Korean air overview of performance

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1. Korean Air Overview

A. Company profile1)

Name

Korean Airline Co., Ltd

Address

1370, Gonghang-dong, Gangseo-gu, Seoul, Korea 157-712

Established

March 1. 1969

Business Field

Passenger and cargo transportation, maintenance, operation, in-flight meal service, hotel and aerospace business

No. of aircraft

127 (as of Dec. 31. 2009)

Flight routes

13 domestic cities and 104 cities overseas

Sales

9,393,703(KRW million)

No. of Passengers

20,720,000

Cargo Transportation

1,570,000 tons

RTK*

13,540,050 (1,000 ton KM)

No. of employees

17,395(including 1,661 overseas)

RTK*: Revenue Ton Kilometer

B. Business 1)

i. Air-Transportation Business

As of the end of 2009, Korean Air had 127 aircraft in its fleet and offered scheduled routes to 13 domestic destinations and 104 international destinations in 38 countries. In 2009 alone, Korean air transported 20.72 million passengers and 1.57 million tons of freight.

ii. Aerospace Business

Korean Air have been engaged in aerospace industry by manufacturing and exporting components for major global airlines and by providing maintenance of aircraft for military and civilian use, while designing and developing satellites and launch vehicles.

iii. Catering and In-flight Sales Business

Korean air offers in-flight meals that meet the different needs of passengers and and provides a pre-order service that allows passengers to buy tax-free products during their flight.

iv. Hotel and Limousine Business

Korean Air Operates KAL Hotels in Jeju City and Seogwipo in Jeju island and also runs through affiliates including Wilshire Grand Hotel in LA, Waikiki Resort Hotel in Hawaii and the Hyatt Regency Hotel in Incheon.

Korean Air's limousine bus is connecting airports and downtown since 1992.

C. Economic Performance 1)

i. Balance Sheet (KRW 100million)

Category

2008

2009

2010

Assets

158,676

169,193

178,143

Liabilities

130,442

138,622

143,152

Stockholders' Equity

28,234

30,571

34,991

ii. P/L Statement (KRW 100million)

Category

2008

2009

2010

Sales

102,126

93,937

114,605

Gross Profit

13,912

14,137

24,334

Operating Income

-993

1,334

11,096

Net Income

-19,424

-989

4,617

D. Jin Air 2) - Korean Air's subsidiary company for low-cost flights

Address

3F, Korean Air Training Center, 653-25, Deungchon-dong, Gangseo-gu, Seoul, Korea

Capital fund

27 Billion won (100% Korean Air investment)

Established

2008

Flight Routes

Seoul-Jeju, Macau, Bangkok, Guam, Clark, Harbin (irregular), Osaka (irregular), Kyushu (irregular)

Jeju-Qingdao, Shenyang (irregular), Shijiazhuang (irregular),

Fleet

Five B737-800 (leased from Korean Air)

2. Aviation Industry and Globalization

A. Air Transport Industry Overview3)

i. Definition of Air Transport Industry

Industry which transports passenger or freight using airplanes with monetary compensation and by demand of a third-party (Aviation Act Article 2, No. 26)

ii. Industry Characteristics

- Fare is high-cost in comparison to other transport modes (land, sea)

- Demand increases due to quality in service and seasonal factors.

- High entry barriers exist (large capital needed, facilities already acquired by existing aviation companies, many government restrictions)

-Oil cost takes up significant portion of overall operation costs; consequently, industry is highly sensitive to changes in global oil prices.

- Majority of aviation networks take the form of hub-and-spoke-network

- The impact of aviation industry is significant on related industries such as aerospace, mechanical, electronics, construction, finance, and insurance. Therefore, industrial policy considerations are great.

- Because it also gives financial security, each country tries to foster at least one airline.

B. Structural Changes to the Aviation Industry and Globalization4), 5)

i. Localization Due to Public Regulations

Unlike other industries, the aviation industry is large-scale in its economic size, highly capital-intensive, has significant impact on aerospace, mechanical, electronic, construction, finance/insurance industries, and has considerable ripple effects for the local economy. Due to these characteristics, the aviation industry in its early stages was considered as an infant industry for which government intervention was crucial to ensure that the industry would be protected and be fostered as a strategic growth industry.

Because of these reasons, the aviation industry showed the signs of local enterprises covering the local markets of each country until the latter half of the 1980s. The government was proactive in their intervention. A global strategy could not be deployed because of the many government regulations.

ii. Relaxing of Regulations and Structural Changes to the Aviation Industry2)

Developed countries around the world slowly began to relax their regulations for the aviation industry starting in the late 1970s. The U.S. enacted the Air Cargo Deregulation Act in 1977. Shortly after, it enacted the Airline Deregulation Act in 1978 and the International Air Transportation Competition Act in 1980. Thus, the U.S. became the first nation in the world to relax regulations for the air transport industry. Europe adopted the ‘Common Transport Policy (CTP)' between nations of EU and pushed for air liberalization in three phases from 1987 to 1997. As for Japan, it revised its Aviation law in 2002 and thus lifted many of its restrictions on prices and entry into the industry. Consequently, consumers were given a wider range of choice for airlines and the routes that the airlines could choose were also freed up. In the case of Korea, Asiana Airlines was the first to enter into the aviation market in 1988. Jeju and Jin Airlines also entered into the industry in 2006 and 2008, respectively. Only 17 foreign airlines were in business in Korea at the end of 1989; as of May, 2011, 65 airlines are now making their way into Korea. Furthermore, the revised Aviation Act was enacted in June of 2009 with the purpose of relaxing aviation regulations and facilitating the aviation market. Continuous efforts are being given into relaxing aviation related regulations.

iii. Changes to the Competitive Environment of the Air Transport Industry and Globalization

As public regulations are being relaxed, the air transport industry faces a free-for-all system with liberalization, privatization, market entry by low-cost airlines, and service competitions. The air transport industry is also showing gradual signs of becoming a global industry as more and more MOUs are made between countries and the number of countries that an airline can enter increases. According to the Ministry of Land, Transport, and Maritime affairs, Korea has entered into an aeronautical agreement with 87 countries as of June 30, 2008. Of particular note, Korea is in Open-Sky agreement with 16 countries concerning passengers, and with 28 countries concerning freight. Open-Sky agreements allow Korea to transport either passenger or freight to those countries with no limits in number of airlines, routes, or flights.

Because of such advancements in the aviation industry, airlines no longer service their local residents only but have opened up their services to the people of any nation that they can travel. Consequently, competition is no longer limited to those airlines within a certain nation but is now expanded to include any airline from any nation that has the same route or destination.

3. Korean Air's Globalization Strategy

A. Passenger Transport Business

i. High-End Services

Korea Air has the strategy of creating new passenger demand by providing the best of services to its customers. As a part of this strategy, Korea Air has recently acquired new aircrafts such as A380 which provides comfortable seating space to its customers and also provides high quality wine and in-flight commodities. These efforts have paid off and have resulted in Korean Air being designated as the “Airline Most Preferred by the Chinese” and “Airline with the Best In-Flight Meal” by Traveler Award.

ii. Code Share Strategy

In its initial stages, Korea Air utilized the Code Share strategy as its globalization strategy and primarily focused on bilateral agreements. Code Share provided airplanes to airlines in alliance as part of a marketing plan. It was during the early days when Korean Air was not well known on the global scene. With Code Share, sales opportunities were expanded through registration on the Global Distribution System. In addition, indirect advertisement was another benefit because of the flight number that showed up in the airline in alliance with Korean Air. Also, other competing airlines both in and abroad were put at check by the partnering airline. Looking from a cost-strategic aspect, new demand could be created with Code Share because of the marketing of the partnering airline. Therefore, Code Share was an effective global strategy for Korean Air in its initial stage of entry into the air transport industry.

iii. Sky-Team Alliance

As means to cope with global alliance strategies stirred up by Star Alliance, Korean Air had no choice but to switch over from a bilateral to a global alliance. Star Alliance, the first of its kind, had loose partnerships with its alliance members despite the members being many. Therefore, in order to aggressively take action against Star Alliance, Korean Air became a member of the Sky Team which had high bonding between its members. Through the Sky Team, Korean Air was given access to mutual lounges of participating Sky Team members. As part of the marketing alliance, Korean Air was also able to pursue joint marketing efforts with other Sky Team members through mileage programs. Especially because of the wide connecting network of alliance companies on Sky Team, Korean Air was able to acquire diversification of its air routes at a low cost. Recently, the development of IT technologies has also brought about the use of e-tickets and other IT integrated services which allow Korean Air to provide standardized services among alliance companies.

B.Air Freight Business

i. Attracting Special Air Freight

Incheon International Airport is a hub airport ranked No. 4 in the world in terms of freight traffic. In addition, the rapid growth of Korea's semiconductor industries such as Samsung Electronics and Hynix has allowed Incheon to secure the logistics market for the import and export of semiconductors and communications equipment. This market is one of the main backbones of the air transport industry. Korean Air has become world's No. 1 air freight carrier ahead of top freight companies such as Fedex or UPS. However, the fact that Fedex and UPS has Singapore and Hong Kong their hub airports, respectively, can pose as a significant threat in case Incheon loses its competitive edge as the world's leading hub airport. In addition, considering the sensitivity of the semiconductor industry to world economy, it is crucial that Korean Air looks into diversifying its items for air freight. Consequently, Korean Air has been developing and providing special freight services for products such as medical items and corruptible goods.

ii. Navoi  Project 

The securing of a hub airport is more important than anything in the air freight industry. To secure hub airports, Korean Air has concluded a MOU with the Navoi Project in Uzbekistan and is actively involved in the investment. This move can be seen as an important strategic decision by Korean Air for the freight business as it shows Korean Air's intention to secure an international logistic hub that connects Incheon, Navoi, and Milan. The securing of a hub airport enables Korean Air to implement a multimodal logistic and an integrated network which connects land and sea logistics.

iii. e-Cargo Service Portal

In keeping up pace with the digitalization of the air transport industry, Korean Air is operating a direct website for online business transactions. Furthermore, it offers services for its customers to check freight schedules, do reservations, check track freight location and flight number carrying the freight, and check U.S. custom clearance status. In particular, Korean Air provides a special e-cargo portal3) to its B2B strategic customers and is putting its efforts into securing long-term customers by providing safe and accurate transport of freight. Along with the diversification of transport goods, the E-cargo service is giving Korean Air the competitive edge by providing a customized air freight service.

C.Other Businesses

i. Aircraft Production and Design

As of the moment, Korean Air is a supply chain of Boeing and Air Bus, the two global-leading aircraft manufacturers. It designs and supplies the two companies with wing parts. Korean Air is making steady progress to acquire the business capacity it needs to design and manufacture its own planes.

ii. Maintenance Business

With its knowhow on aircraft production and design, Korean Air is also making its way into depot maintenance and performance development for military aircrafts as well as heavy maintenance and electronic check-ups for civil aircrafts. Korean Air also is focusing on cutting down costs for maintenance of its own aircrafts. By participating in the logistics industry, Korean Air aims towards securing continuous demand and knowhow on aircraft maintenance.

iii. Entry into the Aerospace Industry

Korean Air is participating in a national strategic project for entry into the aerospace industry - an industry with a promising future. Especially, Korean Air is participating in the overall assembly of the Naro satellite and is steadily building up its knowhow. With the Naro, Korean Air aims to be seriously involved in the Korean government's efforts to acquire Korea's own aerospace rocket technologies. Korean Air has its ambitions set on becoming the world's leading aerospace company.

4. Globalization Strategies of Other Companies

A. Easyjet

i. Easyjet Overview

At its start, Easyjet only had two leased airplanes (Boeing 737-200) and had the motto of ‘Fly for the price of a pair of jeans, only ï¿¡29.00 one way`. Easyjet is an airline with Luton Airport, an airport in the suburbs of Britain, as its base. With steady growth year after year, Easyjet has now grown to be the second largest airline company in Europe.

ii.              Easyjet's Globalization Strategy6)

­ Price discrimination

Easyjet's prices are not fixed. For example, Easyjet's ticket prices at early morning are considerably lower than its prices in the afternoon. In addition, weekend and weekday prices differ and if a customer should reserve a ticket two months ahead of time, the customer may acquire the plane ticket at the lowest price possible. Easyjet then compensates these low-price tickets by selling tickets to late buyers at high prices. Consequently, plane ticket prices hours before the plane departure are almost equal to the prices of typical airlines.

­ Improvement of distribution system for plane tickets (reservation by phone or online only)

Easyjet's success is directly linked with success of its online sales. Currently, over 90% of reservations and purchases of Easyjet's plane tickets are done online. Compared to online sales of other airlines, this is a significant proportion.

­ Using low-cost Luton airport as its base, high plane turnover ratio

Easyjet's first low-cost strategy is to use Luton Airport as its base airport in order to cut down on airport fees. Customers have the inconvenience of lack of public transport; however, Easyjet covers the lack by providing shuttle buses or parking discounts to its customers. Furthermore, by using a secluded airport in the suburbs, Easyjet has successfully cut down on costs and time for plane departures, arrivals, and maintenance. Consequently, as in the case for highway buses, Easyjet airplanes that have just landed are set ready for the next departure in a matter of minutes. This further leads to high turnover ratios for airplanes.

iii. External Factors that led to Easyjet's Success

­ EU's deregulation

One of the key factors to Easyjet's tremendous success lays in the quick deregulation by EU starting in the latter half of the 1990s. Thanks to the deregulation, Easyjet was now able to expand its previous routes from between Britain to Ireland to continental Europe. After the deregulation, Easyjet's aggressive marketing allowed it to make entry to almost all European major cities. Consequently, it was able to gain the competitive edge over other low-cost airlines such as Ryanair, Buzz, and Go.

B. Singapore Air

i. Singapore Air Overview

With the end of World War II, Singapore Air was the first company in Asia to make entry into the airline industry. Due to its distinguished top-class services, Singapore Air has been able to grow as a airline leader not only in Asia but in the world despite Singapore's limited land space and other unfavorable conditions. Especially, Singapore Air is known for its excellent in-flight services. It has poured significant efforts into human resources management to keep up such high quality services. Singapore Air is also deploying other differentiating strategies such as securing the latest aircrafts.

ii. Singapore Air's Globalization Strategy

- Differentiation of in-flight services

The core of an excellent in-flight service lies in providing customized services adapted to individual needs and providing entertainment services which ensure fliers for a better flying experience. By providing various and high-quality in-flight services to its customers, Singapore Air is maximizing customer satisfaction.

    - Latest aircrafts

Not only is Singapore Air focusing on providing excellent in-flight services, but it has also put emphasis on the induction of new technologies from its beginning. Singapore Air has attempted to bring about improvements for its services and productivity by investing in the most up-to-date and efficient equipment system.

- Reinforcement of standards for ground services

To reinforce its ground services and to pull it up to par with its in-flight services, Singapore started the ‘OSG (Outstanding Service on the Ground)' program from 3~4 years ago. The purpose of OSG is to mobilize ground personnel all over the world and to ensure that they have intensive contact with Singapore Air's customers. This means that the ground personnel become the guardian of the customer,   take care of their needs in detail and service them with sincerity.

5. Analysis of and Suggestions for Korean Air's Globalization Strategy

A. SWOT Analysis

Strength

Weakness

> Owns many aircrafts

> Code share & Sky team

> International competitiveness of Incheon

> Online ticketing, reservation system

> Diverse business portfolio

> Fixed logistics demand according to Korean industry

> Transport persons/goods mostly Korean-base

> High fare in comparison to other airlines

> Scarce tourism resources of Korea

> Korea's geographical risk (North Korea)

Opportunity

Threat

> Air liberalization for Southeast Asian market

> Creation of new markets due to high-end strategies (China, Japan)

> Increase in air goods demand following recent conclusion of FTA

> Aggressive tourism promotion policies by government and attraction of international events

> Increase in air demand caused by Southeast Asian economic development

> Korean government's fostering policies for aerospace industry

> New low-cost airlines

> Loss of existing customers affected by price changes due to high-end strategy

> Dependent on foreign market environment (oil prices, exchange rate)

> Security policies of foreign markets being reinforced after 9.11

B. Suggestions for Korean Air's Globalization Strategy

i. Passenger Transport Business

-  Advancement of high-end strategy

With the demand that is inelastic to ticket fares as its target, Korean Air should advance even further its high-end strategy and create more profit.

- Create transfer demand in Southeast Asian by deploying bigger planes between major cities

By deploying large-size airplanes such as the A380, Korean Air can satisfy the rapidly increasing air demand both in and abroad and also create air transfer demand for in Southeast Asia.

-  Expand Jin Air's low-cost airline business

In order to attract the customers who might be blown off by the high-end strategy, the low-cost air industry should be expanded. By doing detailed research for profitability, new routes should be opened for routes where low-cost airline is more favorable.

ii. Air freight business

- Create new air logistics demand

Through recent conclusion of FTA with major countries, the import and export of goods is predicted to increase dramatically. Consequently, acquirement of new market demand is necessary by having prior meetings with import and export enterprises.

- Construction of new logistics terminal

Korean Air should enter into foreign air logistics market by constructing new overseas logistics terminal such as the Uzbekistan Navoi project.

iii. Other

- Prior readiness to the opening of the Southeast Asian air market

Unlike the European and American markets, the mutual understanding between nations in Southeast Asia is different which leads to slow progress for complete liberalization of the air market. However, such liberalization is a phenomenon on a global scale that cannot be avoided; therefore, with prior readiness, Korean Air has to acquire the upper hand in the soon to be created market.

- Effective coping with financial risks following changes in oil prices or exchange rates

Through using derivative products such as oil option/swap or currency option/swap, Korean Air can effectively cope with financial risks due to rapid changes in business environments. By deploying latest high-efficiency aircrafts and improving the efficiency of existing aircrafts, Korean Air needs to cut down on fuel costs.

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