The premises for Air Macau’s business model has been taken away, what should the airline do to survive a rapidly changing operating environment?

Air Macau is in trouble.

The net asset value of the airline stood at a negative 91.2 million Chinese Yuan (USD $13.3 million) at the end of last year, to avoid bankruptcy according to Macau laws, shareholders had to pump a 431.2 million Chinese Yuan emergency fund into the airline to keep it float. 

The situation is not likely to improve, if not deteriorate, as the Air Macau’s  main revenue source – cross Taiwan Strait traffic between Mainland China and Taiwan will no doubt shrink significantly, as direct air link between the two sides have been established since 2008 and continue to grow rapidly in 2009.

A little background

In 1949, after suffering defeat in the Chinese Civil War, the KMT party led by Chiang Kai-shek fled mainland China and retreated to Taiwan Island, where it continued its rule as the Republic of China, while the winning communist party established the People Republic of China on the mainland.

Fearing an invasion from the communist party, the KMT banned direct flight, mail and cargo transportation with the mainland. Passengers traveling to mainland will have to go through a third point, usually Hong Kong or Macau.

However, in the past 20 years, as the economy in the mainland takes off, traffic volume and frequency across Taiwan Strait grew exponentially. Since 1980, more than 53 million visits to the mainland by Taiwan residents have been recorded, more than 2 million Taiwanese live in Beijing, Shanghai and other mainland cities permanently for business and personal reasons. Further more, Taiwanese investment in the mainland has reached USD $100 billion since 1990, resulting in huge business travel demand between the two sides. But travelers between Taiwan and China have to stop in Hong Kong or Macau and change planes, a requirement that adds four hours to what could be a one-hour flight across the 100-mile-wide Taiwan Strait and is seen as a costly obstacle to further economic integration.

About Air Macau

Air Macau was established in 1994 to take advantage of the cross Taiwan Strait travel demand, if fact, more than 70% of its revenue comes from transporting passengers between Taiwan and Mainland China via Macau.  It offers a one-plane service for passengers travelling between the two sides, although they must complete a brief transfer procedure in the Macau International Airport and wait for about 30 minutes in the departure lobby, passengers can board the same plane once again and continue to their destinations. The airline will also assist Taiwanese passengers to obtain mainland entry permit if required.

Ownership info

Air Macau Route Network

Air Macau Fleet (Credit: Wikipedia)

Financials (Latest data available)

Reputation / Brand Equity

Air Macau is not an inspiring airline when it comes to its brand image, unfortunately.

Here are some passenger reviews found on airlinequality.com

“Economy class was full, seats were cramped but bearable for the 1.5 hr flight. Food was poor. MFM-TPE sector had no boarding bridge so has to take the bus to the aircraft.”

“Shanghai to Taipei The flight was delayed for more than 3 hours without explanation. Eventually, we were informed to board an A300. It was an awful and old aircraft and full of terrible smell, and the air conditioning was not functioning properly. This airline does not pay attention to flight safety – I consider Air Macau is the worst airline I have ever taken.”

“Macau-Shanghai. Business Class. Full cabin. Drinks, meal, tea and coffee all served and cleared away 45 minutes after take-off. Why the rush? I filled in a Customer Comment card requesting a reply but never received it. I definitely recommend avoiding Air Macau – it is worth going to HKG just to use DragonAir – 1,000 times better than Air Macau.”

The problem: Political landscape changed & the cash cow is dying

In spite of being a mediocre airline with few endearing attributes, Air Macau has survived so far by relying on the cross-strait traffic created by political barriers between Taiwan and the mainland. However, things are changing, trade and transit ties have improved quickly since Beijing-friendly Taiwan President Ma Ying-jeou took office in May 2008.

As of July 2009, seven mainland airlines, including China Southern, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, China Eastern Airlines and Shandong Airlines have set up offices in Taiwan and started direct flights between mainland China and Taiwan. At the same time, Taiwan based China Airlines, Uni Airways, TransAsia Airways have started their own direct flights to mainland China as well.

As a result, travellers now enjoy shorter travel time, lower ticket prices and more frequency than ever before to fly across Taiwan Strait.

Therefore, Air Macau is in a dire situation: 70% of its revenue comes from travellers between Taiwan and Mainland China, however, there is little, if any reason for most people to transfer through Macau after Aug 31, 2009, when airlines from both sides of the Taiwan Strait started or increased their own direct flights. The premises at the core of its business model has been taken away, how does this airline survive? or will it have no choice but fade away? 

In part II of this post, I will examine the obstacles and opportunities in Air Macau’s operating environment, and propose a few strategic directions that Air Macau might take to rethink and revitalize its business model. (… to be continued. )

1. Airline market penetration rates on Twitter are too low, the majority of airline customer base are not on Twitter.

I compared the follower numbers (as of 30 July, 2009) of top ten airlines in the Twitter universe against the number of passengers they carried in Year 2008.

Most airlines are not reaching even 1% of their customer base. Most airlines have far more names and other information in their email database than their Twitter accounts.

2. As small as airline’s Twitter audience is, it is in fact even smaller than it looks.

At any given moment, there is only a fraction of an airline’s followers are actually online and receiving tweets.

3. There is a mismatch of supply and demand.

Twitter population is skewered towards well-educated, prius driving, iPhone toting high income young professionals, hardly the target market segment for all the deep discounted air fares with lots of restrictions airlines have been pushing through Twitter.

4. Tweets are not targeted.

Unlike email promotion campaigns which can be targeted, tweets are one size for all.

5. Tweets have a extremely short shelf-life, and the Twitterverse is very noisy.

Unlike emails which can be opened any time that is convenient to the consumer, airline’s sales tweets are usually flushed out of view quickly by newer tweets from other parties before the audience even have the chance to read it.

6. Twitter users are not always in a position to buy.

A lot of people access Twitter on their mobile phone, but few airline’s website can handle ticket transactions on a mobile phone, so even if they want to buy, they can’t.

7. An A/B testing can easily prove Email is far more effective in selling airline discount tickets than Twitter.

Send out the same promotion through email campaigns and tweets, but with different channel codes, it will give airlines some much needed insights.

Union rep wrote that Canadian air travel market should be re-regulated, is she right? 

Air Canada is once again teetering on the brink of bankruptcy protection after emerging from it just six years ago. Peggy Nash, the chief negotiator for CAW in the most recent round of talk with Air Canada, argued that the Canadian government should re-regulate the airline industry in order to provide some much needed long-term financial stability for Air Canada. She made some convincing points in her article, however, is re-regulation is right way to go? Will re-regulation bring just as much problems as those it might solve?

Peggy’s main points in support of re-regulation are:

• During the last round of bankruptcy protection six years ago, Air Canada’s holding company ACE sold off key profitable segments of Air Canada, for example the Aeroplan rewards program, the maintenance section and its regional subsidiary Air Canada Jazz. The approach fixed the airline balance sheet temporarily, but the goal was extremely short-term oriented.
• Huge profits out of these selling benefited the investors, especially U.S. hedge funds, and the senior executives, including Robert Milton, the former CEO of Air Canada who, in many analyst’s opinion, ran Air Canada to the ground.
• The 2-billion-dollar concession from Air Canada workers didn’t get invested back into the airline, instead they went straight to the pockets of the investors.
• Contrary to common belief, the private sector does not all do better. Anyone who needs proof only need to look to Wall Street, where institutional and personal greed works against public interest and dragged the whole world into the worst recession in several decades.
• Privatisation caused many airlines to fail, Air Canada has lost 6 billion dollars since it was privatized, and is feeling extremely vulnerable in the current market environment.
• To make things even worse, West Jet and Porter Airlines are beefing up their assault on Air Canada, hoping to grab even more market share from it, therefore exacerbating a precarious operating environment that Air Canada already find increasingly difficult to survive in. The government should put a stop to it.
• The government taking a stake in Air Canada is much better than the alternative: a foreign take-over of Air Canada.

Although I agree with Ms. Nash’s criticism of the selfish and predatory nature of those hedge funds who specialize in corporate  restructuring and think the government should oversee the bankruptcy protection process , I doubt that the Canadian government should step in and protect Air Canada from competition, I don’t think it will do any good to the airline and general public in the long run.

What happened in the US and European commercial aviation markets have clearly demonstrated that deregulation and liberalization is the historical trend that benefited both the airline industry and the travelling public.

Without the  Airline Deregulation Act in the late 70s in the US, there wouldn’t be the wonderful new low cost airline called Southwest Airlines; without the Single Aviation Market initiative in EU, there wouldn’t be Easyjet and Ryanair; and millions of people wouldn’t have access to low cost air travel.

Since the mid-80s, many formerly state-owned airlines have now been fully privatised. British Airways, Lufhansa, Qantas, and Air Canada are examples. Without the protection of state-ownership, a lot of these full service airlines have not been able to compete effectively with their low cost rivals, partly because they are often still run like government entities with an outdated mentality and excessive bureaucracy. 

Unions must also share part of the blame for legacy airlines’ inability to compete: when airlines try to use regional jets on some routes to reduce costs and serve more markets, unions put a scope clause on it; when the economy is booming and airlines start to make a profit, unions negotiate hefty salary increases that simply can’t be sustained when the economy eventually slows down.

As for West Jet and Porter Airlines adding more capacity in a shrinking market to capture more traffic at Air Canada’s expense, as long as they are not asking Ottawa to fund their expansion, why should the government put a stop on that? Isn’t this what competition all about?

Now Air Canada is in trouble again, should the Canadian government step in and bail it out with tax payer’s money? I would like to hear your opinion, dear readers. Please leave you comments!