How do you solve a problem likeHow do you solve a problem likeAir Macau ? (Part II) Air Macau ? (Part II)

A turn-around plan from BetterWings.net

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Index

• Recap of the “problem” Air Macau is facing • Analysis of Air Macau’s marketing and operating

environment• Strategies to revamp its business model and revitalize

Air Macau

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The Problem

• Air Macau derives 70% of its revenue from cross strait transit traffic between Taiwan and Mainland China

• Political landscape has changed and that revenue source is going away as airlines from Mainland China and Taiwan offering direct flight between the two sides starting Aug 30, 2009

• Air Macau faces bankruptcy unless dramatic actions are taken to re-invent the company

• For a detailed analysis, please see part I of this document at:Blog posting: How do you solve a problem like Air Macau Part Ihttp://bit.ly/yACKi

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Analysis of Air Macau’s Operating and Analysis of Air Macau’s Operating and Marketing EnvironmentMarketing Environment

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Political Factors

• SAR’s Air Traffic Rights with the Main Land– Even though Macau and Hong Kong are parts of China, but as Special

Administrative Regions, their airlines need to negotiate air traffic agreement before serving mainland China markets, the same rule apply to main land airlines who would like to serve Macau or HK

– Passengers need to clear customs when traveling between these regions, however, it is a fairly easy and routine procedure for Pearl River Delta area residents

– These restrictions have limited the abilities of HK and Macau based airlines to expand into the fast growing mainland China market

• Hong Kong, Hong Kong– Facing the rapid rise of Beijing and Shanghai as new transportation and

economics hubs, Hong Kong government has lobbied heavily with Chinese central government to protect HK’s economics center and air transport hub status

– Due to its proximity to HK, any efforts by Air Macau to further attract either mainland traffic or international traffic will likely be met with resistance from stake-holders in Hong Kong and Beijing

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Political Factors (continued)

• Air Macau Enjoys Plenty of Air Traffic Rights out of Macau but Under-Utilize Them– As a special administrative region of China, Macau has signed

its own bi-lateral air traffic rights agreement with 49 countries, often with more flexible terms than those between Mainland China and foreign countries

– However, Air Macau only serve 4 foreign destinations within Asia, there are no long-haul international services to Europe, America, Australia & Africa

– Air Macau has traffic rights to serve 37 mainland China destinations, however, it only serves 7 at the moment

– Based on an agreement with the government, Air Macau enjoys a 25 year monopoly concession to operate air services out of Macau International Airport

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Macau is a Tourist Destination with a high-income Economy

• Macau:– Tourism based economy, much of it geared

toward gambling– The highest-volume gambling centre in the world (

that is right, it is bigger than Las Vegas)• Sands Macau – largest casino in the world• Wynn Macau, Venetian Macau, MGM Grand Macau

– A high income economy with GDP per capita of US$28,436 (2006), average growth rate 13% after hand-over to China in 1999

– Strong economic and trade relations with EU, especially Portuguese-speaking countries

– Ranked 21st by World Tourism Organization in Year 2006

– About 25 million incoming visitors in 2007, 50% from mainland China, 30% from Hong Kong

– Macau is an offshore financial centre, a tax haven and a free port

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Competitors in the Region

• Competitors– Cathay Pacific (One WorldOne World airline alliance founding

member)• Well managed flag carrier of Hong Kong, serving 58 destinations

in 27 countries, a respected brand among international travelers

– Dragon Air (One World member)• A Hong Kong based airline serving 29 destinations in 11

countries in Asia Pacific region with extensive network in Mainland China and high name recognition for quality services

– Hainan Airlines Group• The Hainan Island based HA group, the fourth largest among

mainland airlines, has high ambitions in expanding its international profile and controls HK based Hong Kong Airlines & HK Express Airways

– Shenzhen Airlines• The airline serves 85 domestic Chinese destinations from its

home base in Shenzhen, which is only a short ferry ride away from Macau

– China Southern Airlines (Sky Team member)• Asia’s largest airline by fleet size and passenger carried• Serving 121 destinations in 31 countries and regions, however,

its presences in Europe Oceania and North America are weak

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Allies

• Allies– Air China (Star Alliance member)

• Flag carrier of mainland China, serving 185 destinations around the globe

• The world’s largest airline by market capitalization, second largest airline in China (after China Southern) by fleet size

• Air China owns 51% of Air Macau• Air China is based in Beijing, with operational

hub in Shanghai, Hangzhou, Chongqing, Tianjing and Hohhot, however, it has a relatively weak presence in southern China.

– Viva Macau• A long-haul, low-cost carrier based in Macau• Serving 7 destinations in Japan, Indonesia,

Vietnam and Australia• Viva Macau has to cooperate with Air Macau

since the latter holds all the air traffic rights from Macau

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Macau’s Short Distance to HK Poses Both Challenges and Opportunities

Travel between the west bank of PRD (Macau, Zhuhai) and HK relies on water transport

It is a 60 min ferry ride between Hong Kong and Macau

Macau Airport

HK Airport

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Macau Airport’s Catchment Area is Not Just Macau itself, It Is The Whole Pearl River Delta Region

Macau, Zhuhai, Shenzhen and Hong Kong are tightly linked by ferry, highway, rail and helicopter services

Zhuhai

Shenzhen

Hong Kong

Macau

PRD year 2005 GDP US$221.2 Billion

Growth 6% higher than China as a whole

Pearl River Delta ofPearl River Delta of ChinaChina

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A Bridge Will Profoundly Impact on Air Macau’s Business Model

• The planned Hong Kong-Zhuahi-Macau bridge will connect the west side of Hong Kong to Macau and Zhuhai.

• Construction is expected to start in 2011 and complete in 2016.

• After the 29 km bridge is built, it takes only 35 to 40 minutes to go from Hong Kong to Macau and vice versa.

• The bridge will fundamentally change travel patterns:

– Macau will become a viable air travel destination for PRD visitors

– For both international and mainland China visitors to Hong Kong, Macau could become their first stop to the region

ShenzhenShenzhen

Hong KongHong Kong

MacauMacau

ZhuhaiZhuhai

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Summary: A SWOT Analysis (Page 1)

• Strength– Macau itself is a high income economy

with a strong tourism/gambling industry– Macau is also a Special

Administrative Region of Mainland China, one of the world’s largest and fastest growing economies.

– Air Macau holds a monopoly position in the Macau air transport market

– Air Macau also enjoys air traffic rights to many mainland China and international destinations, a lot of them are not yet utilized

– Air Macau has a strong ally in Air China, who is also Air Macau’s majority owner

– Unlike many mainland Chinese airlines, Air Macau has a multi-cultural English speaking work force

– Because of its history, Air Macau also has strong ties to Europe through Portugal

• Weakness– Macau is not a regional business

center– Macau’s economy relies too much on

gambling, therefore have limited appeal to other types of travelers

– Most travelers to the region are attracted to Hong Kong and only visit Macau as an after-thought

– Air Macau is not well managed airline• No vision, no ambition• Relied too much on Taiwan-Mainland

stop-over traffic• Many air traffic rights are not utilized• Does not have a strong brand• Product and services are generic, not

inspiring• Can not compete with better managed

Hong Kong based airlines– No meaningful alliance for its air

transport business

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Summary: A SWOT Analysis (Page 2)

• Opportunities– After Macau’s handing-over to China,

the SAR reformed the gambling industry, resulting in growth of the industry and more influx of tourists

– As part of the world’s largest and fastest growing economy, Macau stands to gain from the rapid development of both the mainland and Hong Kong

– Regarded as the “southern gate of China”, Macau is in a strategic position to link up China and the rest of the world, not just Taiwan

– Macau’s close proximity to Zhuhai and other PRD cities enables Air Macau to catch not just local traffic, but also PRD air traffic

– The planned Hong Kong – Macau bridge will enable Air Macau to carry air travelers who intend to visit to Hong Kong

• Threats– The commencement of direct flight

between mainland China and Taiwan means will dramatically reduce demand for Air Macau’s connecting flights

– Both Cathay Pacific and Dragon Air are well positioned to take advantage of booming Chinese economy

• Dragon Air has an extensive network linking HK and many mainland China cities, it also enjoys a great brand image among mainlanders

• Many business travelers prefer to take Cathay Pacific when coming to China over other airlines in the region

– Chinese airlines are growing fast, both in fleet size and market share. China southern, Shenzhen and Hainan Airlines are targeting same market that is Air Macau’s “home turf”

– Any volatility in Asian economy, especially that of Hong Kong, will negatively impact on Macau’s tourism and gambling industry

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Proposed Strategies for Air Macau

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Objectives of Air Macau Turn Around Strategies

• Find alternative revenue sources to replace revenue lost due to the start of direct flights between mainland China and Taiwan

• Improve Air Macau’s market competitiveness by– Exploring opportunities to offer new product and enter new

markets – Re-launching the Air Macau brand so that it can better

distinguish itself from competitors in the regions among air travelers

– Positioning Air Macau to compete effectively with Dragon Air and Cathay Pacific

• Establish a new and sustainable business model so the airline can continue to grow

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Strategy No. 1 Develop Macau O-D Markets (1)

• Develop air traffic that originates and destines for Macau– More than 25 million people visit Macau each year, yet most of

them arrived by land or water. People fly into Zhuhai and Hong Kong, and then transfer through bus or ferry. Make them fly to Macau directly!

– How?• Air Macau should provide direct air link into more mainland Chinese

cities, it already has the traffic rights, use them.• Work with Tourism Macau to offer incentives to passengers who fly

to Macau directly• Win support and concessions from bureaucrats who are eager to

improve local “foreign investment environment” by having an “international” flight to Macau at smaller cities.

• Since Air Macau’s A320 might be too big to sustain twice daily flights to smaller mainland cities, regional jets should be considered

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Strategy No. 1 Develop Macau O-D Markets (2)

• Expand Macau Airport’s catchment area beyond Macau

• Encourage residents of nearby cities in PRD region to use Macau airport for air travel by:– Offer long haul international

flights out of Macau at lower prices

– Offer hassle free ground or sea transportation for airline passengers

– Establish local check-in facilities at nearby cities, facilitate luggage-free boarding process

Macau

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Strategy No. 2Look Beyond Taiwan for Traffic

• Air Macau used to connect Taiwan to China, now it is time to connect the world to China!– Most international travelers arrived in China via three entry

points: Beijing, Shanghai and Hong Kong– Capacities on flights to these three connecting points have not

been able to keep up with the demand– There is a need and market to add a fourth point and Macau is

an excellent choice– Air Macau enjoys extensive air traffic rights to 49 countries and

37 mainland China cities, most of them not currently utilized, why not connect these markets? These traffic will more than make up for those lost from the Taiwanese markets

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Strategy No. 3 Build Alliances On Three Fronts (1)

• Join Star Alliance– Air China, Air Macau’s majority share holder, is a Star Alliance

member – There is no Hong Kong based Star Alliance carriers, and there is

no Star Alliance member airlines in the whole Pearl River Delta region

• One World – Cathay Pacific and Dragon Air• SkyTeam – China Southern Airlines

– Star Alliance passengers arrived in Hong Kong and continue on to mainland China and South East Asia destinations have to use non-Star carriers

– After become a Star member, Air Macau will be able to attract international travelers, especially frequent flyers to stay in the Star system, therefore share the traffic and revenue

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Strategy No. 3 Build Alliances On Three Fronts (2)

• Build a closer strategic partnership with Air China– Air China’s main hubs are in Beijing and Shanghai, its presence in

southern China is weak

– Air China has been trying to strengthen its position in PRD region by buying into Cathay Pacific, with limited success and lots of political resistances

– Air Macau should position itself to be an strong alternative• Based outside mainland China, Air Macau can position its brand image to be

similar to that of Dragon Air or Cathay Pacific• Establish Macau as a convenient entry point to mainland China, feed

international, regional traffic into Air China’s Beijing/Shanghai hub from southern China, taking advantage of Air China’s extensive mainland China network

• Distribute Air China passengers coming in from its Beijing hub to the south of China, Macau and Hong Kong

• Help Air China strengthen its standing within Star Alliance

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Strategy No. 3 Build Alliances On Three Fronts (3)

• Build a strategic partnership with casino operators – Cross promotion

• Air Macau passengers get discounts and other amenities at casinos

• Casinos patrons get special low fares & perks with Air Macau

– Loyalty program• Connect Air Macau’s frequent flyer program and casinos’ frequent

customer program

• Allow people to redeem miles for gambling chips and vise versa

– Profit Sharing• Provide limited and controlled gambling on board flights to and from

Macau, at the airport and in the frequent flyer lounge

• Invite casino operators to invest in Air Macau

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Strategy No. 4Differentiate From Competition

• Traditionally, Macau has been attracting different kind of visitors than Hong Kong. – If Hong Kong is the business center of the region, Macau is no doubt

the center for leisure travelers / gamblers.

• Accordingly, Air Macau should design its product offering to appeal to leisure travelers while keep business travelers in mind– Air Macau should strive for comparable service levels to Dragon Air and

Cathay while keeping fares at least 15% lower than competition

– Lower fares is possible because of Air Macau’s lower costs: ground handling, takeoff and landing, human resource

– Make no mistake, quality and character of service are of paramount importance, Air Macau is not Ryan Air

– Package air fares with hotels and Casino credits

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Fleet Planning

• Depending on the revenue replacing strategy Air Macau adopts, its fleet will need to be expended an rationalized

• A detailed top-down or bottom-up fleet planning analysis based on traffic and economics data will be required to determine the model and number of aircraft needed, but that is beyond the scope of this document

Strategy Type of Aircraft Candidates

Develop Macau O-D market, direct air link to smaller mainland cities

Regional Jets Bombardier CRJs, C Series

Embraer E Jets

Chinese ARJs

Long haul international flights out of Macau

Airbus product due to family commonality with existing fleet

A330 A340

Connecting the world with China

Both RJs and long haul Airbus jets

All of above

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Marketing and Branding

• A fundamental change in business strategy needs a strong and effective marketing campaign to get the message across, to create buzz and awareness among targeted customer base– TV and print ads to advertise Air Macau’s new services in PRD

region and targeted mainland China markets– Create a brand image that is associated with excellent air

service, affordable fares and a viable alternative to other transport means

– Leverage the internet and social media to supplement traditional ads

• Twitter, Blog, online discussion boards and Facebook

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Sales & Customer Service

• Reduce distribution cost by selling more tickets online– Redesign Air Macau website to streamline the online booking

process– Adopt e-tickets – Enable frequent travelers to redeem miles online

• Leverage Air China Sales Channels around the globe• Adopt passenger self-serve technology

– Check-in online– Boarding pass printing kiosk at the airport– Self-serve luggage drop-off at the airport

• Roaming airline agents armed mobile technology to assist passengers when needed

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Summary

• Strategies to expand Air Macau’s revenue source and revamp its business model– Connecting 2nd and 3rd tier Chinese cities with Macau by direct air link,

developing local O-D air traffic

– Look beyond Taiwan, flying long-haul international routes

– From Taiwan connector to World connector: become the fourth entry point into mainland China for world travelers

– Build strategic alliances with Air China and other Star Alliance airlines, joint forces with casino operators for cross promotion efforts

– Expand and rationalize fleet based on business strategy

• Strategies to strengthen Air Macau’s competing abilities– Position the airline as a premium airline on a budget

– Re-launch the Air Macau brand through media blitz and social media

– Streamline sales channels and enable passengers to self-serve

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