Expansion of United Airlines Into the Asian Market

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Table of Contents

Introduction
Current Problems within Traditional Markets
Operational Strategy
Reference List

Introduction

United Airlines (UAL) is one of the largest airlines in the world with fleet of 702 aircraft that services both the domestic market within the US as well as several international locations. Starting from 2008 to the present UAL has attempted to gain greater access into various markets within Asia due to perceived gains from establishing international routes between the US and certain Asian cities.

This paper will examine the reason behind this subsequent expansion and the strategies the company has evaluated and put in place in order to “ease into” this market segment it’s currently attempting to pursue.

Current Problems within Traditional Markets

Economic Recession

The current problem with the airline passenger market within the US economy is the fact that consumer spending is at an all-time low due to the 2008 – present-day economic downturn.

Unfortunately, the inherent problem with the current situation is that it creates a vicious cycle wherein low consumer spending results in companies reducing various aspects of their operational capacity (i.e., manufacturing of products, low-level employees, etc.) in order to remain in business which results in even lower consumer spending since people don’t have jobs to support themselves anymore.

An example of the effect of such a behavior by major corporations can be seen in the US, wherein up to 8% percent of the population is unemployed due to workforce cutbacks employed by various companies in an attempt to continue to remain viable despite lackluster local demand.

Another global factor that should be taken into consideration when conducting business operations is the current debt crisis in Europe that was brought about through not only the reckless actions of various banks within region (as seen in the case of Ireland) but also through government mismanagement of finances (seen in the case of Greece) and exposure to a reckless housing market (the case of Spain) which has also adversely affected domestic manufacturing within the US.

Such factors have taken a steep toll on the airline passenger market with up to 50% of profits effectively wiped out in period immediately during the aftermath of the 2008 recession with only a marginal improvement on domestic flights.

Domestic Competition

There are distinctly two types of carriers within the aviation market today: legacy carriers and low cost carriers (Beirne, 2004: 30). Legacy carriers are composed of some of the oldest airlines within the industry today or are a result of subsequent mergers and acquisitions over the past 2 decades (ex: United Airlines, US Airways etc.) (Blurring the boundaries, 2011: 58).

Low cost carriers on the other hand have actually come about rather recently and are defined by their no-frills, low cost, and above all lean business models that emphasize savings for clients (Chacon & Mason 2011: 271-290).

While LCs (Legacy carriers) continue to be the dominant form of travel, LCCs (low-cost carriers) have been noted as continuing to eat away at their market share due to recent trends in consumer purchasing behavior wherein affordability has been at the forefront of their purchasing decisions given the nature of the current financial environment (which is still reeling from the 2008 financial crisis) (Chia-Mei, 2009: 237-256).

LCs have attempted to respond to this shift by developing their own low-cost alternative which lasted between 2001 to 2007 with various incarnations of LCCs under the legacy carrier brand; however, these carriers failed to be competitive enough compared to traditional LCCs since they were still under the business model of LCs and thus were subject to the same spiraling costs resulting in their closure by mid-2007 (Stapleton, 2008: 1).

Presently, UAL competes directly with LCCs in nearly 70 percent of the US domestic market with the remaining 30% being due to other LCs.

The problem with this situation is that intense local competition between UAL and LCCs has resulted in considerably lower revenue streams since UAL is unable to match the price offerings that LCCs are able to offer passengers.

Coupled with the current trend in the development of a variety of regional hubs and small airports in the US (the Hub and Spoke system) this created the potential for LCCs to further expand their markets since travel between different hubs and spokes is more cost-efficient and cheaper for passengers when utilizing LCCs as compared to LCs which has further deteriorated UAL’s market position (O’Leary, 2007: 50 – 54).

Operational Strategy

Shifting to New Consumer Markets

With low consumer spending and an atmosphere of economic uncertainty that pervades the domestic market, this has resulted in wasteful operational costs for UAL such as storage, utilities, taxes, worker salaries and employee benefits. The fact is the current consumer market situation within the US is not conducive towards sales and as such the company has suffered as a direct result.

One possible avenue of approach that was decided was to shift resources towards foreign markets which have not been as adversely affected by the current economic downturn and focus efforts there instead of in cathartic local markets.

Asian markets such as those within China, Japan and the ASEAN (Association of South East Asian Nations) presented themselves as viable consumer markets due to the fact that despite the slowdown of various western economies, eastern economies have actually grown on average by five to eight percent annually.

This is due to the fact that as the expense of doing business within western nations rises, companies start to shift their manufacturing operations to other countries with far lower operational expenses (O’Donnell, 2004: 26 -30).

In response to this, legacy carriers have focused more on business and first-class passengers who take international flights to various destinations within Asia (particularly China and Japan) due to the higher fees derived from such customers.

Taking this into consideration it could be possible that one potential evolution of the current situation is a separation of the types of passengers that particular airlines cater to with LLCs catering to ordinary domestic consumers that are looking to save on their fairs while legacy carriers, on the other hand, could focus on developing better services and amenities and focus more on business and 1st class passengers who are taking international flights.

Examining the Market

One of the more interesting pieces of information as of late has been numerous studies indicating that China will lead growth in air travel within the upcoming years. This is actually quite true to a certain extent, given the growth of the Chinese economy as of late and the subsequent increase in wealthy Chinese tourists that have taken an interest in air travel (Rebollo & Baidal, 2009: 559-570).

What must be understood though is that upon further investigation into the current state of the airline industry, it was seen that it wasn’t just China that will be a market leader in air travel but rather the entire Asian region (Waguespack, Rhoades & Tiernan, 2007: 59-71).

As of late, the current economic downturn has affected local markets to such an extent that sales of not only US-based companies but of European based companies as well have been sagging for the past 3 years.

As the US economy has been estimated to barely reach a 1% growth rate by the end of 2011 with an uncertain growth rate in 2012, this signifies a concurrent decline in consumer spending making the future of both US and European economies uncertain in light of the possibility that consumer spending within both regions may continue to be in decline for the next 3 or 4 years (Poon & Waring, 2010: 197-213).

Despite this grim economic forecast, the economies of Asia (particularly the Philippines, China, Japan, India, Malaysia, and Singapore, etc.) have actually experienced steady and spectacular economic growth, which has translated into increased consumer spending within the region within the past 4 years.

This has actually been good news for the airline industry due to the correlation between high economic growth and subsequent increases in the number of passengers on airlines.

Strategic Options – Addressing Challenges

When entering in the airline passenger market within Asia with a focus on business and 1^st class passengers what must be understood is that this necessitates the need to change aspects related to what type of planes to use since airports and the new market that UAL is pursuing would of course require different means of operations

Maldutis, 2004: 66). The previous decade in Asia was dominated by wide-body long-range aircraft however as of late the rise of low-cost carriers and regional air services, especially in Japan and China, utilizing twin-engine aircraft with small frames calls into question strategic options that focus on large-bodied aircraft that focus on passenger capacity rather than efficiency (Poon and Waring, 2010: 197).

Within the past 5 years, it was seen that Asian carriers had been shedding their 747 – 400 series aircraft in favor of wide-body twin-engine aircraft such as the B-787 due to their overall improved efficiency and greater range. In fact, when examining the prevalence of high capacity aircraft such as A-380s within Asian fleets it was noted that Airbus received only a few orders.

On the other hand, population estimates examining the growth of airline passengers within the next 40 years shows an increase of at least 16 billion. Based on this data, the relevance of utilizing higher capacity aircraft such as the A-380 becomes much more important due to the need for meeting consumer demand.

When examining whether United Airlines should cover its US to Asia routes with Boeing 787s or Airbus 380s beginning in January 2014, it thus becomes a question of whether the company should focus on conforming with present-day trends or future need.

When examining the particulars of this case, you have to take into consideration present-day market studies that indicate that business travelers will pay a 15-25% premium to fly to their initial destinations non-stop or direct, rather than change carriers enroute (De Neufville, 2008: 35-68).

Since United Airlines considers business travelers as one of its more profitable target segments maximizing the amount of business travelers per flight through the use of the A-380 would seem to be the most logical choice especially when taking into consideration estimates at passenger increases in the near future.

On the other hand, shifting towards the primary use of A-380s does present several problems such as the plane’s size requiring special modifications necessary to existing airports in Asia, which are more used to B-787 airplane sizes.

When examining whether UAL should proceed with B-787s or A- 380s it is important to examine the current market features of the Asian market in order to determine which particular type of aircraft would be the most effective. Various studies have shown that there is a current predilection within the Asian region for utilizing wide-bodied twin-engine aircraft such as the B-787.

In fact, such studies indicate that this is a trend that began at least five years ago, wherein there was a dramatic shift in the region towards planes with small frames. The reason behind this can actually be connected to the rise of several Asian budget airlines within the region whose business models emphasized affordability rather than luxury.

Not only that, due to the effects of globalization within the Asian region various regional hubs have been created to service a variety of far-flung destinations resulting in budget carriers being the plane of choice for travel to such areas (Gray, 2008:22).

As a result of such events budget airlines within the Asian region have outstripped the growth of network carriers resulting in more airports having structural frames designed for receiving planes like the B-787 rather than the A-380.

This is particularly important to point out due to the fact that while the open skies deal (an agreement between the US and Japan to enable access for American carriers) would enable United Airlines to potentially access the regional airports of the Japan the fact remains that if the UAL fleet serving these airports were composed of A380s this would result in considerable expenses for these airports in terms of tarmac and station modifications to accommodate the A-380 which could jeopardize the open skies deal due to perceived costs on the part of the regional airports.

On the other hand, other examinations of the A-380 and its place in the future of aviation indicate that as the number of airline passengers per year in the world reaches an estimated 16 billion within the next 40 years, this is indicative of massive growth potential within the upcoming years.

This means that utilizing the B-787, while affordable, demand will set United Airlines back in terms of being able to handle increased passenger capacity and as such would cause the company to lag behind its rivals. This is due to models such as A-380 having the necessary increased capacity to deal with the passenger increase as compared to the B-787 models.

Strategies Pursued

The UAL thus proceeded under two potential strategies when examining what particular type of plane to purchase:

United Airlines could focus on maximizing present-day passenger capacity by utilizing the A-380. Not only would this enable the company to meet the present need of business class passengers who are willing to pay 15 to 20 percent more for non-stop flights but it enables the company to meet potential increases in the amount of passengers within the coming years.
By utilizing B-787 United Airlines will be able to easily enter into most airports in Japan and Asia that are used to the planes of the B-787’s capacity thus allowing the company to add more potential non-stop destinations for its business and tourist clientele.

When examining the current Asian market it can be seen that wide-body two engine planes dominate a large percentage of the airplanes currently being utilized. This is due to the rise of various low budget airlines that have grown within the past five years and as such the entry of the much larger A380 into this current market sparks several questions regarding compatibility with several of Asia’s regional airports.

On the other hand, what must be taken into consideration is the fact that in terms of long-range capability and overall passenger accommodation the A380 far outstrips the B-787, but in terms of fuel efficiency and compatibility with Asia’s regional airport infrastructure the B-787 would be a better contender.

Based on the presented data for this study, United Airlines is primarily targeting business class passengers for entry into the Asian market. Taking this into consideration it can be seen that the A380 with its ability to accommodate more passengers for non-stop flights to particular airports in Asia would make it an attractive option for catering to business class clientele.

The interior of the B-787, while large, is still quite small when compared to the interior of the A380 and as such can have only limited amenities in comparison. On the other hand, interior modifications can be made on the B-787, but with a lot of drawbacks. A B-787 can be fitted with the desired amenities requested by the company, but it would result in reducing the number of passengers that can be seated on the aircraft.

It must be noted though, that the recent financial crisis has negatively affected carriers in such a way that many are reluctant to shift into the A380 model. Issues such as cost reductions, maintaining current fleet status as well as the practicality of using such aircraft were taken into consideration and as such delays in their construction were actually welcomed.

While it may be true that sales for the A380 have increased within the Middle East and Europe the fact remains that the Asian markets which UAL is trying to expand into call for another approach rather than the A380 at the present.

The end result was that in order to both effectively assimilate itself into Asian markets as well as reduce costs related to gas and the overall price of the planes while at the same time maximizing the amount of business class customers it can handle the end strategy of UAL was to opt to have a diversified fleet of 787s and A380s with the 787s serving regional hubs within Asia while only a few A380s would fly directly towards airports that could handle its rather specialized needs due to its size.

Overall, opting for such a strategy is not surprising given the fact that UAL needed to take into account both the subsequent increase in airline passengers within the next few years as well as the need to have planes that could actually land within particular Asian airports.

Effectiveness of the Internationalization

It has yet to be determined whether the internalization of UAL through greater expansion into the Asian market will prove to be successful. The reason behind this is that while UAL has been shifting its resources towards accommodating business and 1st class passengers, the fact remains that this strategy has only been recently implemented.

Not only that, the planes that the airlines ordered have yet to be delivered and as such it can only be speculated that such a decision “should” result in improved profits for the company within the next few years.

It is based on this that this section will elaborate on the possible results and effectiveness of the UAL internalization strategy by examining relevant data and trends that will enable the creation of a plausible timeline and strategy outline between now and when the UAL expansion strategy reaches its zenith.

First and foremost, it has been indicated by this paper that the number of passengers that use airlines will increase by several billion within the next 50 years with a large percentage of this growth primarily being centered in the growing economies of Asia and South East Asia.

China, the Philippines, Japan, Singapore and a variety of other countries have all shown increased rates of international travel as a direct result of their booming economies.

With the implementation of UAL’s internationalization strategy involving the use of 787s within Asia’s regional hubs and the A380 for cross-pacific flights, it can be assumed that the company will be well poised in taking advantage of the increased passenger growth.

In terms of effective resource utilization it must be noted that planes such as the 787 and the A380 are made from better more lightweight materials and are more fuel-efficient as compared to 747s or other such aircraft produced nearly 12 years ago.

As such this enables the carrier to save on fuel costs, which is an especially important factor to consider since the price of fuel is the second-highest cost associated with air travel aside from the cost of the airplane itself.

The end result of such actions would result in UAL being able to properly establish itself outside of its traditional markets, thus enabling it to slowly extricate itself from direct competition with the various budget airlines that are clogging the US consumer market.

By focusing on business/ 1^st class passenger flights to various Asian destinations to and from the US UAL will in effect be able to dominate the Asia-Pacific- US route resulting in a far greater likelihood that the airline will survive well into the future, unlike its various counterparts which have been unable to properly respond to the necessity of expansion and change within this new era for the airline business.

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