China prepares for air travel take off

With 500 airports planned for the next few years, rapid growth in low cost travel and increasing investment in digital, China’s airline modernisation programme is well underway. Sally White reports

Chinese carriers were flashing their wallets last week at the aviation annual trade venue, the UK's International Farnborough Air Show. Very early on Boeing announced a $3.39 billion deal with Xiamen Airlines, controlled by top China's airline, China Southern Airlines. That was followed by one worth up to $4 billion from Donghai Airlines, now expanding the passenger side of its business.

China is rushing to modernise its huge but disproportionately earthbound travel industry. As international consultant McKenzie pointed out in its report ‘China's Airlines Flying Higher", 35 billion long-distance domestic trips are taken each year on traditional (i.e. not even high-speed) trains and motor coaches.  

Added to that, the impact of government policy, easy access via online travel booking and visa relaxations all encourage Chinese foreign travel. Last year 109 million went abroad, according to market research company GfK. Incoming tourist numbers are rising too, reaching 57 million last year, according to the UN World Tourism Organisation. This year China's civil aviation authority's target is for overall 10.7% growth for international and domestic passengers to 485 million.

To help achieve this, several 2015 start-ups are expected to fly more, including Colorful Guizhou Airlines and Yunnan Hongtu Air. Aviation International News says that China’s commercial fleet has more than doubled from 1,047 airplanes to 2,645 in the past five years, while the number of airlines has increased from 45 to 54.

Budget carriers now account for around seven percent of China’s domestic air travel market, and analysts predict this to double by 2020

The names of China's airlines are becoming familiar to international travelers trawling TripAdvisor, Expedia and the rest. According to the US's CAPA Centre for Aviation, as published in January on financial site the Market Mogul, the Big 3 are China Southern (27% of the Chinese market), Air China (25%), China Eastern (22%) and HNA Group (15%). But coming up rapidly is the low-cost aviation sector.

Since late 2013, the Civil Aviation Administration of China has encouraged low-cost airlines to expand. It wants them to increase links with neighbouring countries as well as internally. Budget carriers now account for around seven percent of China’s domestic air travel market, and analysts predict this to double by 2020 as they add routes and update their fleets. Last December Spring Air, China’s largest budget airline, signed a $6.3 billion deal to buy 60 A320neo jets from Airbus.

In addition, this sector’s growth potential has led some state airlines to convert to low-cost carriers, according to the Market Mogul. In 2015, it reports, China Eastern Airlines converted its China United unit into a budget carrier, and Juneyao Airlines set up a low-cost subsidiary. West Air switched to budget in 2013, and Lucky Air, another carrier which is part of HNA Group, is the process of doing the same. Reuters says that China Southern Airlines is also considering setting up a budget subsidiary.

Speculation has been growing that Chinese airlines will make quantum leaps internationally. The Chinese civil aviation authority plan is to set up Beijing, Shanghai and Guangzhou as international airport hubs to boost international business.

Taking a stake

Several conglomerates have picked up stakes in Virgin Australia, including HNA and Nanshan Group, putting about a third of the airline in Chinese hands. (HNA owns Hainan Airlines and Nanshan controls Qingdao Airlines). In an alliance with HNA, Virgin Australia now plans to start direct flights to and from China. International bankers Credit Suisse suggest domestic rival Qantas could be China's next investment target.

Chen Feng, the founder of Hainan Airlines is reported by China Travel News to be interested also in both the low-cost UK airline Monarch and London City airport (if it came back on the market.)

This trans-ocean stake building is not just one-way. Last year US airline Delta took a 3.55% stake in China Eastern. The deal made the US carrier the first to own part of a Chinese airline, to build a base for more services. Then this March Air China and United announced closer cooperation that will ‘prepare both companies for future joint opportunities’.

Heavy spending by the airlines is cutting yields, however, noted the China Daily a few weeks ago as routes expand, serviced by the latest aircraft.  All three top carriers reported jumps in their available seat miles (ASM, which measures a flight's passenger-carrying capacity) on international routes.

China Dailyreports that last year, China Southern Airlines saw its ASM climb by 30% over the previous year. China Eastern Airlines and Air China each had ASM growth of nearly 25% and 20% year-on-year, according to their latest earnings reports. But they saw declining yields, or passenger revenue per available seat mile, on the international routes. Air China, China Eastern and China Southern, experienced a yield decline of 19%, 4.7% and 10.3% year-on-year, respectively.

Heavy investment in digital

The airlines are also investing heavily in websites, mobile apps and payment technologies. This is to meet a benchmark set by China's Supervision and Administration Commission, which dictates that state airlines must obtain 50% of seat sales directly by 2018. The South China Morning Post says the largest airline, China Southern, was the first to begin a zero-commission policy for agents in June 2015. The subsequent commission saving cut costs heavily, as sales via its mobile app and WeChat account more than doubled. China Eastern Airlines (CEA) and Air China followed, with the same result. CEA has also recently selected Worldpay as its primary international payments provider, a deal it claims saw payment acceptance rates across the carrier’s growing list of websites rise to over 90% in the weeks following implementation.

At Air China, according to the South China Morning Post, board secretary Rao Xinyu said there was an 85% rise in revenue from direct e-commerce. This was including the airline’s official website, mobile apps and flagship stores on its online booking platforms. OTAs are reportedly under pressure following an edict from the Chinese Civil Aviation Authority that their fees must be set at fixed rates and not on sales.

China seems determined to grow its airlines, hence forecasts of 500 more airports in the next few years. No doubt it has its eye on such estimates as International Air Transport Association's that by 2034 one in five passengers worldwide will be traveling to, from or within China. Naturally, China wants its own airlines to exploit this massive market.

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