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Beijing-Shanghai airfares slump as high-speed rail service commences


The Beijing-Shanghai high-speed railway commenced operations on 30-Jun-2011 and the impact on economy airfares and hence yields on the route have been immediate and significant, with a slump in economy fares of 52% coinciding with the rail launch. However, fares in the higher-yielding and less price sensitive business and first-class markets appear to have remained relatively unaffected.

Ahead of the launch of the high-speed rail network, China Eastern Airlines and several other Chinese carriers  denied reports that their recent fare discounts on the Beijing-Shanghai sector are in response to the opening of the Beijing-Shanghai high-speed rail link. According to Qunar, a Chinese travel search engine, fares on the lucrative Beijing-Shanghai sector are down by an average of 40% to 50% with the lowest fare at a 65% discount at CNY400 (USD62), which is lower than the cheapest ticket for the high-speed rail of CNY410. Ctrip similarly stated that airlines have slashed some ticket prices by up to 65% to below the cost of the cheapest rail pass.

An analysis of ITA fare data reveals that fare reductions on the sector coincided with the launch of the network, with economy fares slumping 52%. This fare reduction is in marked contrast to what occurred prior to the line launch, with fares on the sector increasing over the eight-month period prior to its launch. Economy fares in this period were in the USD360 to USD408 range, increasing over this period, but have slumped to between USD268 and USD339 for the Jul/Aug-2011 period, according to ITA data.

Return fares on Shanghai Pudong-Beijing sector (economy class, most convenient route)

Return fares on Shanghai Hongqiao-Beijing sector (economy class, most convenient route)

In the economy classes, price competition between the modes will continue be intense, particularly in periods of lower seasonal demand. Some predictions have high-speed rail capturing between 1.3% and 5.3% of domestic airline passengers annually by 2014 and airline revenues declining by a correspondingly higher 3% to 8%, due to shrinking demand and pricing pressures.

Fares cheaper than the airfare

China’s Ministry of Railways Vice Minister Hu Yadong in Jun-2011 announced the pricing structure of the high-speed rail link, with the fares being less than expected, increasing the threat to domestic airlines on the route.

Based on the pricing structure, fares range from CNY410 (USD63) to CNY1750 (USD269). One-way fares on the 250km/h trains will start from CNY410 (USD63) for second-class seats to CNY650 (USD101) for first class while fares on the 300km/h trains will start from CNY555 (USD86) for second-class seats to CNY1750 (USD271) for business class.

According to Morgan Stanley, the cheapest tickets on the slower train will cost about CNY0.31 per kilometre compared with other high-speed rail lines that charge around CNY0.47 per kilometre for the cheapest tickets. The cheapest ticket on the 300km/h Beijing-Shanghai train is priced at around 35% of monthly disposable per capita income for urban dwellers.

Meanwhile, fares on three existing bullet-train lines (Wuhan-Guangzhou, Zhengzhou-Xian and Shanghai-Nanjing) will also be reduced by 5% from 01-Jul-2011 to coincide with the Ministry slowing trains to 300km/h to boost operating costs and increase passenger numbers.

Responding to the pricing structure, China Southern chairman Si Xianmin noted that “the fare for the Beijing-Shanghai high-speed rail will be cheaper than airfares, and the travelling time will also be a lot shorter”. A flight typically takes two hours, excluding travel time to the airport and check-in time. Additionally, around 25% of Chinese services experience delays.

The nation’s airlines are gearing up for a fight, maintaining services and improving their product offerings. Capacity between Shanghai (Pudong and Hongqiao) and Beijing has increased from a combined 78,833 seats in the week between 30-May-2011 and 05-Jun-2011 to 86,745 seats in the week commencing 27-Jun-2011 to 03-Jul-2011. This is increasing further to 90,533 seats in the week ended 31-Jul-2011.

Shanghai Hongqiao Airport to Beijing Capital Airport (seats per week, one way, 30-May-11 to 25-Dec-11)

Shanghai Pudong Airport to Beijing Capital Airport (seats per week, one way, 30-May-11 to 25-Dec-11)

Chinese carriers are also introducing other measures such as offering free shuttle buses to/from airports to entice passengers away from high-speed rail. CAAC Director Li Jiaxiang also stated measures would be taken to shorten the time that passengers spend at airports on security checks and check-in, and improve punctuality. As part of this, airlines are offering high frequency "air express" services and streamlined passenger check-in, including dedicated check-in counters, dedicated security channels and additional services such as accelerated baggage claim areas for passengers.

For more information on the high-speed rail line network, the traffic impact on airlines and airline responses to the HSR, see related article: China's aviation industry to witness ‘another blow’ with opening of Beijing-Shanghai high-speed rail

Business and first-class fares continue to increase

While economy fares have slumped, changes to the less price sensitive business and first-class fares have been marginal, with fares increasing significantly over the past few months.

The Beijing-Shanghai is a key business route, with business trips accounting for 70-80% of all airline ticket sales on the sector. This should limit the impact of fare reductions, as long as the airline product remains competitive. This trend was noted by China Eastern Airlines Co Ltd GM Ma Xulun who stated that while “the number of passengers might be reduced 20 or 30% within half a year, but in a long run it will not affect the airlines so much because of diversified demand”.

Business-class fares on Shanghai Hongqiao-Beijing sector stood at USD582.60 as at 30-Jun-2011, marking a 60% increase from 28-Sep-2011 levels. Over the past 12 months, business fares on the sector will have increased by 99% up until the end of Oct-2011. Price variations on the Shanghai Pudong-Beijing sector are less extreme, although fares have still increased by 14% over the past eight months, and will have increased by 17% over the 12-month period to Oct-2011.

Return fares on Shanghai Hongqiao-Beijing sector (business class, most convenient route)

Return fares on Shanghai Pudong-Beijing sector (business class, most convenient route)

For first-class fares, fares on the Shanghai Hongqiao-Beijing and Shanghai Pudong-Beijing sectors stood at USD756.60 as at 30-Jun-2011 and are remaining stable throughout Jul-2011 and Aug-2011. Fares from Shangahi Hongqiao have increased by 42% year-on-year based on Oct-2011 fare data with increases of 81% from Shanghai Pudong. 

Return fares on Shanghai Hongqiao-Beijing sector (first class, most convenient route)

Return fares on Shanghai Hongqiao-Beijing sector (first class, most convenient route)

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