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Case study :E-commerce at Yunnan Lucky Air

University of The People

BUS 5117: STRATEGIC DECISION MAKING AND MANAGEMENT- AY2021-T4

Written Assignment Unit 5

Dr. Karl Thompson

May 12th, 2021

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Yunnan Lucky Air is one of China’s greatest airlines operating in domestic passenger

traffic and with over 80 destinations and over 51 routes.The firm was founded in 2004 and it

offers air transport services, maintenance services, reservation services. It is based on low prices,

affordable tickets, customer service and flexibility of the distribution system. Overtime,Yunnan

Lucky Air has been having several issues which have hindered its efficiency and sales growth.In

this paper,we will discuss the challenges faced by Yunnan Lucky Air as it relates to costs.Then

we will develop a cost centered business strategy to enhance the Chinese company’s profitability.

Finally,we will define an efficient tactic accompanied by its implementation to differentiate the

firm and to support the cost-focused strategy we developed.

Challenges faced by Yunnan Lucky air as it relates to costs :

One of the challenges faced by Yunnan lucky air was heavy government regulations. The

regulations limited the flexibility for new airlines. The availability of many airlines in the

country pressured each to lower its ticket price. Other challenges included the increased price of

fuel, high costs of landing fees, taxes, aircraft licensing, and air ticket distribution system.Despite

the improved technology infrastructure in China, the e-commerce sector is still unsophisticated.

Payment systems are either expensive, and transaction security is poor. Airlines online services

were considered less satisfactory due to fraud and errors, and a majority of users preferred to use

the offline payment systems. With these regulations, the airlines could not control prices as they

wanted, and they, therefore, adopt strategies like using discounted tour packages like paying fuel

bills upfront in a regulated environment. The travel agents regulate the ticket price, and the

government imposes taxes on the ticket price. Lack of an e-commerce system made airlines
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dependent on travel agents who took a commission on each ticket. With these circumstances,

Lucky Air can make use of internet opportunities and enable customers to use its website to book

airline tickets through gifts. The regulations have made Lucky Air have to look for opportunities

elsewhere (Jones, 2020).

Analysis of the costs:

According to Jones, "Lucky Air has managed to be different and unique from the other

airline companies. Lucky Air did not just adopt the key components of the Southwest airlines; it

also managed to reduce its maintenance and operational costs by using the single type of aircraft

and offering one-way seat class only with no entertainment. In 2007 ,Lucky Air had 5 Boeing

737-700 airplanes; each airplane had 148 seats. In the same year, Lucky Air flew 1.2 million

passengers and had a total of 17,875 flight hours with a load factor of 81.4% compared to the

load factor of 2006 that was 74.7%" (Berenguer et al. 2008).

To capture the growing tourist market, Lucky Air Company operates in the Yunnan

region with a promising tourist population. Lucky Air observed new flights and new customers'

arrival increased from 21 million to over 24 million by 2008. This increase made Lucky Air

assign up to 87 new weekly flights in other regions. In 2006, Lucky Air received 500,000

passengers with a total of 5,746 flight hours with a load factor of 74.7%. The company

progressed and achieved profitability from operating revenue worth US$31.2 million to having

operating revenue of US$104.3 million. By operating in secondary cities and distancing itself

from similar airlines, the company has avoided overcrowding and achieved to reduce its landing
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costs. Due to the challenges imposed by the government, Lucky Air cost structure was about

only about 5% lower than the industry average compared to other low-cost airlines with about

30% cost advantage (Jones, 2020). Lucky Air spends on taxes, fuel, and landing fees,

representing about 70% of its operating cost, and therefore, the government regulations hugely

impacted its operating cost (Ketchen, 2012).

According to Jones, "Lucky Air had carried 5.7 million passengers in 2014, up 21%

growth from the number of passengers it had in 2013. The company had added about 990,000

passengers in 2014, slightly above the 970,000 it added in the previous year, 2013. Lucky Air

worked on improving and expanding its services, and the company ended the year2014 with 61

routes across 50 destinations. Lucky Air doesn't stop the growth it has reached. The company

anticipates 20% annual growth through 2020, but if it is to reach its goal of having 70 aircraft by

2020, annual growth will have to be closer to 30% (Jones, 2015)

Cost centered business strategy

The company should shift the percentage of bookings from the airline's current 'indirect'

channel to a higher percentage of 'direct' channel ( 67%) by carrier type. The Yunnan Lucky Air

should focus on the following key policies for a cost-effective airline business. The key policies

include: embracing fuel hedging strategies, fuel-saving performance improvement, optimizing

flight speeds, and replacing old aircraft. The use of the control strategies will significantly reduce

operating costs of Low-cost carriers. Lucky Air should embrace use of Low-cost carriers because

they have a productive business model at a significantly lower price point. Low-cost carriers pay

lower salaries and level resources effectively. Low-cost carriers cost half the amount spent by

full service based on production models, business pace, and ticket complexity (Berenguer et al.

2008).
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Low-cost carrier market penetration is growing in China, and Lucky Air should develop a

competitive cost structure. The competitive cost structure should not compromise the services,

service quality. Lucky Air should implement these tactics to increase their marketing advantage:

developing a chat system in their website to provide assistance to customers and solve their

issues online. Lucky Air can also lease its aircraft based on regulations provided by the rule of

law to increase capacity. Lucky Air can create an app for their airline and make customers loyal

by offering reward points to travelers. Using the Lucky Air app, customers can give their reviews

on how they were served by the company, why they use Lucky Air, their likes and dislikes, and

customers' suggestions for improvement using the app. They should also address customer

concerns urgently. Lucky Air can also partner up with a travel website by focusing on

exceptional customer service by ensuring that customers have access to all they need while at

Lucky Air. China's internet population is growing.Consequently, Lucky Air should take

advantage of the market.

In conclusion, Yunnan's Lucky Air efforts to develop oversea markets have significantly

impacted the Yunnan economy. Yunnan Lucky Air has a great business model but for high

efficiency, it should also focus on good leadership, and customer satisfaction. The Chinese firm

should focus on internet penetration to enhance sales growth. With cost leadership strategy,

Yunnan Lucky Air will gain competitive advantage over other airlines in the region. Besides, it is

based on the value of low cost production and efficiency to its customers. E-commerce services

will significantly improve Yunnan Lucky competitive advantage and its business model should

be structured to attract more customers.

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References :

Berenguer, I., Jing, L., Liang, L. Shijun, K., & Wang, N. (2008). Ecommerce at Yunnan

Lucky Air. MIT Sloan School of Management. Retrieved from:

https://mitsloan.mit.edu/LearningEdge/strategy/EcommerceYunnan/Pages/default.aspx

Jones, F. (2020). Ecommerce at Yunnan Lucky Air. SMO Case Studies Journal.

Ketchen, D & Short, J. (2012). Strategic Management: Evaluation and Execution. This book

is licensed under a Creative Commons by-nc-sa 3.0 license.