China's airlines see growth despite recession and increased competition from high-speed rail

“High-speed rail is overtaking air as the preferred means of travel on certain routes,” says Jessica Lo, managing director, CMR. “Consider, for instance, the Shanghai to Wuhan trip. It used to take 11-plus hours by train, but now it is only five. When you add in travel time to airports and frequent flight delays, more people are choosing rail.”

Most of China’s cities will be connected by high-speed rail by 2020, and by as early as 2012 China is poised to lead the world in track mileage. China’s regional airlines and low-cost carriers (LCCs) are feeling the impact. Late last year, for example, Spring Airlines, the country’s leading LCC, shuttered its Chengdu to Chongqing line, and began re-appraising other routes of less than 1,000 kilometres.

Despite this, 2009 was still a banner year for air travel in China. Spring Airlines itself reported a 27 per cent increase in operating revenue to Rmb1.99 billion, and a sevenfold jump in profit to Rmb158 million. Good fortune also returned to Air China, China Southern and China Eastern - dubbed the big three - and smaller regional airlines, which collectively saw their loss of Rmb31.8 billion in 2008 turn into a profit of Rmb7.4 billion last year.

Driving profit was an increase in domestic flights. Boardings rose 13 per cent last year to 260 million. Aviation industry watchers say China’s economic stimulus of Rmb4 trillion helped boost both domestic business and leisure travel.

International travel lags behind. Inbound and outbound air traffic to and from China peaked in 2007, with arrivals at 17.1 million and departures at 16.2 million, according to Euromonitor. Ironically, the 2008 Beijing Summer Olympics depressed international tourist arrivals, due to increased security measures, as did natural disasters such as the 2008 snowstorms and the Sichuan earthquake, as well as political unrest in Tibet and Xinjiang.

China’s outbound travel could recover this year, even as the rest of the world’s travel markets languish from the global recession hangover. Increased departures would benefit the big three most of all. In a TNS survey of airline choice for past and pending international flights, Chinese respondents overwhelmingly selected their national carriers over foreign airlines.

Leading was Air China, followed by China Southern and China Eastern. Well behind these were foreign carriers such as Singapore Airlines, United Airlines, Cathay Pacific, Japan Airlines and Dragonair.

Yet consumer perceptions sit at odds with their purchase behaviour. “Foreign airlines definitely have a brand position at a higher end than domestic carriers,” says Lo. “They are viewed as having newer and safer planes, and Chinese travellers like their service. Singapore Airlines and Cathay get high marks.”

Umang Pabaru, Nielsen’s managing director, Greater China consumer research, says Chinese carriers are aware of this perception gap.

For Chinese travellers, the factors ranking as most important are safety, airfares, on-time departure and onward connections, followed by extras such as inflight service, frequent flyer programmes, lounges and inflight shopping.

“Chinese airlines understand that service is important, and they are improving,” said Pabaru.

Fuelling this is the ability of Chinese to research their travel plans online. Nielsen research shows that 61 per cent of experienced travellers searched the internet for destination information, and 48 per cent participated in travel discussion forums. The online experience far outweighed information from travel agents (41 per cent), family or friends (38 per cent), or traditional media (30 percent).

Trailing online research, however, is fulfilment. Online booking is low, due in part to low credit card penetration and a lingering distrust of online payment. Ctrip, which handles more than half of China’s online bookings, and second-ranked competitor, eLong, still complete many bookings by phone.

Analyst Comment

Soumyajyoti Basu, Consultant, aerospace and defence, Frost & Sullivan
“China Southern Airlines, Air China and China Eastern Airlines became profitable in the last two quarters of 2009, becoming among the first of the world’s airlines to recover from the global recession. The reasons for their success are manifold. China’s economy grew in the high single digits, creating demand for business and leisure travel. Even as passenger volume shrank elsewhere, air-traffic increased eight per cent in China.

China’s airlines also saw gains in efficiency. Less efficient carriers are being phased out. Eastern Star Airlines, for example, went into liquidation in early 2009. A merger between Shanghai Airlines with China Eastern Airlines will further improve capacity utilisation.

Meanwhile, China’s big three are expanding their footprint overseas through investments and service alliances with global airlines. Air China plans to increase its stakes in Cathay Pacific and Air Macau. Through such moves, Chinese airlines are learning about Western fleet management.

Yet, challenges remain. What will happen to domestic demand after the effects of the government’s economic stimulus fades? Will demand dip if the government tightens monetary policy? Also, high-speed railroads present a threat to domestic air travel. The expansion of these rail networks in eastern and southern China could decrease load factors on short flights by as much as 20 percent.

Even so, the IATA says the Chinese airline industry is well positioned to weather the global recession. The fact that most flights originating in China end in China means that performance is tied to China’s rather than the worldwide economy.”

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This article was originally published in the 11 February 2010 issue of Media.