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15 new passenger airlines to launch in China. Though small in size, they will rattle the status quo

3rd May, 2014

China in the next year could see about a 50% increase in its number of passenger airlines. There are 15 known airlines that either plan to launch or have launched in recent months. This rapid growth comes as China loosens restrictions on new carriers that have been in place since mid last decade. These new carriers join about 10 airlines launching in other parts of Asia in 2014. Whereas those 10 airlines outside of China are exclusively low-cost carriers, almost all of China's new carriers will be full-service – at least initially.

There is a wave of LCC interest in China accompanied by some regulatory liberalisation, such as on minimum fare pricing. Yet there are more policies that need to be loosened or streamlined, and then upheld in practice. While there is large growth in the number of airlines, their size will be small. Recently-launched Loong Airlines has about 12,000 weekly domestic seats compared to China Southern's 1.7 million. But there will be impacts in the specific markets these new airlines operate in. Their ultimate, long-term potential with a new business model or one free of legacy weight is the larger worry for the country's incumbents, including the behemoths, which are among the world's 10 largest airlines. China's major airlines have been publicly quiet on this market re-ordering but are closely watching it, and planning their own response.

In China 15 new passenger airlines intend to launch over a year

In late 2013 there were about 25 scheduled passenger airlines in China. (This number is actually subject to interpretation as some airlines fly under a parent company's code.) From late 2013 to Apr-2014, three airlines entered the passenger market: Loong Airlines, Donghai Airlines and most recently Qingdao Airlines on 26-Apr-2014. 

There are a further 12 known airlines hoping to launch by the end of 2014, collectively giving China 15 new airlines since late-2013. The proposed carriers' readiness varies from still awaiting approval to planning a first flight in the next few weeks.

Summary of proposed new Chinese airlines: May-2014 

Airline Name

Status

Model

Airline Shareholder

Shareholding

Base

Fleet

Notes

Chang'an Airlines

Waiting

FSC

 HNA

TBA

 TBA

TBA 

HNA in May-2013 announced it would seek to launch Chang'an and four other proposed new airlines. However, Chang'an was an existing airline integrated into the larger HNA Group. As recently as 1H2013 HNA has reported separate financials for its Chang'an unit. It is unclear what the development plan is.

Donghai Airlines

Launched

FSC

N/A

East Pacific Group, share unknown

Shenzhen

737-800

Donghai Airlines is a carrier based in Shenzhen, China. A subsidiary of the East Pacific Group, Donghai Airlines has operated cargo services and corporate jet services since its establishment in 2002. In Dec-2013 the carrier received approval to provide scheduled passenger services and as of Mar-2014, the carrier commenced domestic services from its hub at Shenzhen Bao’an International Airport to the cities of Ningbo and Dalian. The carrier plans to roll-out further domestic services as well as introduce international services to regional centers such as Hong Kong and Ho Chi Minh.

Fuzhou Airlines

Waiting

FSC

 HNA

CNY1200 million (USD187.5) million from HNA (60% stake)

CNY400 million (USD62.5 million) from Fuzhou State-owned Assets Investment Holdings Co (20% stake)

CNY200 million (USD31.3 million) split between Century Golden Resources Group andNingboRuitong Network Technology Co (each with 10%)

Fuzhou 

TBA 

Fuzhou Airlines was announced in mid-2012 as a proposed start-up carrier to be based in its name city of Fuzhou in Fujian province. The carrier is a cooperation between HNA Group and the Fujian provincial government and will operate as a subsidiary of Hainan Airlines. Fuzhou Airlines plans to operate services within Southern China and will compete with Xiamen Airlines, which has a 50% market share in Fuzhou and is a subsidiary of China Southern. In May-2013 Hainan said it was still awaiting government approval.

Guangxi Airlines

Waiting

FSC

 HNA

TBA

 Nanning

 TBA

Another HNA-affiliated start-up, Guangxi Airlines plans to be based on Tianjin Airlines’ Nanning branch, which is also a subsidiary of Hainan Airlines. The carrier is set to further improve Tianjin Airlines’ regional network, or may expand into South Asia

Guilin Airlines

Waiting

FSC

HNA

TBA

Guilin

TBA

Guilin Airlines is a start-up planning to launch services in May-2014. The carrier will be a JV between HNA Group and Guilin’s Municipal Government. The airlline was jointly established in order to boost the development of the tourism industry in Guilin. HNA vice chairman Chen Wenli said Guilin Airlines proposes to operate three aircraft initially with plans to expand its fleet to 30 aircraft in three years.

Hefei Airlines

Waiting

FSC

 Joy Air

TBA

 Hefei

3x MA60 

Hefei Airlines is a joint venture between Hefei Municipal Government and Joy AirAviation Holding, which is partially owned by China Eastern. Hefei Airlines plans to launch scheduled services by year-end 2013 with three aircraft. By 2020, the carrier plans to operate a fleet of 30 aircraft serving 50-70 routes including international services. Hefei has been delayed, initially expecting to launch by the end of 2012. Then it was to be established in Jun-2013. In Aug-2013 the carrier said it expected to submit its application shortly. Hefei reportedly wanted to purchase Airbus narrowbody aircraft to tackle thicker routes, but Joy Air part-owner AVIC wanted Hefei to focus on regional routes and use the aircraft AVIC manufactures in Xi’an.

Heilongjiang Airlines

Waiting

FSC

 HNA

TBA 

Likely to be in Harbin

TBA 

Heilongjiang Airlines is a proposed Chinese start-up to be launched as a JV between HNA Group and China’s Heilongjiang Provincial Government after signing a strategic cooperation agreement in Mar-2013. The carrier will focus on expanding services in China’s northeast. Heilongjiang Airlines may be based on the operating model of Capital Airlines, ocused on regional routes and charter travel as its main business. 

Jiangxi Airlines

Waiting

FSC

N/A

CNY400 million (USD62.5 million), details unknown

Nanchang

TBA

Jiangxi Airlines is a proposed Chinese start-up planning to launch services in Jul-2014. Jiangxi Airlines Investment Co is a JV between several state-owned companies in Jiangxi Province, including the Jiangxi Airport Group. Jiangxi Airlines has visited several airlines including Air China, China Southern Airlines, China Eastern Airlines and Xiamen Airlines and is planning to visit additional airlines in order to secure cooperation with its launch.

Jiu Yuan Airlines

Waiting

LCC

Juneyao Airlines

TBA 

Guangzhou

TBD

Shanghai-based private carrier Juneyao, which launched during last decade’s liberalisation wave, has reportedly received preliminary approval to operate a Shanghai-headquarted, Guangzhou-based LCC called Jiu Yuan Airlines. Its name derives from its lead-in fares of RMB9, made possible by the recent removal of minimum fare regulations. Rival Shanghai carrier Spring follows the LCC model (Juneyao is full-service) and had planed to have a base in nearby Shenzhen, but this appears to be a fading thought. Jiy Yuan may use the English name 9 Air and intends to launch in mid-2014 on domestic routes and expand to international services within a few years.

Loong Airlines

Launched

FSC

 N/A

TBA 

Hangzhou 

A320 

Zhejiang Loong Airlines (operating with the abbreviated name Loong Airlines) is a Chinese start-up based in Hangzhou. The carrier signed an MoU for 20 A320 family aircraft, including 11 A320ceo and nine A320neo in Sep-2013. Loong is, according to reports, the re-branded name of CDI Cargo Airlines, which operates three 737-300Fs from Hangzhou. Loong launched on 29-Dec-2013 with service from Hangzhou to five domestic destinations. As of May-2014 it operates four A320s and one 737-300F. Regional (Hong Kong/Macau/Taiwan) and international operations are hoped to commence in three to five years time.

Qingdao Airlines

Launched

FSC

Shandong Airlines

CNY250 million (USD39.1 million)QingdaoMunicipal Transport Development Group Co (25%)

CNY550 million (USD85.9 million) from Nanshan Group Co (55%)

CNY200 million (USD31.3 million) from Shandong Airlines (20%)

Qingdao 

A320 

 Qingdao Airlines is a Chinese start-up established by Air China, Nanshan Group and the Qingdao Municipal Government. The carrier  received CAAC approval around May-2013/Jun-2013, a speedy timeframe as Qingdao government only publicly stated in Oct-2012 its desire to have a local airline. The first flight was on 26-Apr-2014. Qingdao Airlines is being sponsored by Shandong Airlines, which is partially owned by Air China. Air China’s indirect ownership likely helped the process along. The airline plans to launch in 1H2014 with leased A320 equipment, possibly numbering five in the short-term. Qingdao Airlines inSep-2013 announced an order for a total of 23 A320 family aircraft, including five A320ceo and 18 A320neo with the first delivery expected in 2016.

Ruili Airlines

Waiting

FSC

 N/A

CNY600 million (USD93.8 million), 100% owned by Yunnan Jingcheng Group 

Kunming and Mangshi

737s 

Ruili Airlines is a Chinese start-up planning to launch services from Kunming Changshui International Airport. It received CAAC approval in May-2013, the first of the new wave of carriers to do so. While the carrier received its first aircraft in Feb-2014, its launch appears delayed. The new carrier will be 100% owned by Yunnan Jingcheng Group and plans to utilise Boeing 737-700/737-800 equipment. CEO Dong Lecheng said the start-up carrier will launch 10 routes including Mangshi-Kunming, Mangshi-Beijing, Mangshi-Shanghai and Mangshi-Guangzhou. In Aug-2013 Ruili Airlines and Boeing signed a purchase agreement for 14 Boeing 737 aircraft including eight 737-700s and six 737-800s. The carrier also signed purchase agreement with Air Berlin for two 737-700s in 2013 and two 737-800s in 2014. By 2020, the carrier plans to expand its fleet to 45 aircraft. Although privately owned, flight inspectors to come from China Eastern AirlinesYunnan while management staff will also be recruited from China Eastern Yunnan. Technicians from Sichuan Airlines Group and Civil Aviation Flight University of China.

Urumqi Airlines

Waiting

FSC

HNA 

TBA 

Urumqi 

TBA 

Urumqi Airlines is a proposed Chinese start-up which is a JV between the Urumqi municipal government and HNA Group. Urumqi Airlines plans to take over Hainan Airlines’ operation at Urumqi which includes seven Boeing 737-800s based at the airport. Urumqi Airlines will also expand internationally from Urumqi to Central Asia, Europe and the Middle EastHainan Airlines is expected to be the controlling stakeholder in the start-up although the ownership structure has not been decided.

Yangtze River Express

Waiting for passenger flights

FSC

HNA

In Jul-2013 HNA reported its stake as 51%, but intended to wholly-own Yangtze River Express after other shareholders sold their stake.

Shanghai

TBA

Shanghai-based Yangtze River Express is a cargo airline owned by the sprawling HNA group. The carrier was established in 2003 and as of May-2014 operates 20 freighter aircraft: 17 737s and three 747s. Reports from Apr-2014 indicate the carrier has applied to the CAAC to have passenger flights, thereby increasing HNA’s exposure in the Shanghai market.

(Unspecified – regional carrier)

Waiting

FSC

Okay Airways

TBA

TBD

TBD

Okay Airways is a privately owned carrier unaffiliated with others. It is based in Tianjin and follows the regional model, although its fleet of eight MA60s is complemented by 11 larger passenger 737-800s, with additional 737 variants on order. In mid-2012 Okay said it submitted an application to base a regional affiliate at Harbin in Heilongjiang province. In Aug-2013 Okay said it had filed an application to launch a regional carrier in 2014, but it was not made clear if this was new, a revised or the same application as 2012. The announcement that HNA and Heilongjiang provincial government agreed to form Heilongjiang Airlines appears to conflict with Okay's initial plan to have a carrier in the same province. HNA may have decided no to go with Okay. Okay said new affiliates would have separate branding and be part of its effort for a country-wide regional carrier network. Okay has spoken of eventually operating over 100 MA60s.

 

See related reports:

Of the 15 new airlines launching, four airline groups will continue to dominate

While China may experience a 50% growth in its number of airlines, top-level market share among its main groupings will remain intact.

In Oct-2013, 89% of domestic seat capacity in China was held by four airline groups:

  • Air China,
  • China Eastern,
  • China Southern and
  • HNA, according to OAG data.

Of the remaining 11% of airline seat capacity, just under half was held by Sichuan Airlines, which has direct/indirect stakes from Air China, China Eastern and China Southern.

So only about 6% of seat capacity was held by unaffiliated airlines. (More up to date data is not yet possible as some new airlines have not filed schedules.) 

Seat share of China's domestic market: 07-Oct-2013 to 13-Oct-2013

Many of the new or proposed airlines are affiliated with an existing airline group, and that group is often HNA.

Market share changes are a worry to the big airline groups, which take the strategic view their pricing ability is derived from market share, so it must be maintained as closely as possible. Any market share gains at privately-owned HNA are a concern to state-owned Air China, China Eastern and China Southern. But even market share changes amongst Air China, China Eastern and China Southern are extremely sensitive as the three are intensely competitive with each other.

Entirely new and private carriers may thus not see a large impact in the overall market, as some have stated to downplay their impacts for strategic reasons. However, this ignores the specific city-pairs where the carriers will have impacts. Incumbents are worried about the long term given the growth potential for the new airlines, a few of which have announced orders for aircraft from Airbus and Boeing.

Start-ups have a targeted impact on specific routes. With time, the impact will grow, worrying the big carriers

Much discussion on the Chinese market centres on the state-owned big three (Air China, China Eastern and China Southern), which account for about three-fourths of the market. In this framework, even Spring Airlines is discounted from the discussion as its 30-plus aircraft and single-digit marketshare pales in comparison.

But such views ignore the importance of a local focus, such as Spring holding about a 10% share of the Shanghai market. Impacts extend beyond marketshare: Spring's mere presence, even small, on routes impacts incumbents' yields. And Spring specifically is having influence beyond its route map; regulator CAAC upheld Spring in 2013 as an example of efficiency, with the connotation China's other carriers need to emulate Spring's efficiency.

None of the new carriers is yet being paraded, but they are making small gains. On Loong Airlines' largest route, from its Hangzhou base to Xi'an, it has captured about a 17% share of seat capacity. This ignores yields and ultimate profitability, but shows that a six-month-old carrier with four A320s can quickly become a force to reckon with. Hangzhou-Xi'an is just one route, but Loong is young.

Hangzhou Airport to Xian Airport (seats per week, one way): 19-Sep-2011 to 26-Oct-2014

The atmosphere largely pervading incumbent carriers is that there are new start-ups and they are small for now; the issue is that their future potential is a threat. While the new airlines for the most part may not be based in first- or even second-tier cities, they will want to serve first-tier cities from their base, bringing new fronts of competition on numerous routes into major cities.

Incumbents see a slippery slope of one small airline today becoming bigger and being joined by many new airlines. Certainly, the entry of 15 new airlines over a single year raises the question how many more airlines are to come. While the current scenario may seem unsustainable since the multiple carriers fail to gain synergies, their local ownership in a specific city or province largely prevents consolidation - while possibly providing artificial support where unprofitability is outweighed by local economic and social interests.

In the long term, consolidation will be healthy. In the short- and medium term, airlines are rightfully seen as economic generators, and cities and provinces are itching to have an airline to call their own. It is a regional take on the epithet "You can't be a real country unless you have a beer and an airline."

The low-cost model is likely the end game. When and how remain the questions

There is seemingly a paradox of the CAAC regulator encouraging greater adoption of the low-cost model while most of the proposed new airlines are planning to follow something closer to the full-service model. Even one start-up, Qingdao Airlines, says it plans to be a "boutique" carrier, although the exact message of how it will deliver on that appears muddled. But perhaps one should not read too much into statements so early in a market where there is still much growth potential irrespective of business type.

Most insightful if anything from Qingdao's statement is perhaps what the "boutique" statement says about China not being as market- or strategic-oriented as elsewhere. With the exception of Spring and smaller initiatives from other carriers, the full service model is what China knows and has created support and regulations for.

China's mass market (excluding the relatively small premium sector) is largely extremely price sensitive and loyalty is almost non-existent. With a drive for lower fares in what is largely a short-haul market, low-cost travel is the obvious way for the future, just as it has been in so many other markets. Yet Spring Airlines, probably the only genuinely low-cost model,  will be the first to comment on the challenges it still faces.

Carriers like West Air transforming into LCCs see their job only half-done; further progress requires change from the regulator. The regulator meanwhile is cautious about unleashing its own dragon, and faces pullback from incumbents.

Government reforms are making start-up and low-cost environment more sustainable. But work remains

Since late-2013, China has announced reforms to better support start-ups and LCCs. As CAPA previously wrote:

When CAAC vice-administrator Xia Xinghua proclaimed “We urgently need to develop LCCs” at a public forum in Beijing on 5-Nov-2013, it became clear that fundamental changes are on the way for low-cost carriers and the overall aviation market in China.

Within the overriding goal of ensuring stability for the Big Three Chinese flag carriers, it will not be a simple process. One thing is very clear however: the CAAC is serious about introducing significant change in the sector. This includes approving new carriers, reforming airport charges, introducing LCC terminals, changing aircraft acquisition processes and taxes, not requiring approval for new routes, and the ever-topical matter of airspace reform (albeit largely outside its control).

The forthright move is part of a wider commercial agenda of China's new leadership, which meets again on 9-Nov-2013, seeking to find the right formulas to allow greater play of market forces, while maintaining appropriate regulatory backstops. Purists will see this as being half pregnant. For example, in Oct-2013 the CAAC abolished minimum pricing requirements in the domestic market, an important step for LCCs; but price caps remain as a consumer protection measure – despite total price freedom being integral to LCC structures.

But China has repeatedly shown the ingenuity to evolve tailored solutions that fit the very different environment in this enormously complex country. There will be a "China solution" and it will allow more LCC operations – but there will be differences

See related reports:

While the reform initiatives have been formalised, they remain subject to interpretation and implementation.

Airlines looking to become LCCs are also finding the reforms, while significant, are only a start and much more loosening of the reins will be necessary. To start with, airlines are unclear if new initiatives taken in the market will require approval for each airline, and if initiatives must be individually approved. This sort of uncertainty and any lack of procedural transparency can very quickly stifle the innovation and agility LCCs use to succeed.

Outlook: start-up victories will be small, but are important steps

Even if all 15 – or more – proposed airlines launch, they will have a small overall capacity impact in the short term. In some cases they will make tangible gains on certain routes, but overall will still have a minority position; Loong Airlines for example is not even one of the nine largest carriers in the city (Hangzhou) it is based in. That will change with time, but more important for the present is the impact these new airlines have merely by virtue of their existence.

Incumbents do not need to be told of the rapid growth efficient airlines like LCCs have had in other markets. It is well accepted that China's market must and will change, with market share slowly redistributing across other carriers, and with LCCs having a much larger role. Impacts on existing businesses could in the long-term be profound.

The seeds now being sewn that will bring about this change. An exact timeframe for this shift and its impact is difficult to predict, but with the CAAC embracing the concept of LCCs, the expectation is that once it starts the change will happen very quickly.

While state-owned carriers are hardly bastions of efficiency, along with their market power they have an early start over these new entrants in studying the low-cost model.

Having launched, the challenge for the new carriers is surviving today and already planning for a very different tomorrow. Airlines will be cautious of experimenting for fear of failure, but this is a necessary step for adaptation. In China's unique market, that adaptation does not need to be prescribed on the same lines as the world has already seen. China's airlines can create new solutions. And, like Spring, the bold will break from the pack.

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