Korean Air Analysis

Introduction

Korean Air is the largest airline in South Korea and Incheon international airport serves as its hub for its operations. Korean air handles 65% of the cargo in Incheon airport. The development of Incheon airport into a free trade zone has strengthened the logistical advantage and has also made the airport become a hub for Northeast Asia; hence additional revenue for the airport.

Korean air cargo boasts the tag of the biggest air cargo fleet in the world with an operating fleet of 25,747 freighters, with an additional four new freighters due by the end of 2010. Korean air cargo network serves 117 cities in 39 different countries, which also include passenger transport destinations. The industry report indicates that the airline company has been experiencing an average growth of 27% in the recent past.

The airline handles the following categories of services;

Since the company handles such a high percentage of air cargo, the management saw the need to install a cargo handling system that would be efficient to suite its services in this competitive industry. It thus followed that the company resorted to adopting the FAST system from Alitalia in the 1980s for tracking, handling, and tracing cargo.

To bolster its efficiency, Korean air uses some cargo handling partners located in different parts of the world, focusing mainly on critical factors such as security, quality operations, and cost-efficiency. This subsequently enables its system to be the most efficient in the sector. The company also insists on training its personnel to meet the specific demands of its growth strategy.

With the increased competition in the industry every day, Korean Air has formulated expansive strategies, among them the creation of new global markets (e.g. Hanoi, shanghai, Beijing, etc) to boost the demand for its services in the central Asia region.

In other words, Korea Air has developed a business policy system that involves the adoption of new information technology systems, business partnership strategies, training of its employees to match its growing business needs, and expansion strategy to penetrate the increasingly competitive global market. The main objective of these policies is to bring high efficiency in service provision including ground cargo handling, passenger handling, and maintain a high level of ethics to cement its number one spot in the sector.

Ground handling activities covers a diverse number of services and activities which include;

• Catering.
• Cabin service.
• Ramp service.
• Passenger services.
• Field operation.

The main aim of this research is to identify;

• Factors behind its success in the cargo handling market.
• Ways in which the airline handles ground handlers.
• Ways in which the cargo handling service provided by cargo handling serving customer carriers in the contract will be maximized.
• The carrier’s need in the maximization of its effectiveness in the ground handling service.
• Challenges in outsourcing the cargo handling service and the possible solutions for these challenges.

Current situations

According to IATA world air transport statistics, Korean Air is currently the largest cargo operator in the world, with a handling capacity of 8822 million tonnes per kilometer in 2008, a position it has held since 2004 (IATA 2010).

Korean air cargo handling service has been experiencing an annual average growth of 27%, with the highest rise experienced in the cargo handling service. The table below illustrates the operational revenue experienced per year since 2006;

The total Korean air cargo output per capita was US$ 2.55 million in 2008 and 2.42 million tons of cargo.

Identified issues

Since there is high competition in the air transport business, many large airlines use their large economy of scale and offer low prices to their customers. It, therefore, means that small airlines need to fight for volumes as well as stay cost-efficient in their effort to stamp their presence in this competitive market (ISEC Inc., 2008).

Korean Air has faced increasing challenges in the recent past as analyzed by Eva International (2010). Some of the identified challenges are;

Overcapacity

There is an increasing growth in the capacity in the recent past due to the linearization of the Asian continent, a phenomenon that has subsequently caused overcapacity. This increased demand can be represented as follows;

“The original design of the airport cargo handling facility which has 3 terminal complex and five separated warehouses was initially 1.7 million tonnes of cargo every year. Due to increased demand, the facility was forced to increase its capacity to 2.7 million tonnes a year by expanding the existing two terminals to meet the growing demand as seen in the airport technology analysis” (Boeing Company 2010).

Ground handling service carrier management

The airline needs to establish an effective cargo handling relationship with the outsourced carriers in the different destinations they operate from. Since they use these outsourced services more frequently, there’s the need to ensure that their corporate objectives are achieved in the whole supply chain. This means that a strict measure in the selection and monitoring of these handlers is necessary to ensure full optimization of the airline’s potentials. The Korean airline has introduced the following measures and amendments to its systems;

• Customer carrier requirements, Service legal agreements, and Ground handling agreement;
• Limited resource-use maximization and efficient utilization to serve customer carriers;
• Cost-saving carrier and freighters purchase;
• Facilities improvement and expansion;
• Manpower maximization with up to 65% utilization;
• Equipment servicing availability without delays.

Developing new markets

The airline has partnered with several governments to try and create demand e.g. central Asian market expansion. It hopes to develop other partnerships with the Chinese in Beijing or shanghai airports in the future.

Workforce management

The workforce is the core of any business operation. The airline aims to efficiently and beneficially utilize them to achieve organizational goals. The major cost of ground handling is human resources cost (ISEC Inc., 2008). Many basic variances can affect the ground handling operation. They include flight delays, workers’ strikes, and changes in weather conditions. To achieve its goals and interests, KAL airline has laid out a procedure where its ground handling services are handled perfectly by the people in charge. However, from a ground handling company point of view, they also want to serve other carriers as well. As a ground handling company, they can strive to provide perfect service to the clients, even though it has limited resources to adopt all the requirements of other carriers. To achieve this strategy, the company needs a highly qualified individual with very good ground handling experience within the industry setting. At the same time, the person tasked with such a duty will need to undergo constant training in an attempt to bolster and upgrade his or her ground handling skills with new and modern technologies.

Competition from sea

The review has not taken into consideration the sea-air multi-modal transport of cargo to Central Asian Republics using the ports in South Korea as the interchange point. Korean ports could serve as a convenient interchange point, provided an efficient logistical supply chain is developed, whereby urgent delivery cargo arriving by sea or air could be transferred to the other mode of transport within hours with the minimum essential processing formalities. This would also require frequent air services to various destinations in the world. At present Dubai is serving as a hub for such multi-modal transport, where transfer from sea to air takes place within hours.

This has become evident in that the competition between these two modes of transport is increasing with an average growth of sea transport being faster than that of air transport in Korea.

Services offered and consumer needs

There are very limited services offered in the other airports in the Korean republic in terms of cargo handling. The other important factor affecting the transport of cargo by air is the unavailability of cargo handling facilities in many of the airports in the region. Moreover, there are constraints of space for handling the cargo in these airports. PIA and Aero Asia handle their cargo, while Air Blue and foreign airlines make use of the services of the cargo handling agents like SAPS and Gerry’s Dnata.

Because there is a lack of integration of operations, the available facilities are not efficiently utilized. All airports require modern cargo handling facilities extending over much larger area as observed by Xystouri and Bamford (2005, pp.306-320)

Security and risk management

Security has become an important issue for international transport companies, especially the airline industry (Ekwal 2009, p 48). Unless the cargo is screened through a modern screening machine capable of detecting explosives, it has to be held back at the airport for 24 hours during the cooling period. This defeats the very objective of quick delivery through air shipment. Many of the cargo handling facilities at the airports lack suitable screening machines. Physical examination of cargo damages packaging, and also makes the cargo susceptible to pilferage, consequently affecting its acceptability by the importer.

Risk management is concerned with the assessment of the risky exposure in the airline’s operations. The emergence of terrorism increased the risk exposures and thus the airline has to adhere to the highest possible security and threat detection measures possible (Ekwal 2009, p 49).

Uncertainty

There is a lot of uncertainty in the regulatory issues related to the environment across many sectors of the Korean economy. Considered one of the leading airline companies of the world, Korea Air is also considered the best in a class of foreign operators. Examples of this uncertainty identified by Lobo & Mohamed (2009, pp302-309) include;

• Global financial crisis.
• Unstable oil prices which damage carriers profitability.
• War against terrorism which is hindering a smooth flow of cargo.
• Anti-trust enforcement is contracting already slumped airfreight industry.

The government must send a strong message by issuing clarity on the policy on the environment as soon as possible. This is particularly necessary for the ground handling department.

However, operating in the international arena means that the company needs to understand the increasing international regulations on the environment so that their entry into new markets may not be hampered.

Integrated computerized systems

An integrated computerized business process system is an essential requirement for efficient handling of air cargo in Korean airlines. At present different agencies involved in the process i.e. Customs, KAL airlines and cargo handling operators have their own IT systems, which have not been interlinked to each other. For the business to work efficiently as a single unit, a collaborative information system must be introduced at all international airports where KAL operates. This IT systems integration also needs to involve all agencies in air business to increase collaborative activities to increase efficiency in various areas such as security.

Advanced air traffic management technologies available today for aviation communications, navigation, and surveillance (CNS) systems improve airline fuel efficiency by enabling planes to calculate the most efficient routes and altitudes to take more direct routes between destinations, use more airspace at currently prohibited lower elevations, and minimize time-wasting for landing and take-offs (Airport technology 2010).

When airplanes fly the most direct routes, and less time is spent before takeoff and after landing, less jet fuel is used hence reduction of overhead costs and subsequent increase in profitability. The airline can develop and introduce sophisticated flight planning software that will help to improve the calculation of the effects of wind and weather patterns. This will enable the airline to invest in non-petroleum jet fuels in the future as observed by Aghahowa and Stephen (2007, pp 296 -315).

Performance measurements

This is essential for monitoring the effectiveness of the operations in the cargo handling sector and is usually the basis under which improvement and expansion measures could be improved (Xystouri & Bamford, 2005, pp.306-320).

Performance measurement criteria will help identify the following; long-term planning and control, resource allocation, system improvement and control, and motivation of the personnel.

A review of the company reports revealed the continued problem of incorrect loading and securing of ULDs and pallets. The representative instances included:

• Cargo not being properly tied down.
• ULD not locked into position.
• Pallet moved due to cargo crash net not properly installed. For instance, the report stated that the ground handling staff could not open the door of the forward hold during times of operations, jeopardizing the smooth operations of the company in a big way.
• Pallet not properly locked, no center locks on the left side (which if left uncorrected would have allowed the pallet to move laterally into another pallet).
• Pallet had moved more than three feet during the flight.
• The load shifted during the flight.

The problem occurs during service provisions because these shortcomings do lead to damaging of goods and increase costs of operations. The company may resort to cost-cutting strategies such as helping the ground handling companies they subcontract to train their workers or higher experienced and skilled employees. This will help them (subcontracted companies) reduce the cost of training, hiring, and retaining the skilled workers since they do have less economy of scale (David 2009). This is important because it is common knowledge that less or no experienced people are likely to increase the possibility of accidents and at the same time jeopardize the cost-saving strategies that every business desires.

Moreover, low-skilled personnel may cost less in terms of wages and salaries, but the overall costs of operations would be higher due to the low level of services offered. If the ground handling policy is to reduce the cost then the company cannot retain a person with fewer skills, which means that the highly experienced people have to be paid more to motivate them for higher productivity. Consequently, the company must be able to evaluate its resources and programs. This will enable them to design strategies to retain the qualified personnel that the company badly needs. Through evaluation, they are also able to ensure that a high level of services is conducted by the outsourced companies and consider the point of view of both carrier and ground handling company researchers based on sourcing policy.

Solution overcome issues

SWOT Analysis

The matching of both the external and internal factors and also opportunities and threats is a very efficient way of analyzing both the micro and the macro environment of the company.

Gap Analysis

A Gap Analysis is used to figure out what needs to be done at Korea Air to make improvements to its current state. It is the study of the difference in the standards and the delivery of those standards by a company.

These are a number of gaps that are important to measure in the service quality at Korea Air; the Reference for Business Encyclopedia (2010) has formulated the following gap measurement criteria:

• Service quality gap;
• Management understanding gap;
• Service design gap;
• Service delivery gap;
• Communication gap;

Although it is a broad concept, the Gap analysis for Korea Air will only be based on the targeted results for the company.

Implementation

Korea airlines have designed measures to counter these trends in the market to make it a market leader in its business operations. It has been implementing the following strategies;

Developing of new markets

Currently, the airline is developing a new market in central Asia in Uzbekistan. It is in partnership with the government to;

• Modernize the existing airport in terms of facilities and equipment purchase, education and training the cargo handling operators, and process improvement among many other areas as the demand may dictate;
• The development of transport networks in rails, road, etc to facilitate the cargo handling in the various destination in central Asia;
• After these facilities are developed there will be the need to create demand in the region by development of tourism and leisure facilities to increase the aggregate demand in the cargo industry

Network expansion

The airline is considering an expansion in the Asian market and also planning to establish partnerships with cargo handlers to reap the most out of the industry.

Hub and gateways

The Korean air hub operation is in the major cities of the world, especially those destinations that deal with cargo. In Incheon airport, its terminals capacity has been increased by a considerable margin in the recent past. It can handle 1.6 million tons of cargo.

Financial performance

The ground handling company should have secure financial revenue as well as enough facilities to provide the carrier company with a strong financial base. In other words, the company needs to be flexible in terms of service level and pricing. For example, asking for a service level of 100% may not be realistic. Instead, it is more attainable to ask for a service level of 98%. Financial benchmarking is the best way to improve the ground handling operational efficiency to provide best practices in terms of reliable financial performance standards. It helps to identify the internal performance measures and each function of a business operation. It is also important to measure the leading competitors to compare the performance levels to identify areas of comparative advantages and disadvantages. This would help identify the right programs to be implemented to close the performance gap (Hsu et al 2009).

Currently, it is difficult to achieve the key performance indicators due to limited resources. There is also the fear of losing customers through a lack of performance evaluation. For example, the ground handling business is a very sensitive part of the company and any slight fault in the process may lead to customer dissatisfaction (Express ground Handling 2008). It is therefore important for the management of the company to exclusively treat the ground handling business with care to attract more business opportunities.

Still, the best strategy is to keep a long-term relationship with ground handling companies to ensure a level of responsibility is higher about performance. They could also form a joint venture relationship to provide reliable value-added services to ground handling customers. During peak time, multiple skilled workers and cross-functional facilities are important because they would help minimize the time required to perform tasks, hence improving efficiency.

High qualified manpower

The company management needs to do special training and increase time-bound efficiency to implement services. There should be a decrease in delays to reduce additional costs charged ground handling during extra time. According to Chowdhury (2008), “ground handling company includes specifications like putting priority cargo above non-priority cargo”. He also recommends that the shipments should be handled in line with “the destination to be reached; color-coded, bagged and subject to various scans at various airports, which requires a dedicated workforce trained by the company to carry out the jobs” (Chowdhury 2008).

The key success factor is to efficiently supply materials needed by the company (ISEC Inc., 2008). They should be performed to increase the understanding of manpower requirements of task performance and an effort to avoid an oversupply of manpower as well.

In this case, human resource is a fundamental requirement for the achievement of the company objectives. The management must ensure that their staff is challenged and rewarded. The right person must be placed at the right job as well as ensure that the values and ethics of fairness, honesty, and respect are principal factors to be given priority in the ground handling process (Aviation ground handling 2010).

Once employees are allocated the right duties, it enables the company to increase productivity and reduce costs of logistics management. The carrier’s highest priority should be to improve service level, safety, and security (Leukel et al. 2009).

• Measurements and control over vehicle utilization can help to minimize the quantity of equipment that is needed in the ground handling operation.
• The flight delays could be minimized even if flight schedule changes, as long as they ensure that equipment is in the right place at the right time. There should be real-time visibility of vehicles and text communications with operators at all levels of operations.

Cultural codes and values

Codes and values for growth in the airline are one of the industry drivers in terms of efficiency in the handling systems of the company. The company maintains a high level of ethics in the following ways;

• It has a speed and flexible system of handling cargo;
• It has a pioneer and can-do spirit in the workforce;
• It is well organized in on and off-line training system;
• It has a policy of timely and reliable decisions.

Conclusion

The case study was done as a preliminary measure to guide the management in establishing measures to improve the financial status of the company in which the main goal is to increase profit margins. To reach this goal, the need to increase client base through Customer satisfaction and speed of documentation initiatives are paramount. It also facilitates faster service in the cargo handling service.

We have identified several areas relating to cargo handling that need to be addressed to increase the safety of moving cargo from origin to destination. We believe that standardized procedures and actions should be implemented by the management of the carrier. This may help to eliminate cargo with inaccurate weights being improperly loaded onto pallets. For example, cases of cargos with incorrect documentation and lacking proper and secure seals have been reported in several incidences.

We further believe it is in the best interest of Korea Air cargo to use this consistent set of procedures to safely move cargo, even in cases where cargo changes containers, aircraft, and/or operators. The operator should provide adequate staffing to safely perform the duties and functions required. Their supervisory personnel should maintain surveillance and oversight of their operations, including those provided by contractors and their outstations.

The airport modernization program and associated developments such as the new ground handling policy are ultimately at a growing stage of their development. Consequently, it is not unexpected that there will be teething problems, delays, and some pain as the system adjusts to a new paradigm. All those involved will be learning along the way. However, the frustrating issue for the main parties involved is that the key policy decisions have been taken without sufficient consultation with stakeholders and are announced late in the day, creating significant planning challenges. Confusion has reigned on the issues of the metro airport policy, the Airports Authority of Korea tender, and the application of ceiling prices.

Recommendation

• The management needs to keep in mind the cause and effect issues of the company and make a decision on outsourcing that can improve the company’s principal goal. In most cases, the cheapest handling company is chosen but the company must be able to serve a high level of service irrespective of their cost implication from the outsourcing activities;
• Both carrier and ground handling companies must decide how much they can outsource. It could be that carrier owns some warehouses in different foreign regions and a few outsourcing types of equipment and buildings are needed to increase the cash flow and improve operational efficiency in the long run (Hsu et al. 2009). Some ground companies cannot purchase all ground handling equipment because they require a lot of funds to achieve this goal. Most ground handling companies have to rent facilities, with costs likely to include maintenance of the company database. The ground handling company needs to rely on data programs;
• The other airport in Korea should also be utilized by the airline to increase its handling capacity and speed;
• Development of new markets is designed to form the basis for future growth and thus the company is entitled to make prudent choices in the decision-making process. A study on the viability should be done first to determine the true profitability of the carrier so that the cost-benefit analysis and investment appraisal are facilitated to act as the best option to undertake decision-making processes;
• The process of resource optimization of the available resources should be conducted to tap into the benefit and the unutilized potential in the process of increasing the inbound efficiency and capacity before looking for other expansion measures. Optimized resources could be done in the following ways;
  • Fleet restructuring and management
  • Redesigning the whole organization to come up with the best model which maximizes both space and capacity
  • Work smart in all the operations.
  • The quality of their services should be increased to meet the consumer’s demand and expectations in the market. This can be done using the following measures in air cargo transport;
  • There should be branding solutions to customer needs in the market
• Their systems should be designed in a manner that they can promptly respond to the emerging issues
• There should be an introduction of VIP cargo service
• Increase efficiency as much as possible to ensure zero-defect services.
• Develop standardized forms to contain specific, safety-critical information in load documentation, load manifests, and other forms used in the loading or cross-loading of an aircraft. Design and use of such forms should minimize the potential of incorrectly reporting weight and location information about the cargo loaded and operation of an aircraft.
• Develop standard procedures and guidance material to allow personnel performing or supervising safety-critical tasks to verify that all task steps are completed in the proper sequence. This process would be enhanced by efforts to ensure that supervisory personnel are not overloaded in their responsibilities to ensure they properly exercise safety responsibility to increase the integrity of the loan documentation and the cargo on the aircraft;
• Ensure training programs for cargo supervisors, loaders, and ramp personnel, including familiarization with the safety implications of aircraft being loaded incorrectly. This curriculum should contain modules that include operational information used by the flight crew and awareness of the potential problems that incorrectly loaded, unsecured or damaged cargo placed in a ULD or on a pallet may have on ground personnel, occupants of the aircraft when in flight, and the aircraft fuselage and structure.
• Develop a non-punitive reporting process to allow identification and correction of observed hazards by anyone involved in the cargo loading, packaging, or transport process. Such a program should include a means to disseminate such information to all.

References List

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Ekwall, D. l. (2009) The displacement effect in cargo theft. International journal of physical distribution and logistics management, 39 (1) pp. 47-62.

Enoma, Aghahowa. & Stephen, A. (2007) Developing Performance Indicators for Airports Safety and Security. Facilities, 25 (7/8) PP. 296-315.

Eva International (2010) Handling record-breaking volumes at Korean Air Cargo (Hitting the headline article) Web.

Express ground Handling (2008) Key Performance Indicators. Web.

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International air transport association (2010) Fact sheets (Hitting the headline article). Web.

ISEC Inc. (2008) Process Re-engineering & innovation. Web.

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Lobo, I. & Mohamed, Z. (1999) Benchmarking: an international journal competitive benchmarking in the cargo industry, l6 (4) pp. 302-309.

Reference for Business Encyclopedia (2010) Gap analysis. Web.

Xystouri, T. & Bamford, D. (2005) A Case Study of Service Failures and Recovery Strategies within an International Airline. Managing Service Quality, 15 (3), PP.306-320.