E-Commerce at Yunnan Lucky Air

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08-076 August 11, 2008

E-commerce at Yunnan Lucky Air
Inaki Berenguer, Cai Shijun, Li Liang, Liu Jing, Ningya Wang

Preserve the essence of traditional Chinese culture while learning from successful models of the world. - Yunnan Lucky Air, statement of corporate culture Fortune had favored Yunnan Lucky Air. Four years after its founding in 2004, Lucky Air had grown into a US$104.3 million (RMB720 million) low-cost airline, serving domestic routes from its hub in Kunming, the capital of southwestern China’s Yunnan province. Yunnan was one of China’s top tourist destinations, famous for its beautiful landscape and multi-ethnic culture, and Lucky Air had successfully attracted over 1.2 million Yunnan-area travelers in 2007 alone – more than double the number of passengers from the year before. Compared to such major competitors as Air China and China Southern Airlines, Lucky Air operated at a relatively small scale, modeling its low-cost, highefficiency strategy on Southwest Airlines in the United States. And the years of consistently rapid growth seemingly demonstrated the model’s strength. Yet Lucky Air and its parent, Hainan Airlines, were growing concerned. The Chinese airline industry was heavily regulated, limiting flexibility for new airlines. Nonetheless, new low-cost competitors were blossoming, and Lucky Air found itself among an increasingly crowded field: there were 11 low-cost Chinese airlines by 2007, and two more waiting for official approval. Anticipating a potential squeeze, Lucky Air was searching for additional competitive advantages. One option was to focus on e-commerce. Lucky Air’s IT operation was backed by Hainan Airlines, which had one of the most advanced web portals in the Chinese airline industry. True, airline e-commerce was still at an early stage in China, but Lucky Air was eager to position itself at the This case was prepared by Inaki Berenguer and Ningya Wang (MIT Sloan School of Management, MBAs Class of 2009), and Cai Shijun, Li Liang, and Liu Jing (Yunnan University School of Business and Tourism Management, IOMBAs Class of 2008), under the supervision of Professor Yasheng Huang and lecturer M. Jonathan Lehrich. Copyright © 2008, Massachusetts Institute of Technology. This work is licensed under the Creative Commons AttributionNoncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.

Inaki Berenguer, Cai Shijun, Li Liang, Liu Jing and Ningya Wang

cutting edge of technology and reap the same rewards as Southwest Airlines and similar U.S. competitors. Yet Lucky Air’s executives had to decide what was right for their company, customers, and market. If they chose the wrong expansion strategy or missed the mark with e-commerce, then the company’s luck might run out forever. Passenger Aviation in China China’s airline industry had benefited from the country’s rapid economic growth in the previous decades and the significant increase in Chinese people’s disposable income. The Civil Aviation Administration of China (CAAC) anticipated an average annual growth rate of 15% for air traffic up through the year 2020. In 2007 alone, passengers in China increased to 387 million, a 16.8% jump from a year before. Roughly 349 million passengers traveled on domestic flights, a 16.7% annual increase, and 38 million passengers traveled on international flights, a 17.5% annual increase. Moreover, an increasingly large percentage of these passengers traveled for vacations and leisure and paid the airfare themselves (see Exhibit 1). There were 25 airlines operating in China by the end of 2007. The three biggest national airlines – Air China, China Eastern Airlines, and China Southern Airlines – dominated domestic air travel, accounting for a combined 83.7% market share. The airline...
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