices. Recent performance by Chinese Eastern Airlines has slowed down because of the rapid increase in its operating costs. For instance, in the year 2008, its landing charges increased by 2.04% to RMB5, 280. The increase in the landing charges was because of an increase in the number of aircrafts in the company with high landing charges. As the airline works to expand its operations, it has had to hire more workers and staff (Routledge, 2007).The airline has hired more workers to a have 44,153 employees as compared to 40477 in the previous year. This increase in the number of workers has led to an increase in the wages, salaries and benefits expenses. In the year 2008, there was an increase of about 5.04% to RMB4, 545 million.

A proof to show the low performance is in the rate of improvement and return to profitability of the company after the economic downturn. The company made a quarterly profit of 23 million Yuan or $3.3 million in the quarter ending 30 September 2009. Its competitor, the China Southern Airlines on the other hand made a quarterly profit of 283 million Yuan or $41.6 in the same period. Its other competitor, Air China made a quarterly profit 884 million Yuan or $129 million. The results show that China southern Airlines made fourteen times of the profit made by China Eastern airlines. The two companies have a higher rate of return than China Eastern Airlines. China Eastern airlines had revenues of 11.4 billion Yuan in the year 2009 compared to 2008, which is an increase of 5.5%. On the other hand, China Southern Airlines had revenues of 11.4 billion Yuan in the same period, which was a 9.5% increase. This shows that the performance of China Eastern Airlines compared to its competitors is lower. Air China made a loss of 1.94 billion Yuan in the year 2008 but is now making a higher profit than China Eastern Airlines. China eastern Airlines’ costs have now fallen by 9.7%. However, the fall is lower compared to Air China whose operational costs fell by 10.6%.

China Eastern Airline has been one of the three largest Chinese airline companies. However, as seen above, the company has experienced poor performance in the recent past. In conclusion, measures should be taken to help improve the company in its performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Doganis, R. (2006). The airline business. New York, NY: Routledge

Earn Shaw, G. (2005). China Business Guide. China Economic Review Publishing

Hanlon, J. P. (1999). Global airlines: competition in a transnational industry. Woburn, MA: Butterworth-Heinemann

Holloway, S (2008). Straight and Level: Practical Airline Economics. Burlington, VT: Ashgate Publishing, Limited

International Air Transport Association. (2006). World air transport statistics. Montreal: International Air Transport Association

Routledge (2007).Far East and Australasia 2008. Washington: Taylor and Francis