August 11, 2008
E-commerce at Yunnan Lucky Air
Inaki Berenguer, Cai Shijun, Li Liang, Liu Jing, Ningya Wang
Preserve the essence of traditional Chinese culture while learning from successful models of
- Yunnan Lucky Air, statement of corporate culture
Fortune had favored Yunnan Lucky Air. Four years after its founding in 2004, Lucky Air had grown
into a US$104.3 million (RMB720 million) low-cost airline, serving domestic routes from its hub in
Kunming, the capital of southwestern China’s Yunnan province. Yunnan was one of China’s top
tourist destinations, famous for its beautiful landscape and multi-ethnic culture, and Lucky Air had
successfully attracted ...view middle of the document...
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E-COMMERCE AT YUNNAN LUCKY AIR
Inaki Berenguer, Cai Shijun, Li Liang, Liu Jing and Ningya Wang
cutting edge of technology and reap the same rewards as Southwest Airlines and similar U.S.
competitors. Yet Lucky Air’s executives had to decide what was right for their company, customers,
and market. If they chose the wrong expansion strategy or missed the mark with e-commerce, then
the company’s luck might run out forever.
Passenger Aviation in China
China’s airline industry had benefited from the country’s rapid economic growth in the previous
decades and the significant increase in Chinese people’s disposable income. The Civil Aviation
Administration of China (CAAC) anticipated an average annual growth rate of 15% for air traffic up
through the year 2020. In 2007 alone, passengers in China increased to 387 million, a 16.8% jump
from a year before. Roughly 349 million passengers traveled on domestic flights, a 16.7% annual
increase, and 38 million passengers traveled on international flights, a 17.5% annual increase.
Moreover, an increasingly large percentage of these passengers traveled for vacations and leisure and
paid the airfare themselves (see Exhibit 1).
There were 25 airlines operating in China by the end of 2007. The three biggest national airlines –
Air China, China Eastern Airlines, and China Southern Airlines – dominated domestic air travel,
accounting for a combined 83.7% market share. The airline industry was heavily regulated, but
recent years had seen some relaxation of government regulations and the founding of a number of
new airlines. A wave of new low-cost airlines had emerged, making domestic travel more affordable
for everyone. Analysts estimated that about 780 routes were appropriate for low-cost flights, based
on route popularity, trip length, and similar factors, and that by 2013 25% of passengers would be
carried by low-cost airlines with a projected growth rate of 20% per annum.1
The growth potential attracted many new entrants and intensified competition. Government
regulations restricted airlines’ ability to reduce ticket prices, yet the sheer abundance of low-cost
airlines pressured each to lower its ticket prices as much as possible. Some airlines opted to expand
beyond offering flights alone. Spring Airlines, launched in 2005 and based in Shanghai, flew to 23
destinations within China and had achieved US$72 million in revenue and US$4.3 million in net
profit by the end of 2006. The key to Spring’s growth strategy had been the decision to pursue the
large Shanghai tourist trade by offering discounted...