International Business Management

-Excellence in Flight, Korean Air-


Korean Air's International Business Analysis


1. Airline Industry

1-1. Features in airline industry

Airline provides air transport services for passengers or freight. There are several features in airline industry. First, the airline industries produce both fixed and visible commodities and services together. The fixed commodities include seats, cargo compartments, airplane, and facilities in the plane. The services they provide include booking a flight, boarding services, service that flight attendants provide, and dealing with the cargo after the flight.

Second, punctuality is important in airline industry. Almost every regular scheduled airline has a duty to provide a service, which is allowed by government, as planned except when the weather condition is unusual or unusual incident happens.

Third, in airline industry there is the simultaneity of production and sales. The seating and cargo room of the mounting space, unlike the typical manufacturer's products, cannot be immediately re-stocked.

Last but not least, it has relatively low production flexibility. In the case of regular transport aircraft, flight number and the number of flights are pre-determined, so if the passengers increase or decrease dramatically, it is hard to regulate the amount of the supply. Shortly, in airline business, supply is difficult to adjust flexibly to meet the demand.

1-2. Current status in the airline business

As U.S. loosened some regulation about entering air transport industry in 1978, global air transport industry has progressed the liberalization of air transport, the expansion of private sector participation in airline and airport operations, and the single aviation market in each specific areas rapidly. In addition, as large aircraft has been commercialized, the development of aviation-related technology to the air transport market has been functioning as an important parameter for the reorganization.

Meanwhile, the domestic air transport industry has been focused on Incheon International Airport to be the center hub airports in Asia. Hub airport means an airport selected by airlines for the management strategy that is used as a central airport. For example, if there is a hub airport of Northeast Asia, the United States and Europe passengers arrived in the large aircraft in the hub airport to transfer to another flight to head Japan or China. Shortly a hub airport is a place where passengers transit. The place where these kinds of aircrafts are gathered is called the center hub airports. However, due to some deterioration of the environment, it is going through some difficulty these days.

1-3. International Business Strategy in Airline industry

Usually airline business is taking a global strategy which means the firm views the world as single marketplace. The primary goal would be to create standardized products. However the standardized products don't mean the firm should use single marketing strategy or uniformed services. Even though consumers for airline commodities don't really affected by marketing strategy than other manufacturer's products or services, airline firms have to consider lots of culture differences and global issues since the service itself is literally flying all over the world. Since the food, the language, the preference and so on are different from country to country, they have to keep in mind that fact. �


2. Korean Air

Korean Air or known as Daehan Hangggong is one of the largest airline company in Asia and actually the largest company in South Korea . One of the main services that Korean Air provides are transportation of passengers, cargo, maintenance, and training service, which is the 96% of its revenue (90,548 hundred million won) and the remaining percentages are Limousine, Hotel, in-flight service, among others having as a total revenue of 93,937 hundred millions (2009). Korean Air serves passenger transportation and cargo service in 130 cities in 45 countries making them of the top 20 airlines in the world, and being top ranked for international freight carrying. It has transport 20,41 million passengers (12.89million international passengers and 7,52million domestic passengers). Korean Air has actually total of 19,178 employees, which the high percentages of workers are concentrated in cabin crew (26%), Engineering (27%), and in administration (24%). (Appendix 1)

The main slogan and mission statement of Korean Air is "Excellence in Flight". Korean Air has been achieving its mission statement by giving a good service being one of them having SKYPASS. Skypass is the frequent flyer program which they give to the passengers multiple benefits like free tickets, hotel discounts, among others , if the passenger flies a certain amount of miles per year. Korean Air also gives 4 types of first classes which Kosmo Suite and Prestige Sleeper class can stretch the seat into 180 degrees, making it more private and also delivering specials food. To be excellence in flight and being a top ranked airline they have to fulfill with Operational excellence, service excellence, and innovative excellence.

In North America, Korea airline is the largest airline to Asia and their main rival is Asiana airline which is another Korean company. In order to have a better operational and service excellence, Korean Air belongs to the Skyteam which is the world second largest airline alliance. By making some special alliance in certain routes, passengers can earn miles even though if they are not flying Korean Air.


3. Korean Air's International Business Strategy

We will focus on passenger division, because sales of other business except cargo and passenger are very small and cargo business is the best in the world. Passenger business has some issues which Korean Air should pay attention, so analysis is concentrated on passenger business. For investigating Korean Air's international business, we used value chain analysis. Based on value chain, a business consists of two activities, supportive and primary activities. Supportive activities include functions which support company's main activity such as Firm Infrastructure, Human Resource Management, Finance and etc. Primary activities are the firm's major activities to produce products or service. We looked into each sector and analyzed international business in each sector.

3-1. International Business Strategy in Supportive Activities

1) Mixed organizational structure

Korean Air has systematic organizational structure as it is shown in the attached chart. (Appendix 2)[1] As we can see in chart, divisions and functions are mixed. It has lots of divisions according to their functions what to do. These are divided by what they are focusing such as passenger division or cargo division. Because it is international company, it has a department of International Affairs. Also it has a Cabin Service division which is aimed to train flight attendants to provide high quality service. Head Office in Korea has many power and control international business.

2) Internal and external risk management methods

Since airline industries are influenced by oil price and currency quite sensitively, Korean Air has operated risk management methods internally and externally to hedge the possible risk.[2] In terms of internal risk management Korean Air has four hedging methods (Netting, Matching, Leading, Lagging). On the other hand, regarding the risk of oil price it is enforced to use derivative products (e.g. Forward, Swap, and Option) as a hedge to reduce annual oil prices below the level of risk tolerance. Also, by using same derivative products regarding the risk of currency, hedge is operating against certain part of exposure. Now, Korean Air has three risk management managers who are entirely in charge of the above risk management.

3) Global network

3-2. International Business Strategy in Primary Activities

1) Find new markets actively and reinforce global network

Korean Air offers regular flights to 104 cities in the world and tries to develop new markets. In 2009, Korean Air launched new flights to some potential markets such as Xi'an, Mudanjiang in China and Shizuoka in Japan and non regular flights to a third country by expanding the fifth freedom rights of the airline in Japan. As next new growth engines, the company decided to go into South America, the Middle East and Africa and establish service and sales offices.[3] Also, as aeronautical agreements are liberalized among countries, the company is finding new flights actively than before. In the case of flights to the Americas, Korean Air has the largest flights among Asian Airline companies and secures model for long-distance flights after liberalization agreements among countries.

Moreover, by using 'Codeshare' with allied airlines, Korean Air strengthens global network to create global demands. 'Codeshare' is an agreement where an airline buys space on another airline and markets the extra space as its own. Korean Air belongs to SKYteam, an alliance of global airlines. (Appendix 3) Korean Air and the airlines in SKYteam cooperate with each other to increase route networks without spending extra cost of running the whole service through 'Codeshare'(total 24).[4]

2) Manage flight plans considering global economy and market situation

An airline industry is very sensitive to global events and changes, so Korean Air controls flight supply flexibly. The company can improve the profitability through some activities. For example, in 2009, Korean Air reduced some flights to China and Oceania in which demand for tour decreased and increased flights to the Americas, Japan and CIS which demand increased because of visa waiver, a strong yen and interchange of economy.[5] Although there were the financial crisis and the flu, it overcame those obstacles well enough.

3) Based on bargaining power, sell the tickets

Korean Air has two ways to sell the tickets, direct way and indirect way. The company sells the tickets in international offices, airport offices and online directly. Especially, through own online reservation system, TOPAS (Total Passenger Service System), it sells tickets on 9 sites by regions. It can get synergy effect with other businesses that Korean Air is providing, such as Hotel or Limousine business because people can also reserve hotel and limousine at once.

Also, Korean Air uses indirect sales through travel agencies both at home and abroad. The company contracts dealership with travel agencies and gives some rebates depending on their sales. Travel agencies are connected to TOPAS and use it. Sometimes there is a problem. Korean Air forces sales to small travel agencies and if an agency does not fulfill that, it cannot get any incentive or commission. Especially, Korean agencies both in and out of the country have some trouble like this.

4) Provide high quality service

  • Airport Service: Passenger using Korean Air can use lounge service in various international airports, because Korean Air shares over 400 lounges with allies of SKYteam. Also, the company helps passengers' efficient transfer by check-in service. A staff carries out allocating seat, issuing boarding pass and checking in baggage to the final destination.

  • In-flight Service: Korean Air has following in-flight services to satisfy various passengers with the finest and state of the art seats. First, it gives tailored entertainment service for international people such as movies, music, magazines and newspaper. Second, it provides tailored meal service. People can order individual and special meals before 24 hours. Also, it provides fragmented meal service. There are vegetarian, medical, religious meals and infant or baby meals. Lastly, It has so unique service, 'Flying Art Embassador'. This is famous museum guide service. The company hires culture or museum professionals as crews and the crews give some information about museums in the destination. It is one way to improve the company's premium image.[6]

5) Practice membership program and strategic alliances as a marketing

Korean Air uses membership system for customer loyalty, and contracts strategic alliances with other business on and offline as one major marketing strategy. Also, for the premium image and differentiation from competitors, it promotes and puts an advertisement.

  • Skypass: Skypass is a membership system that Korean Air provides. The company gives special treatment to frequently flyers in the world. In 2006, there were 13,000 thousand members. Members can earn mileage when they travel and buy bonus flight tickets with their mileage they have collected. Also, Korean Air provides some service such check-in counter only for VIP and lounge, free-baggage service for residual seats.

  • Partnership (Alliance): Korean Air has many partnerships with many firms. First, Korean Air expands 'Codeshare' between Skyteam allies, and promotes own brand to other nations. Second, passengers can use renter-car, hotel, theme-park, hospital, restaurant and outlet with discounted prices, because of partnership. Third, Korean Air and some partner operate online site together. These partners are travelling sites and sometimes other airline companies. For example, Korean Air will create online travel agency in collaboration with Asiana airline.

  • Culture Marketing: To be a premium airline, since 2007, it uses culture marketing. 'Museum sponsorship' and 'Flying Art Embassador' are good examples. Through sponsorship, it supports culture exchange between Korea and Europe and Korean language service in museums such as Louvre and the professional crews give information of the museums and the works to the passengers.

  • Ads and Promotion: In airline industry, majority of passengers are sensitive to safety. Thus, Korean Air emphasizes safety by planning strategic ads. In the ads, a huge airplane is in the center and the company uses a simple message to give an image of calm and safety. Also, the model is an employee or an ordinary person instead of star so consumers can feel more comfortable and as a result the reliability of the company would increase. Moreover, Korean Air continues to announce the awards, new seats, service and company's good news through mass media such as magazines, TV and etc.

    Korean Air operates various marketing strategies, but there is a limit. Because Korean travelers occupy the highest portion of whole passengers of Korean Air, the company's marketing has mainly focused on Korean. Recently, in Korea, the firm started YOUTH marketing for 20s after visa waiver program between Korea and USA was signed.[7] On the other hand, in international market, it has performed more single marketing to improve brand awareness and image. However marketing strategies by region are not successful enough yet.

4. Current issues

1) Increasing transit passengers

As the result of the increase of transit passengers who use Incheon International Airport and Korean Air, the boarding rate has been increased. Transit passengers who use Korean Air have been increased for years, but since 2008 the amount increases faster than ever. (Appendix 4) While passengers who departure from Korea decreased in 2008~2009(due to some economic recession and increased exchange rate), transit passengers were responsible for the loss and from this year, the transit passengers will play an important role to increase profit margins. Usually March, April and November are low seasons for airline business, but this year the situation is different. Korean Air is expecting the boarding rate to reach 77% even in March.[8] This expectation is impossible without transit passengers. The number of transit passengers tended to increase for a long time. In 2005~2007, there were Economic boom and decreased won / dollar exchange rate and due to those factors passengers who departure from Korea increased. So at that time Korean Air didn't really need to attract transit passengers. However the trend of the rapid decrease number of passengers who is leaving Korea since 2008, the airline starts transfer marketing with Incheon International Airport.

Thanks to Incheon airport, 30% of the international passenger demand consists of transit passengers in 2009. (Appendix 5) One of the main reason investors do not like Korean Air in past was that the revenue structure is depend entirely on the macro variables such as exchange rates and oil prices, so the company can't control anything. But now Korean Air can do something. They can control the demand mix. Starting this year, if passengers who departure increase and there are no enough seats, they can simply sell less ticket to transit passengers and in the low seasons they can increase the seats for transit passengers. The revenue structure will be stable so exchange rates and oil prices would less affect the profit than they did in the past.

2) Incheon Airport's important rule

Every people who experience Incheon international Airport argue without hesitation that Incheon international airport is the best airport in the world. Even though it is a public company, Incheon international airport always actively listens to the needs of customers to improve efficiency. Therefore it always looks like brand new airports for 9 years and become one of the most competitive airports in the world. This is because of the geographic advantage, superior service and the operating ability of Incheon international airport corporation is performing.

One of the advantages Incheon international airport is the convenience of the transfer. For example, if someone has to take a flight from United States, stop at Shanghai to transfer, and arrive at Qingdao, he should transfer from international flight to domestic flight. In this situation he will feel inconvenience to find his baggage from international flight and send it to domestic flight. But if you fly into Incheon international airport to transfer to go to the Qingdao, the International flight will be flown twice and he does not have to find or send at the airport which is not his destination. Incheon International Airport, calls the system 'Through-check system'. People do not need to find their luggage or go through such complicated procedures such as boarding pass.

Also Incheon airport possess many routes to go to many cities. Compared to Japan's Narita Airport and Pudong Airport in China, which are available for 35 and 31 line each in the Asian International airline, Incheon international airport has more lines which can go to 86 cities. Already, Incheon airport is the hub air port in northeast Asia.

3) Government encourage the tourism industry

November 2009, the government announced ' advanced strategies for tourism industry ' and will improve the visa system to attract more Chinese tourists. Thanks to SHANGHAI EXPO which is held in May 2010, the government is preparing the system to enter each country with no visa. Also the government is planning to issue the travel visa for the individual visitor in Korea. Jeju Island has already allowed Chinese visitors with no visa and the Chinese tourists annually by 2008, increased 82 percent (22,913 people in 2008). Even though the profit from China area out of the whole passenger revenue isn't very large but the high growth potential shows the positive aspect. In the 'Advanced strategies for tourism industry', government also announced it will promote and improve the system related with vacation and holidays. To ensure the legal holiday and to make sure people enjoy their vacations enough. These kinds of government actions will definitely help the airline business, and of course it will help Korean Air to make more profit.

4) Eco-friendly Company

Actually Korean Air has been exercising a green management during the past 10 years. As we know global warming is affecting the entire world and has cause a cultural shock to almost the entire population making big companies create Eco friendly campaigns in order to satisfy the consumers at flying Korean Air that they are not polluting the environment. They are actually reducing greenhouse gases, reducing fuel consumption, using energy efficiently, and even preparing the noise reduction.


5. Recommendation

1) Special service for increasing transit passengers

As we mention before, Incheon airport is one of the biggest and successful airport in the world attracting the attention of many passengers. Its service is also very convenient because they can give hotel facilities a Korean Spa if passengers have to wait less than a day. Also because of the Through-check system, the demand to transit Incheon airport increased. But how can we increase the demand of Korean Air when they transit to Incheon airport?

In our opinion and after making few researches, we conclude that a recommendation to increase Korean Air demand would be to give special preference to passengers using Korean Air at Incheon airport. In order to do this we need some help from the Korean government to give Korean Air the facilities to establish this privilege preference because Incheon airport is a public company. There is a high expectation that the government can help because if there is more income as a Korean Air there will be more income to the nation (tax). Some special preference we discuss can be special discounts to Korean Air passengers in their stay at nearby hotels of Incheon airports. Another recommendation is to have a room for Korean Air passengers inside the airport when they can have a free coffee, rest comfortably and make them feel special because they are flying Korean Air. In this way if passengers transit to Incheon airport they will always prefer Korean Air, increasing the demand of the airline and having additional profits.

2) Green Marketing

Actually Korean Air has been exercising a green management during the past 10 years. As we know global warming is affecting the entire world and has cause a cultural shock to almost the entire population making big companies create Eco friendly campaigns in order to satisfy the consumers at flying Korean Air that they are not polluting the environment. They are actually reducing greenhouse gases, reducing fuel consumption, using energy efficiently, and even preparing the noise reduction. We also have to mention that Korean Air also contributes to the social contributions activities. Many passengers don't know about these information that Korean Air is doing, even we as a researchers didn't knew that Korean Air had a lot of contribution to the environment. We made up that the one way to inform the passengers that Korean Air is caring about the environment, is to make publicity at the magazines when passengers get aboard to Korean Air air services. Also when turning the TV inside the airplane there will be a short ad of Korean Air informing that they are being a Eco-friendly company and also adding some special features. This way passenger can take conscience on the social and environmental activities that Korean Air is performing. As airlines are usually global companies, one of the main objectives and competence is also concern about the global environment. Eventually this marketing will help Korean Air not only to attract customers but also to get a positive position in global airline market.


6. Conclusion

KAL is one of the promising international companies all over the world. KAL is already known to the world's best airline in cargo transportation area. KAL has many opportunities to be influenced positively. Of course, managing an international company is a challenging task but KAL is doing well. We've just recommended to strengthen specialized high quality service for increasing transit passengers and its' eco-friendly management activities. It is time to go abroad with more customized and localized international marketing strategy. We expect that KAL will be one of the best airlines in the whole world.


References

  • Annual Report, Korea Air, 2009

  • Company Analysis Report; Korean Air, Korea Investment Security, 2010

  • Company Report; Korean Air, KB Investment Security, 2010

  • Airtansport Business Theory, Her Youn Hee, 2003

  • Airline Business Theory, Youn Dae Soon, 1996

  • Korean Airline American Website, http://www.koreanair.com

  • Korean Airline Website, http://kr,koreanair.com

  • Incheon International Airport Website, http://www.airport.kr

  • SKYteam Website, http://www.skyteam.com

  • http://sportsworldi.segye.com, "Agreement for 'codeshare' between Korean Air and Air Macau", 2010

  • http://www.munhwa.com, "Korean Air accelerates youth marketing", 2010

  • http://news.mk.co.kr, "Korean Air support culture exchange", 2009

[1] Korean Air Website

[2] Annual Report, 2009, Korean Air

[3] Annual Report, 2009, Korean Air

[4] News, http://sportsworldi.segye.com, "Agreement for 'codeshare' between Korean Air and Air Macau", 2010

[5] Annual Report, 2009, Korean Air

[6] Korean Air Website

[7] News, http://www.munhwa.com, "Korean Air accelerates youth marketing", 2010

[8] Company Analysis Report from Korea Investment Security, Yoon Hee DO ([email protected]) , Lim Jung Hwan ([email protected]), 2010

Source: ChinaStones - http://china-stones.info/free-essays/business/korean-air-international-business-analysis.php



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