CRM Strategy of Air China

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1 CRM Strategy of Air China Customer Relationship Management Professor Werner J. Reinartz Hongjing Liang Shipeng Wang Jing Gao Tony Qin

2 CRM Strategy of Air China 2 out of 18 China Airline industry overview Market Value A growing economy and improved living standards have encouraged business cooperation and tourism in China, which directly benefit major airlines. In 2003, the China airlines market grew by 5.6% to reach a value of $12,334 million. The compound annual growth rate of the market in the period was 6.5%. The strongest growth was in 2000 when the market grew by 7.9%. Looking forward, the market is expected to experience steadily accelerating growth rates. In 2007 the China airlines market is forecast to have a value of $16,364 million, an increase of 40.6% since 2002, which is higher than other Asia Pacific markets. The compound annual growth rate of the market in the period is predicted to be 7.1%. (See exhibit 1 and 2) Market Segmentation Domestic flights account for the largest share of the market, representing 74.6% of the market value. In value terms this sector was worth $9.2 billion in Compared with other countries, China currently accounts for 19.6% of the Asia-Pacific airlines market, and is forecast to grow to 25.3% by 2007, a 5.7% increase compared to Japan s growth of 1.2% during this timeframe. (See exhibit 3 and 4) Competition in China Market Strategic restructuring of the civil aviation industry will continue to improve efficiency, and as more companies enter the market competition will intensify. Currently, the largest two competitors of Air China are China Eastern Airlines and China Southern Airlines.

3 CRM Strategy of Air China 3 out of 18 About Air China Established in 1988, Air China is the largest commercial airline in China, which operates passenger and cargo aircrafts to more than 300 cities in the world. Air China has total asset of $6.2 billion and 23,000 employees around the world. It operates 266 domestic routes and 56 international routes, and has 2472 regular flights each week. The coverage of Air China is much larger than its closest competitors. Air China also has strong cooperation with more than 60 foreign airlines, such as Lufthansa and United Airline, in code sharing and SPA. In year 2003, the company generated total revenues of $2.8 billion. Air China commits on flight safety and customer services, and its logo, the phoenix, is a symbol of good fortune and an artistic perception of the letter "VIP". Why CRM? In general, airlines industry has been striving to improve and sustain profitability. Many have focused on operational improvements to reduce costs, but the customer cannot be ignored. Customer relationships must be fostered for airlines to maintain competitive advantage and profitability in the long term. And many airlines are turning to customer relationship management (CRM) as a tool for managing customer relationships. CRM s promise is indeed compelling: strengthened loyalty driving increased revenue, with lower acquisition costs and improved operational efficiency. Air China is the first airline in China which implemented CRM to improve the quality of customer service and enhance its competitive advantage. There are several reasons which motivate Air China s CRM initiatives. Intensified competition in domestic market The competition is two-fold. Firstly, there is competition between airline and other players of

4 CRM Strategy of Air China 4 out of 18 domestic travel in China. Since the train has long been the preferred transportation means in China, airlines, to combat this long lasting traditional means of travel, have been making great efforts in reducing price and promoting convenience and services to attract travelers, especially among eastern cities. Secondly, there is intense competition between domestic airlines, which mainly focuses on non-price aspects as the prices of all domestic flights are still regulated and set by CAAC (Civil Aviation Administration of China). Competitive areas include flight scheduling, safety, aircraft type, airlines' travel agents and reservation, promotions, service quality (e.g., in flight services and meals), and flight punctuality. And it is very important for airline to have customer need driven business strategy to attain more regular customers in order to realize economies of scale and gain competitive advantages. Potential deregulation of China airline market In the China airline industry, government historically played an important role in directing the development of the whole industry by setting policies and providing guidelines for published fares, aircraft acquisition and standards for aircraft maintenance, jet fuel prices, and airport operations and air traffic control. CAAC as a government identity strictly supervises and regulates the domestic airline companies. For the largest three airlines, Air China, China Eastern and China Southern, Air China is currently the only one that is still wholly owned by the government. And due to this special aspect, Air China has enjoyed tremendous support from the government in terms of flight routes approval, advanced aircrafts purchasing, etc. However, as China has reformed from planning economy to market economy, government is now introducing more competition into the domestic markets and potential deregulation is highly expected in the near future. In such a case, Air China will inevitably lose its privilege and special treatment from the government, and in fact, Air China is

5 CRM Strategy of Air China 5 out of 18 now proactively preparing for its privatization and listing in various stock exchanges. Future development trend in China airline industry Looking forward, China s entry into WTO and the country s continuing march towards a market economy expose the airline industry to significant challenges. Foreign airlines continue to assault the marketplace by establishing new international flight routes in and out of China. During 2001, United Airlines operated 21 flights (more than any other North American airline) daily between China and U.S. A similar state of dominance, by Lufthansa, exists between China and Europe, with 24 non-stop daily flights. By October 2000, Air France had increased the frequency of its flights to Beijing to daily service, significantly more than the four flights a week it had in To further limit the domestic airlines and to directly challenge their routes, these three foreign airlines started a price war by providing significant discounts for Chinese passengers. This might help the Chinese international flyers; however, it creates further problems for the domestic airlines competing for the same lucrative international routes and takes away their competitive advantages. In summary, the China airline market is growing rapidly, so as the competition from both domestic and international players. In order to maintain its leading position in China and obtain first-mover advantage, Air China initiated and implemented its CRM program in Air China Frequent Flyer Program Air China launched its loyalty program Zhi Yin Club in 1994, the first frequent flyer program in China. Since then, the number of membership has been growing rapidly (Exhibit 5). Until 2003, the Zhi Yin Club has 1.3 million members and is now the second largest frequent flyer program in China. All Air China s passengers can choose to become the member of this program. In order to attract

6 CRM Strategy of Air China 6 out of 18 more customers, Air China makes the registration process as simple as possible. The mileage that a member flies will be automatically recorded into the customer s personal account. As Air China is continuing expanding its business network, Zhi Yin Club member now has more options to redeem his/her mileage. CRM activities The frequent flyer program is the core element of Air China CRM strategy. As a full service airline, Air China recognizes the importance of effective customer management in establishing long-term competitive advantage and views CRM as an essential component of its expansion strategy- the means of differentiating itself from competitors in the eyes of the customer. Furthermore, the frequent flyer program opens a new way to manage its passenger traffic and revenue as Air China can sell the miles to third parties such as hotels, car rental companies and travel agencies. Data collection Previously, Air China exclusively relied on the FFP to gather customer information, which then allows customer segmentation and tailored marketing strategy. As Air China continues expanding it business network, more and more channels are open now to collect broader and detailed customer information. For example, after Air China signed code-sharing agreement with several major European airlines, it has gained the access to the information of those non-air China customers. By understanding these customers in terms of both value and needs, Air China can initiate some unique offerings that may be of interest to this group and therefore effectively acquire new customers. The co-brand card launched by Air China and China merchant bank also allow more information feed into the frequent flyer program. This co-brand credit card is of special strategic importance

7 CRM Strategy of Air China 7 out of 18 in terms of data collection for Air China since more detailed financial data and purchase behavior of each customer can be obtained through each transaction he/she does using credit card. By analyzing these data, Air China can easily identify the potential valuable customer and act to migrate them or retain them more effectively. Customer segmentation using the information obtained In order to differentiate its CRM more effectively, Air China needs to understand the customer needs and value. Effective customer segmentation is vital to the success of the CRM strategy. While the customers can be grouped in many different ways, constrained by the technology and resources, Air China chose to segment its consumer base by the miles they flown. This information can be easily obtained by checking the frequent flyer status of a passenger, so it is very cost-effective. By using this method, Air China identified three customer segments: business travelers, less frequent travelers, and occasional travelers. Since the value and demand of customers vary significantly from segment to segment, Air China focuses its effort and resources to retain the most valuable customer in the business traveler segment and find ways to increase the profitability of the customer in the occasional segment. Understand customer needs The airline needs to understand respective drivers of each segment in order to provide new services that the target customers value. For example, the business travelers are less-price sensitive but placing more emphasis on flight punctuality and quick check-in service, while the occasional travelers are more concerned with the ticket price and baggage limit. The difference in customer needs allows airlines to tailor and improve its value proposition by using levers such as price, schedule, and customer service.

8 CRM Strategy of Air China 8 out of 18 Despite the frequent flyer program, which primarily gathers demographic data, many alternative ways are used by Air China to collect more information to identify in greater detail about customer needs. For example, compliant form is provided at all the Air China flights and check-in counters for customers to give feedback; customer satisfaction survey is conducted once a year to develop a comprehensive and updated understanding of customers overall satisfaction level with Air China. All these information, although many of which are not at individual passenger level, complement the frequent flyer program to allow Air China to map the feedback and characteristics of each segment. New customer service Based on the information gathered from each customer segment, Air China launched new marketing initiatives to better satisfy the needs of the customer and differentiate itself from its competitors. Special treatment to business customers Since the business travelers are more time sensitive, and demand special treatment worthy of their status, Air China is using new value added service to address their need in order to build loyalty and differentiate service level. For example, Air China opened a quick check-in counter at all major airports for those passengers whose mileage has exceeded certain level (this status can be easily identified by the type of the frequent flyer card held, i.e. normal card, silver card and gold card). It is estimated that the express check-in service only take one third of the time that a normal check-in takes. Air China also launched a free hotel pickup service for these customers. Since these initiatives save a lot of waiting time and hassles in commuting and

9 CRM Strategy of Air China 9 out of 18 baggage handling, they have received positive feedback from the target segment, which substantially improve Air China s value proposition. Direct mailing Air China sends regular direct mails or s to the customers who Air China wants to retain. However, the contents of mails to each customer segment are different according to their needs and characteristics. For the leisure travelers, the mails are mainly about new promotional activities and marketing offers, which interest this segment most. For the business travelers who are less concerned about the ticket price, purely sending the same mail as to leisure segment will not effectively build loyalty. As a result the direct mails to this segment focus more on introducing the company news and new services improvement to establish a premium carrier image. Through distinguished communications, Air China is able to promote emotional attachment of the high-value customers to the company. Worldwide voice enquiry system Facing the increase in international traveling and more diverse customer base, Air China launched a multi-language voice service, which can be accessed from many cities around the world. In addition to the membership status and mileage check, the system can provide help to some simple customer enquiries, such as the flight schedule, flight cancellation and promotional offers. The service can be listened in Chinese, English, Japanese and Korean. Air China is working to include more languages into the service. Other CRM activities

10 CRM Strategy of Air China 10 out of 18 Air China has introduced a new training program to its customer-facing ground staff to improve their ability to quickly solve problems in the events of flight delay and cancellation. Furthermore, Air China commits to empower these personnel in dealing with complex situation. Realizing the importance of CRM to increase the competitiveness and profitability, Air China has appointed a dedicated team consisting people from several departments such as marketing, IT and sales to handle and implement CRM strategy. Measuring Air China CRM Effectiveness Whether or not Air China s executives have a well-crafted CRM strategy in mind when they started the frequent flier program in 1994, the company has certainly seen the benefit of better managing the relationship with its customers since then. The idea of CRM is that it helps businesses use technology and human resources to gain insight into the behavior of customers and the value of those customers. For CRM to be truly effective, a company must first decide what kind of customer information it is looking for and it must decide what it intends to do with that information. Next, the company must look into all of the different ways customers information comes into a business, where and how this data is stored and how it is currently used. To measure the effectiveness of a CRM strategy, we believe a company could use a combination of qualitative and quantitative tools such as return on investment (ROI) analysis, customer satisfaction survey, customer retention analysis, etc. And we tried to measure the effectiveness of Air China CRM programs in the following four approaches. Return on Investment We could not access the detailed data which shows the gains directly driven by Air China s CRM activities, and it is very common that many airlines don t have the capability to track the

11 CRM Strategy of Air China 11 out of 18 result of their CRM programs. Nevertheless, Air China s revenue does demonstrate a steady growth as it continues to build on its CRM programs. But it is still weak to conclude that the CRM programs are efficient in driving business growth as there are many other factors, such as economic environment, competitive landscape, and regulatory change which could have played a role in the positive financial results. Therefore, ideally more related data and in-depth analysis, such as statistic regression, should be conducted before we could safely arrive at a conclusion. Customer Satisfaction According to the industry survey conducted by CAAC, Air China has been ranked No. 1 in the category of customer satisfactory level from 1996 to 2003, and the customer complaint rate, namely around 3.2% to 5.8%, has been consistently lower than other domestic airlines. We believe this result could be partly attributed to Air China s CRM program which aims to improve customer services and customer satisfaction. Customer profitability analysis We believe tracking and analyzing customer profitability is a sensible means to measure the effectiveness of CRM activities, as the ultimate goal of CRM is to maximize profitability by improving customer services and properly managing customer relationship. However, we don t have the access to related data of Air China and can hardly measure the effectiveness of CRM in such a way. Industry benchmark Generally speaking, benchmarking with other comparable players in the industry could help measure the effectiveness of CRM activities. Most of other domestic airlines have adopted similar CRM strategies in recent years; however, comparison between Air China and other

12 CRM Strategy of Air China 12 out of 18 domestic airlines on CRM strategy doesn t seem credible as Air China has been enjoying the market dominance and special government support. As the market is become and open and competitive, we believe industry benchmarking will become a reliable way to assess the effectiveness of CRM programs in the future. Strategic Recommendations Customer Data Base Management Establishing a customer database that reflects the changes of the customers on a timely basis is the first step and key to the success of a CRM strategy. Air China needs to do more in managing its customer data and improving its data-mining capabilities, for example, (1) Obtain more accurate customer data by developing code sharing agreement with more airlines, partnering with hotel chain, tourist agency, and car rental, as well as expanding alliance with local and multinational banks in offering mileage credit cards, etc.; (2) Segment and interpret the customer data on value and need base rather than on mileage flown; (3) Invest on latest information technologies to strengthen its data-mining capability. Customer Profiling As some customers are making your company more valuable while some are draining value from it, it is important to allocate sufficient resources to the profitable customers to retain their loyalty. And it is even more important to identify the unprofitable customers in order to offer them the right value proposition with the aim of transforming them into profitable customers. Coupled with customer profiling, customized direct marketing and personalized services prove to be highly effective in creating value for a company, for example, before a take-off, a detailed customer report with information on high-value customers and things such as whether they ve

13 CRM Strategy of Air China 13 out of 18 had their luggage lost in the recent past or experienced a delayed flight can be sent to the flight attendants, who will approach these customers during the flight to pay extra attention to their needs. Such high-touch, personalized services will increase customer loyalty, which in turn drives revenue. Customer Community Once a person identifies himself/herself with a group with common interests and preferences, he/she is likely to enjoy the sense of community and stays within the group, the same goes for an airline customer. Air China should invest more in building a community, physical and invisible, among its customers with the aim of customer acquisition and retention. A physical community can be frequent fliers club, new route launch party, or tourist groups. A invisible community can be on-line feedback forum/chat room for passengers. Once the sense of loyalty is strengthened through various network and community-building events, word of mouth will help bring in more new customers. Call Center Call center is another CRM initiative Air China should add to its line of offerings. A well-managed call center will undoubtedly shorten the distance between customers and the company and help send their feedback to the relevant departments on a timely basis. Customers always welcome the more personalized approach as compared with self-service on the web. The call center is especially important in serving the high value customer segment, as self service on the web, or automatic response may be appropriate for low-value clients, whereas Air China will probably want to avoid such automation for high-value customers and instead will address their questions faster with a friendly voice.

14 CRM Strategy of Air China 14 out of 18 Effective Measurement of CRM To put money where it really makes a difference, Air China needs to urgently develop programs measuring the effectiveness of its CRM strategy, such as return on investment analysis, customer satisfaction analysis, and customer profitability analysis, etc. Return on investment is the key measurement as it directly links investment with its impact on the financial results. Other than the traditional survey and focus group interviews, Air China should develop more sophisticated method tapping into the satisfaction level and the needs of its customers. Customer profitability analysis needs to be done on a regular basis to find out the potential shifts of customer segment as well as the impact of various factors on customer profitability.

15 CRM Strategy of Air China 15 out of 18 References: Declan Boland, Doug Morrison and Sean O Neill, The future of CRM in the airline industry, IBM Institute for Business Value. 4. Airlines in China, Datamonitor. Reference Code:

16 CRM Strategy of Air China 16 out of 18 Exhibit 1 China Airlines Market Value Forecast: Exhibit 2 The Growth of China Airlines Market:

17 CRM Strategy of Air China 17 out of 18 Exhibit 3 Market Segmentation: Domestic market vs. International market Exhibit 4 China Airline Market represents 19.6% of the total Asia Pacific Market

18 CRM Strategy of Air China 18 out of 18 Exhibit 5 Increase in Zhi-Yin Club membership Zhi-Yin Card Membership (thousands)