News Backgrounder
Mainland airline juggernaut powers across the globe
Increasingly affluent Mainlanders are driving the monumental growth of China’s passenger traffic. Chinese carriers are looking beyond the Open Skies agreements of old as their global market share explodes.
September 1st 2017
Recent equity links between U.S. and Chinese airlines may speed up moves to seal a long-awaited new Open Skies agreement between the two nations. Read More »
If a breakthrough agreement is achieved, it would allow the partnerships formed to apply for anti-trust immunity to coordinate networks and pricing across the Pacific.
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Chinese carriers have been on an unprecedented global expansion drive, offering low fares on long-haul routes that is putting severe pressure on competing western carriers. At press time, return economy flights between Los Angeles and Shanghai were being offered at US$722 by Hainan Airlines and $880 by China Southern Airlines. Delta’s lowest price for the route is $920.
China’s biggest carrier, China Southern Airlines, is offering Sydney to London return, via Guangzhou, for $1,420 and China Eastern Airlines is charging $1,539. In contrast, Qantas Airways’s cheapest fare is $1,717, Emirates Airline’s is $1,807 and Cathay Pacific Airways $2,147 from Australia to the UK capital.
China Southern also has been selling flights from Sydney to Seoul, via Guangzhou, for $588.30, more than one third cheaper than flying direct with Qantas to South Korea.
Flying from London to Hanoi, also via Guangzhou, costs $830 with China Southern and $1,216.50 on British Airways.
Earlier this year, China finalized a landmark Open Skies agreement with Australia and late last year agreed to a new bilateral with the UK. The China-UK agreement allowed China to increase its flights to Britain from 40 to 100 a week.
Chinese regulators are allocating 28 of the 60 additional flights to second-tier airlines, including Hainan Airlines and Tianjin Airlines, which already own traffic rights for service into the UK. Other carriers who want to launch flights between the two countries will also be approved.
However, in the case of the U.S., Open Skies discussions have stalled for months, primarily because major Chinese gateways are already congested and there are insufficient slots to meet demand.
Analysts calculate that in 2019, Beijing and Washington could finally sign a new Open Skies agreement. The reason? The first phase of Beijing’s second airport, at Daxing, will open in 2019 followed soon afterwards by a new satellite terminal at Shanghai’s Pudong Airport.
The availability of more slots at China’s two busiest airports will help solve a longstanding belief in the industry that Chinese airlines receive preferential treatment in slot allocations in their home territory.
| 'In general, the European carriers charged more and Chinese airlines charged less, with Hainan Airlines appearing to be one of the most competitive. Russia’s Aeroflot, which can connect traffic over its Russian hubs, also has low average fares. Emirates has maintained one of the highest yields in the market, with average fares that are 50% higher than the average fare in the market as a whole. In the last 12 months, scheduled capacity between China and Europe grew by 11.4%, which was close to the 11.6% expansion for the year to July 2016. In July 2017, typically the month with the second highest level of capacity being operated by airlines, seats offered grew by 12.8%, to almost 72 million, between the Mainland and Europe' |
| OAG DATA 2017 |
The CAPA consultancy said it was an “open secret” that slot allocation in China was protectionist, was not transparent and did not follow International Air Transport Association (IATA) slot guide lines. “There are well cited examples of U.S. airlines being unable to secure Chinese slots, most recently American Airlines trying for a new Los Angeles-Beijing route and United Airlines for a second daily San Francisco-Shanghai Pudong service,” it said.
“The problems are not new. American Airlines had a well-publicized incident when attempting to secure slots for its Chicago-Beijing service. It had to cancel the launch at the last minute and only received slots much later. At the same time as these incidents, Chinese airlines have secured new slots.”
The situation is changing. American Airlines has spent $200 million for 2.76% of China Southern and Delta has paid $450 million for 3.55% of China Eastern. While no equity is involved, United Airlines this year signed a deal with Air China to improve connections and enhance frequent flyer benefits between the airlines.
This new eagerness on the part of Chinese carriers to seek closer ties with western airlines is not confined to U.S. carriers. Hainan Airlines has bought 13% of Virgin Australia for $114 million and China Eastern recently announced it would acquire 10% of the Air France-KLM Group for about $440 million. China Eastern, Delta and Air France-KLM are members of the SkyTeam alliance.
China Eastern believed these investments would speed up its global expansion. Having partner carriers in three continents would build closer commercial ties, through equity deals and market cooperation agreements, between the three airlines.
“The three of us are all renowned international airlines with a history of cooperation, which lays a solid foundation for this strategic investment,” said the chairman of China Eastern, Liu Shaoyang.
“We will also start cooperation in resource-sharing and e-commerce. The goal is to enhance our internationalization in terms of competitiveness and brand,” said the carrier’s chief marketing officer, Dong Bo.
Air China, said analysts, does not feel close to United Airlines, which has the highest presence of its own metal in the Chinese market. “Air China questions whether United actually wants Open Skies. There is unlikely to be any government deal without the support of Air China, the flag carrier, and a major airline that enjoys a close relationship with the regulator,” CAPA wrote in a recent analysis.
A decade ago, U.S.-China Open Skies was regarded as standalone market liberalization, irrespective of partnerships. But now U.S.-China Open Skies is intertwined with the prospect of establishing joint ventures with antitrust immunity, CAPA said.
Chinese airlines are increasingly forming joint ventures, informed by the recognition that the future China-U.S. market is huge and the strategies of 10 years ago no longer apply.
Historically, U.S. airlines have dominated routes between China and North America. In 2011, the Chinese airline seat share of the market, excluding Hawaii and Pacific Islands, reached a decade low when Mainland carriers accounted for only 37% of U.S.-China seats and 36% of U.S.-China flights. In 2015, Chinese airlines overtook their U.S. rivals. This year Mainland carriers account for 61% of seats and 57% of flights between China and the U.S.
In the meantime, the fare dumping by Chinese carriers in international markets is continuing to hurt their competitors. OAG airline data has reported the average one way fare on flights between China and four of the largest Western European countries - France, Germany, the Netherlands and the UK - was $538 in March this year, although there were wide variations in price between airlines.
But it’s not all up, up and away. Two months ago, United Airlines announced it would close its three times a week San Francisco-Hangzhou service in October because of weakness in the China market. “In every market we serve, we continuously review and measure demand and performance,” said a United Airlines spokesman. “After careful analysis, we have determined this route is not meeting our expectations and is not economically sustainable.”
A U.S.-China Open Skies deal would certainly turn around such decisions. With anti-trust immunity and a more extensive joint venture with Air China, United could return to Hangzhou at low cost and at low risk.
Whatever the outcome, there is no sign Chinese expansion will slow. International air routes into China jumped 35%, to 660, last year, the Civil Aviation Administration of China has reported.
With manufacturers forecasting Chinese airlines will need up to 6,810 new planes in the next two decades to meet Mainland passenger demand, there is no doubt a large proportion of those aircraft will be plying routes that cross China’s borders.
