This report aims to identify the specifics of the internal and external environments of Hainan Airlines with an emphasis on its competitive advantage. As criteria for assessment, organizational competencies, resource base, strategic capabilities, as well as macro-environment trends will be reviewed. Based on this analysis, recommendations will be given regarding the direction of the company’s strategic development. The evaluation of internal and external environments provides an opportunity to identify the key aspects of Hainan Airlines’ business and determine the best path for its development in specific market industry.
Analysis of the Internal Environment
Hainan Airlines is one of the largest airlines in China and has a wide resource base. At the moment, in its service, there are 220 aircraft, and the organization ranks fourth in the country in terms of the size of its fleet (Hainan Airlines fleet details and history, 2021). Moreover, the airline updates its fleet regularly, which indicates the commitment of the management to passenger safety and adherence to the program of the high-quality standards of civil transportation.
Organizational competencies are business strengths that companies can apply to increase sustainability. About Hainan Airlines, one can highlight several significant competencies that have allowed the airline to earn a high position in the ranking. They are an improved corporate culture, an emphasis on financial planning, sustainable and modern management, and enhanced customer service. These competencies contribute to increasing the credibility of Hainan Airlines in its target market.
In terms of strategic capabilities, the existing resources and competencies enable Hainan Airlines to implement its development program successfully. According to Pearson et al. (2015), one of the company’s main capabilities is entering the global air transportation market. In addition, the airline maintains a sound financial policy, which allows it to pursue a reasonable strategy of making profits and minimizing costs (Pearson et al., 2015). These factors contribute to the continued high position of Hainan Airlines in the target market.
Key Competitive Advantage
One of the main factors that confirm the current competitive advantage of Hainan Airlines is creating a sustainable business value chain by focusing on passenger needs. As Jiang, Baxter, and Wild (2017) note, this airline is characterized by relatively low prices and strong corporate culture. These criteria contribute to the retention of the target audience and, therefore, increase the competitive advantage of the Chinese air carrier.
Analysis of the External Environment
Analysis of the Macro-Environment
The analysis of the operating conditions of Hainan Airlines in its market can be performed from a macro-environment perspective. Individual trends affect the airline’s business and determine specific development factors, including both financial aspects and operational characteristics. One of these trends is the asset-liability ratio, which Yide (2018) refers to as a crucial macroeconomic factor. The author estimates this indicator for the four largest Chinese airlines and notes that “Hainan Airlines’s asset-liability ratio is in the upper-middle level” (Yide, 2018, p. 32). At the same time, in comparison with the other three companies, the parameter is similar and fluctuates almost identically. Nevertheless, the trend hurts the operation of Hainan Airlines and requires optimizing its financial and accounting procedures to reduce the asset-liability ratio.
Another macro-environment trend that is essential to take into account is deregulation. Providing a freer environment for doing business is a positive aspect for a country that was politically and economically isolated in the past. According to Chen and Wang (2020), this trend has had a favorable impact on the activities of Chinese airlines, including Hainan Airlines, and allows pursuing an alliance and cooperation strategy as one of the most effective entrepreneurial approaches to expand the sphere of influence. As a result, the airline in question has gained autonomy and the ability to develop its business independently.
Analysis of the Industry Environment
To assess the business of Hainan Airlines from the standpoint of its industry environment, Porter’s Five Forces Model will be utilized as the main methodology that allows for identifying the degree of market competition and the drivers that affect this parameter. Baxter (2019, p. 6) argues that “Porter’s model focuses on the five forces in an industry (buyers, suppliers, new entrants, substitution, and rivalry) that impact each other”. Each of these criteria has an impact on the business of the airline in question.
From the perspective of the power of buyers, this criterion is a valuable feature. As Xiao and Thomas (2016) state, Hainan Airlines provides customers with constant discounts, which, in turn, allows them to retain their target audience and ensure stable demand. The power of suppliers is negligible due to the airline’s business structure. Hainan Airlines adheres to a vertical management strategy and does not depend on supply chains since the organization’s services are narrowly focused and specific (Hainan Airlines, 2021). The power of new entrants is potentially high because, based on the analysis presented by Yide (2018), local airlines that started operations in the 2000s have lower asset-liability ratios and, therefore, better financial growth prospects. In addition, foreign carriers may enter the Chinese market, which creates a threat of the loss of competitive advantage.
The key substitutes are Shanghai Airlines and Shenzhen Airline as early contributors to the country’s aviation industry (Hainan Airlines, 2021). Finally, the main rivals of Hainan Airlines are China Eastern Airline, China Southern Airline, and Air China (Hainan Airlines, 2021). Their market participation has an impact on the organization in question and requires effective strategies to overcome the competitive barrier, retain the target audience, and generate stable profits.
They conducted a five forces analysis to help evaluate the implications for Hainan Airlines’ business. In particular, new entrants and rivals pose risks to the stable operation of the air carrier and require utilizing adequate business development strategies to maintain its competitive advantage and prevent displacement by substitutes and foreign companies. The power of suppliers is insignificant, while the power of buyers is essential and influences the organization’s profit.
Recommended Strategic Direction
The analysis of the internal and external operating conditions of Hainan Airlines allows concluding the strengths and weaknesses of its business and making recommendations for optimizing market performance through adequate strategic solutions. Despite being in demand among consumers due to low-cost transportation, the company has some challenges with asset allocation and, as Yide (2018) notes, has an unstable asset-liability ratio.
At the same time, according to Zhuan (2017, para. 10), “Hainan Airlines has adopted a forward-looking strategy”. In particular, the company adheres to cost leadership as an approach to meeting demand with an emphasis on minimal costs. As practice shows, this strategy has positive results, but to secure the business and eliminate competitive risks, the company should focus not only on its pricing policy but also on other aspects of work.
According to the analysis of the internal operating environment, Hainan Airlines has sufficient resources and competencies to develop new ways to attract and retain customers. The evaluation of the external environment, in turn, shows that the organization does not depend on suppliers, but the power of buyers is significant. Therefore, as an alternative, the carrier can revise its current operating conditions and follow the focused differentiated strategy as an approach to maintain a strong competitive position even in case of a price increase. One of the methods that Kan, Chung, and Chung (2018) suggest is to focus on the business class as a potentially lucrative market segment.
China’s population is the largest in the world, and the target audience growth can be stable if Hainan Airlines takes steps to add additional air travel options. As Kan, Chung, and Chung (2018) argue, this practice of expanding services has a positive effect on airlines’ credibility and may serve as a driver for increasing competitive advantage, which is relevant to Hainan Airlines. Therefore, the focused differentiated strategy is a potentially effective solution for strengthening the company’s business and enhancing its financial policies.
The purpose of this report is to identify the specifics of Hainan Airlines’ internal and external operating environments. The emphasis on gaining a competitive advantage and the assessment of the current development strategy has allowed identifying the company’s key capabilities and competencies. Following Porter’s Five Forces Model, the main competitive barriers are identified, in particular, the threats of new entrants and rivals. To overcome the current challenges with the asset-liability ratio and high competition, the transition to the focused differentiated strategy is seen as a potentially effective algorithm for strengthening the market position of Hainan Airlines and enhancing its financial policy.
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