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A new wave of LCCs for China?
October 1st 2014
It is no surprise that China’s airlines have hit a rough patch. The once over-regulated industry was bound to encounter challenges as it moved to the competitive global stage. Read More »
Although most of China’s airlines still benefit from some form of subsidy, they are now largely corporate entities, which must deal with the same problems that face their regional and global rivals.
And so to 2014, when four factors outside the industry’s control resulted in mostly losses or profit declines for China’s carriers in the first half of this year.
The first setback was the unexpected reversal of the renminbi’s exchange rate against the U.S. dollar. Secondly, the Mainland’s ongoing crackdown on corruption was depleting the premium cabins of passengers as errant officials had their extravagant air travel habits curtailed.
At the same time, a new competitive threat emerged: the government’s policy of supporting the development of low-cost carriers by Mainland operators, announced last December. These three factors, coupled with constant competition from an expanding, and cheaper, high speed national railway grid, have eroded airline yields.
Despite this difficult operating environment, the “Big Three” carriers – Air China, China Eastern Airlines and China Southern Airlines – are planning LCC subsidiaries. No doubt there will be more China budget start-ups as investors hope to emulate the success of regional LCCs such as AirAsia.
The new LCCs will struggle to find sufficient landing slots at Beijing, Shanghai and Guangzhou to launch their services, as Spring Airlines, the country’s biggest existing budget flyer, has discovered. Nor will they find it is easy to operate the low-cost carrier model in a country where serious air traffic congestion, causing long delays, is a 24/7 problem.
But that is not the idea anyway. The government wants the budget carriers’ growth to be focused in China’s vast and underdeveloped Western provinces. And China’s airlines seem prepared to do what they are told. LCC hopefuls have ordered dozens of new single-aisle jets from Boeing and Airbus.
Whether they can be operated profitably once these aircraft are delivered is another question altogether. Given the difficulties they face, it is hard to see budget operations in China growing at the pace seen in Southeast Asia or in other parts of the Asia-Pacific in the last decade.
