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China Eastern announces June-2012 Boston service as North Asia-North America traffic flows increase

3-Apr-2012

After many years of waiting for Asian service, Boston Logan International Airport will see two Asian services this year after China Eastern Airlines announced it will open a daily Beijing-Shanghai route from 01-Jun-2012. The route launch follows recent CAAC approval. While Japan Airlines (JAL) will be the first Asian carrier to serve Boston, with a Boeing 787 service to commence on 22-Apr-2012, it is worth contemplating the speed with which China Eastern can launch its route compared to JAL. While JAL has had open access to Boston for many years, the Beijing-Boston route authority had been sitting idle since being granted to Hainan Airlines/Grand China Air in 2006. China Eastern’s approval for the route indicates Hainan has lost the route authority.

China Eastern is expected to take up the capacity in the short-term, reflecting the underlying strong potential of the China-US market, as well as the increased agility Chinese carriers have compared to fellow North Asian carriers in Japan, Korea and Taiwan.

ANA and JAL are planning to open new US cities in the medium-term while Asiana is increasing frequencies. The China-US market remains heavily regulated, with authorities on each side approving specific routes for each carrier. There is scope for further growth and market liberalisation is a progressive goal, although the Chinese government is more hesitant, fearing the stronger US carriers that typically achieve higher load factors than Chinese carriers.

The Beijing-Boston growth comes as the larger North Asia-North America market expands, including Chinese carriers adding frequency and services in the US and Canada.

China Eastern is second largest Chinese carrier between US and China

China Eastern is the second largest Chinese and Asian carrier based on available seats and is also the second largest Chinese carrier operating between mainland China and the US. (The largest is Air China, the country's third-largest airline. China and Asia's largest carrier, China Southern, is the third-largest operator between China and the US.) China Eastern serves Los Angeles and New York JFK from its Shanghai hub. The Beijing-Boston route would be the carrier's first long-haul route from Beijing; Chinese carriers are typically relegated to operating flights from their hub. Air China's US services all originate in Beijing although Hainan operates a Beijing-Seattle service. China Southern's attempts to deploy its A380 from Beijing – an aircraft type Air China does not operate – have been met with significant government hurdles.

In the last two years, China Eastern has built up its Los Angeles and New York load factors after industry-wide weak performance in 2009 following the global financial crisis. Its performance is below the load factors achieved by US carriers, reflective of the broader US-China market except that American Airlines tends to have low load factors while Air China's Beijing-New York load factor is the highest in the market.

Until last year China Eastern was the only operator on the Los Angeles-Shanghai route. American commenced services in Apr-2011 while United commenced services the following month.

Los Angeles-Shanghai load factors: 2009 to 2011

United also operates between New York and Shanghai with United's service (inherited from the Continental merger) serving Newark and China Eastern's serving New York JFK. As at Los Angeles, China Eastern's performance lags that of United. While specific yield information is not available, United can be expected to have better performance. Chinese carriers have a marginal cost advantage, although that advantage will grow in coming years as they become more efficient.

New York-Shanghai load factors: 2009 to 2011

In Boston, JAL waited for 787 and anti-trust while China Eastern forges ahead

JAL cited the dual combination of the 787's efficiency as well as anti-trust immunity with alliance partner American Airlines as critical to allowing JAL to open its Boston service. China Eastern, however, will launch with neither of those advantages, underscoring the potential the carrier sees as well as how under-served the US-China market is. The Northern Hemisphere summer 2012 schedule offers 116,000 weekly seats between the US and Japan while only 44,000 weekly seats are offered between the US and mainland China.

China Eastern is expected to codeshare with Delta on the Boston route. Delta codeshares on China Eastern's trans-Pacific services and further codeshares – namely Chinese carriers placing their code on Delta's trans-Pacific services – were announced in Feb-2012. Once the expanded codeshare is implemented, Delta and China Eastern will provide codeshare service to 34 cities within the US and China, while Delta and China Southern will provide codeshare to 18 cities in the two nations.

While China Eastern's long-haul fleet is being fully utilised, it placed an order in Oct-2011 for 15 A330s (12 -200s and three -300s) due for delivery between 2013 and 2015, supplementing its existing A330 fleet. While the aircraft would not ordinarily reach Boston from Beijing, they could be used to allow China Eastern to shift capacity across its network, facilitating the launch of Boston services. At the same time as the A330 order, China Eastern cancelled its 787 order and announced plans to dispose of its A340-300s, which could either launch the route or facilitate movement of other aircraft.

Expansion by Chinese carriers addressing some of the imbalance with US carriers on US-China flows

United Airlines is the dominant carrier on US-China routes with a 39.5% capacity share. United is trailed by Star Alliance partner Air China with an 18.2% capacity share. Three US carriers and four Chinese carriers operate services between US cities and Chinese cities, with US carriers holding around 63% of the total weekly capacity, according to Innovata schedule data.

US-China by carrier (seats per week, one way): 19-Sep-2011 to 23-Sep-2012

US-China traffic flows to grow

Service between the world's two largest aviation markets will continue to grow from a relatively small base in 2012 and beyond as airlines from both sides increase service as permitted by their governments. While market liberalisation is needed, also a limiting factor for traffic growth is the tight visa regime the US has implemented for Chinese nationals.

Passenger levels between the US and China have increased by almost 200% over the past decade, to a record 2.7 million annual passengers in 2010 (+30.5% year-on-year). Capacity constraints at China’s largest airports has also limited growth prospects.

US-China annual passenger numbers: 1990 to 2010

As a result, while the main gateways are likely to remain the focus of trans-Pacific services, subject to the availability of landing slots at conducive times, China's high potential second tier markets will come into the frame later this decade as the marker further opens, Chinese economic development spreads and aircraft types capable of serving thinner markets profitably enter the fleets of US airlines.

Vancouver also seeing new China capacity

Despite moving some of its planned international capacity growth back into the domestic market, China Eastern Airlines’ North America capacity expansion is not limited to Boston. The carrier plans to increase Shanghai Pudong-Vancouver frequency from seven to 11 times weekly from 22-Jun-2012 to 10-Sep-2012. Services will be operated with A330-200 equipment. According to Innovata, Air Canada operates on the sector with daily frequency.

Vancouver is seeing an influx of Chinese capacity, with China Southern increasing Guangzhou-Vancouver frequency from three to five times weekly from 23-Jun-2012. The carrier launched the service on 15-Jun-2011 and as of 31-Jan-2012 has transported 44,000 passengers on the sector. The carrier has also signed a special prorate agreement with WestJet Airlines, allowing passengers on Guangzhou-Vancouver service to connect to WestJet’s 26 domestic services from Vancouver. 

China Southern is also scheduled to launch five times weekly Nanjing-Beijing-Seattle service from 14-May-2012 to 09-Jun-2012, increasing to daily from 10-Jun-2012 to 27-Oct-2012.

Hainan Airlines and Sichuan Airlines also planning North America expansion

Hainan Airlines also plans to introduce a fourth weekly Beijing-Toronto frequency from 20-Jul-2012 through 07-Sep-2012 as part of efforts to expand its North America network to be more competitive on China-North America operations.

The carrier at present operates Beijing-Seattle and Beijing-Toronto services, with plans to increase Beijing-Seattle frequency to five times weekly between 14-May-2012 and 09-Jun-2012, increasing to seven times weekly between 10-Jun-2012 and 27-Oct-2012. According to Innovata, Hainan Airlines is the smallest of nine operators on services between China and North America with a 5% capacity share in the current week.

Hainan Airlines, on 26-Mar-2012, implemented its new codeshare with American Airlines. Currently, American operates non-stop service in three US-China markets: Chicago O'Hare-Beijing, Chicago O'Hare-Shanghai and Los Angeles-Shanghai. The codeshare agreement covers Hainan Airlines services between Seattle and Beijing as well as on Hainan services beyond Beijing to Fuzhou, Guangzhou, Hangzhou, Kunming and Urumqi and American Airlines services between Chicago and Beijing and Shanghai, Los Angeles and Shanghai, as well as on American flights to/from 12 other cities in the US. American Airlines ceased a similar agreement with China Eastern Airlines in 2011, as China Eastern joined SkyTeam alliance in Jun-2011.

Sichuan Airlines is also planning to launch direct services to Vancouver in Apr-2012 as part of a route expansion which will also see the carrier launch services to Amsterdam and Frankfurt in Jul-2012 and to Melbourne in Sep-2012.


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