CRM Strategy of Air China

Customer Relationship Management

Professor Werner J. Reinartz

Hongjing Liang
Shipeng Wang
Jing Gao
Tony Qin

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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 1998-2003 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 2002-2007 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 2003. 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 Japans 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.

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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. CRMs 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 Chinas
CRM initiatives.
Intensified competition in domestic market
The competition is two-fold. Firstly, there is competition between airline and other players of

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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

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now proactively preparing for its privatization and listing in various stock exchanges.
Future development trend in China airline industry
Looking forward, Chinas entry into WTO and the countrys 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 1997. 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 1994.

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 Chinas passengers can choose to become the member of this program. In order to attract

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more customers, Air China makes the registration process as simple as possible. The mileage that a
member flies will be automatically recorded into the customers 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

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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.

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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

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baggage handling, they have received positive feedback from the target segment, which
substantially improve Air Chinas value proposition.
Direct mailing
Air China sends regular direct mails or emails 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

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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 Chinas 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 Chinas
CRM activities, and it is very common that many airlines dont have the capability to track the

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result of their CRM programs. Nevertheless, Air Chinas 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 Chinas 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 dont
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

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domestic airlines on CRM strategy doesnt 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 theyve

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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 e-mail 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.

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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.

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References:
1. www.airchina.com.cn
2. www.caac.gov.cn
3. Declan Boland, Doug Morrison and Sean ONeill, The future of CRM in the airline industry, IBM
Institute for Business Value.
4. Airlines in China, Datamonitor. Reference Code: 0099-0756

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Exhibit 1 China Airlines Market Value Forecast: 2002-2007

Exhibit 2 The Growth of China Airlines Market: 2002-2007

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Exhibit 3 Market Segmentation: Domestic market vs. International market

Exhibit 4

China Airline Market represents 19.6% of the total Asia Pacific Market

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CRM Strategy of Air China

Exhibit 5 Increase in Zhi-Yin Club membership

Zhi-Yin Card Membership (thousands)

1400
1200
1000
800
600
400
200
0
1998

1999

2000

2001

2002

2003