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China's aviation industry to suffer billions in losses from high-speed rail

15-Apr-2011

High-speed rail is rapidly becoming a pillar of China's transportation network and an increasing threat to local airlines that have prospered from years of strong demand growth and a lack of efficient ground transport alternatives. China's burgeoning high-speed rail network is already the world's most extensive at 8358 km as at the end of 2010. But that is just the start. A 50% increase in the network is planned in 2011 alone. China’s aviation industry is bracing for a reduction in revenues and profitability arising from rising competition from high-speed rail. International expansion is an increasingly necessary option for China's airlines.

Some estimates put the loss in revenue for China’s aviation industry (from reduced traffic and price pressure) at up to CNY10 billion (USD1.5 billion) in 2012, or 3-4% of the total.

CAAC Director Li Jiaxiang stated some 50% of flights less than 500 km in length could become unprofitable as a result of competition from high-speed trains and around 20% of flights of between 800 and 1000 km could also run at a loss for the same reason. But sectors above 1500 km are not likely to be threatened, he added.

However, Mr Li noted that, over the long-term, the development of the nation’s high-speed rail network could be highly complementary to the local aviation industry. The CAAC has also forecast that with rising household incomes and increased demand, the aviation industry will continue to witness double-digit domestic passenger growth, even with the impact of high-speed rail.

Passenger throughput at 175 Chinese airports reached a record high of 564.3 million in 2010, as the year-on-year growth rate soared to 16.1%, according to the CAAC. This included a 15.7% increase in domestic passenger numbers to 520 million and a 20.6% jump in international passenger numbers to 44.7 million, or roughly 7.9% of the total.

China’s international travel market is still in its infancy, as this proportion attests. By contrast, the US market is roughly an 89:11 split between domestic and international traffic. If this proportion is applied to China’s traffic forecast for 2020, there would be a total 77 million international passengers to/from China in 2020 – or 32.3 million more than in 2010. If the US proportion is applied to China’s 2030 traffic forecast, the total international traffic would rise to 165 million, or 3.6 times the 2010 figure.

In fact, CAPA expects these figures to be exceeded as China’s aviation links with neighbouring Asian countries are liberalised and expand rapidly.

See related report: Asia Pacific aviation outlook: Sustaining momentum will require vision and leadership

Experience elsewhere shows big cuts are looming

Guotai Junan Securities recently predicted that high-speed rail could capture between 1.3% and 5.3% of domestic airline passengers p/a by 2014. First Capital separately forecast that airline revenues would decline by between 3% and 7.9% due to shrinking demand. China Minzu Securities, while downplaying the impact of high-speed railways on airlines, stated up to 9% of passengers could shift from air to rail transport by 2016.

Experience elsewhere in North Asia, such as Japan, Korea and Taiwan has generally been positive for airlines, allowing them, particularly in the Korean case, to rationalise loss-making domestic services and focus on more profitable international routes. The problem for the Chinese carriers, however, is their service standards trail their foreign counterparts and they are also highly reliant on the domestic market, which remains highly regulated, for the bulk of their revenues and profits.

In South Korea, the impact on domestic airline operations was profound, with seating capacity reduced by over 30% between 2003 and 2007. Since then, the introduction of LCC entrants has seen market capacity grow again, but it still remains below pre-high speed rail levels.

South Korea domestic airline capacity (seats per week): Four months to April: 2002 to 2011

Korea Train Express opened a third high-speed rail line on 01-Nov-2010. Since 2004, two lines have been in operation, together handling more than 100,000 passengers a day and providing competition for the nation's airlines. The first high speed rail line was opened in Apr-2004, after 12 years of construction, on the Gyeongbu Line (connecting Seoul to Busan via Daejeon and Daegu), slashing travel times between Busan and Seoul by half to 2 hours and 40 minutes.

One of the lines operates from Seoul to Busan linking Korea's four largest cities while the other goes west to Mokpo through Gwangju. The new line also runs from Seoul to Busan but operates via the southeastern industrial heartland on the way. The travel times between the two cities has been reduced by 22 minutes to 2 hours and 18 minutes with stops in Daejeon, Daegu, Gyeongju and Ulsan. Air Busan has stated it would "compete with KTX directly by offering flights from Seoul to Busan once every 30 minutes and from Busan to Seoul once every 60 minutes adding: “In addition, we are planning to offer discounts to passengers in contrast to KTX, which has raised its prices by KRW4000.”

South Korea's Transport Ministry in Apr-2011 stated it plans to expand the high-speed rail network nationwide by 2020 to accelerate transportation and promote regional development.

The impact of the Taiwan High Speed Rail link - a 335km link from Taipei to Kaohsiung launched in Jan-2007 - has been even more profound on domestic airlines, with capacity slumping by half over the past couple of years. The establishment of scheduled cross-Strait services to Mainland China has provided a lifeline for Taiwanese carriers, whose domestic point-to-point business between the island’s two major cities has been decimated.

Taiwan High-Speed Rail Corporation earlier this year stated it is operating in deficit despite an annual passenger numbers growth of 14% year-on-year in 2010. Taiwan’s high-speed rail handles on average more than 100,000 passengers per day but needs to handle more than 145,000 daily passenger numbers in order to make a profit.

Taiwan domestic airline capacity (seats per week): Four months to April: 2002 to 2011

High-speed line to reach 16,000 km by 2015

China Ministry of Railways stated the UN World Tourism Organisation (UNWTO) expects China to become the most visited country in the world by 2015. 5149 km of the line was put into service in 2010 and a further 4715 km of high-speed track will be laid this year. At present, nearly 1200 multi-unit trains are operating daily on the network.

The Ministry plans to invest on average CNY700 billion (USD106 billion) p/a on the nation’s railway infrastructure between 2011 and 2015 for a total investment of CNY3500 billion (USD535 billion). China aims to expand its high-speed rail network to 13,000 km by 2012, enabling train passengers to reach most provincial capital cities from Beijing within eight hours. By 2015, China’s high-speed rail network will reach 16,000 kms, for a total rail network of 120,000 kms.

High-speed trains will run at 300km/h starting from 01-Jul-2011, instead of the previously announced 350km/h, which was the policy under former Railways Minister Liu Zhijun. Mr Sheng stated only the four east-west and four north-south artery lines of the high-speed rail network will carry trains at 300km/h. The inter-city lines that usually connect major centres within regions should be operated at between 200 and 250km/h, while most railways in central and western China will operate at less than 200km/h. Railways Minister spokesman Wang Yongping separately stated that the lowering of the operational speed will "provide a bigger price-float range", without elaborating.

China’s medium-long-term rail network blueprint

Airlines acknowledge threat of high speed rail

Air China, China Southern and China Eastern Airlines have all acknowledged the threat of China’s high-speed railway, but have echoed CAAC comments that the treat is focused on sectors below 800km. The carriers stated high-speed rail cannot replace airlines on longer sectors.

China Southern Airlines Chairman Si Xianmin stated the rapid development of China’s high-speed rail network has changed the competition pattern in the transportation market and it "expects to lose some of our customers to them”. He acknowledged, “airlines will lose all their current competitiveness, like saving time”.

China Southern is accelerating the pace of its international expansion in 2011, building on this focus of the past few years. The carrier is in the unenviable position of having 80% of its domestic route network, and nearly a quarter of its city pairs, in competition with high-speed rail. The Chairman stated that of the carrier’s 160 domestic routes, 38 are in direct competition with high-speed rail. 88.7% of the carrier’s capacity is deployed domestically, according to Innovata - the biggest domestic exposure of China's 'Big Three' airlines.

China Southern expects the expanding rail network to eventually impact approximately one quarter of the carrier’s domestic network, with potential traffic declines of greater than 50% on 418 of its approximately 1,700 weekly services. The Guangzhou-based carrier hopes to boost international operations to 30% of total routes by the end of 2011, from 18.5% in 2010 - representing a major shift in focus, which significant implications for profitability and regional competition. China Southern plans to further increase the ratio to 40% over the medium term. "It's part of the efforts to build up and enhance our long-haul flights on our global route network. We have set up a tri-hub international route map based on Guangzhou, Beijing and Urumqi," China Southern Airlines VP Beijing branch, Kong Fansheng said.  

China Eastern Airlines Chairman Liu Shaoyong has said high-speed rail will make it difficult for air routes under 600km to be profitable and cut passenger traffic on air routes under 800km by 20-30%, but will have "no impact" on air routes of more than 1000km. He stated the carrier will further its "global strategic deployment to continuously strengthen core profitability" and "step up its exploration of the global market". China Eastern currently allocates 82.5% of its capacity to domestic operations, according to Innovata.

The carrier’s deputy GM Li Jun last month stated the carrier does not expect the nation's developing high-speed rail network to have a major impact on the airline business. The airline sector is still in a "growth stage" and the industry in China still offers "tremendous growth potential", Mr Li stated. The China Eastern GM also commented that airlines should "seek cooperation with high-speed railways to explore international markets they can't reach".

Air China Chairman Kong Dong stated he sees the nation's high-speed rail network as both a challenge and an opportunity. He stated there would be opportunities to cooperate with high-speed rail, including codeshare agreements between airlines and rail. "Airlines and high-speed railways are not like water and fire. Each has its own advantages," he said.

Air China Investor Relations General Manager Rao Xinyu separately stated China’s high-speed rail development would have a minimal 2% to 3% impact on the carrier’s route network. Air China estimates a 10% impact on other carriers. On domestic routes, Mr Rao stated less than 10% of the carrier’s revenue is generated from sectors less than 800km while the carrier’s routes under 1000km are focused in the south-west, northern and north-east regions, which have minimal impact from high-speed rail links. Air China deploys 82.1% of its capacity domestically at present, based on Innovata schedules.

Spring Airlines Chairman Wang Zhenghua stated “there is no point competing head-to-head with high-speed rail”, adding, "We will stop our Shanghai-Wenzhou, Shanghai-Wuhan, Shanghai-Fuzhou and other shorter flights in stages."

Separately, Lao Airlines Deputy Director General Sengpaseuth Mathouchan stated it was too early to tell what the impact of the planned Laos-China high-speed rail link will be. "Fares are a major factor in most passengers' considerations and ticket prices for the planned railway are yet to be announced," he said. The USD7 billion JV agreed by the two governments signed last year outlined plans to connect Vientiane to Luang Namtha on the border with China, running 421 km through several provinces.

Wuhan and Nanjing hit hard

CAAC Deputy Head Wang Changshun stated the rapidly expanding high-speed rail network has already forced airlines to withdraw from some short-haul sectors.

All air services on the Wuhan (capital of Hubei Province) to Nanjing (capital of Jiangsu Province) route were suspended on 27-Mar-2011, due to intense competition from the Heifei-Wuhan high-speed rail link. The Hefei-Wuhan high-speed line, which opened in 2009, has reduced train travel between the two cities from 10 hours to three. Three pairs of China Railway High-Speed (CRH) trains run at 250 kmh between Wuhan and Nanjing every day at a price of USD27 for a second-class seat, compared with USD108 for a full price airline fare. Occupancy on the high speed rails are generally about 90%. Carriers cut their fares on the route by up to 80% in response, but the distance of the airport from downtown Nanjing made the offering unattractive.

In Wuhan, where the impact has been felt most, nearly 70% of flights less than 600 km in length have been suspended, according to Wuhan Tianhe Airport. The city's airport handled 677,700 passengers during the Spring Festival holiday in Feb-2011, down 8.52% year-on-year - the first decline in 23 years. Over the same period, the occupancy rate of trains on the Wuhan-Guangzhou high-speed line rose more than 60% year-on-year.

The Wuhan-Guangzhou high-speed railway has handled 20.6 million passengers since its opening in Dec-2009, to average 56,000 passengers per day, while the number of services between Changsha and Guangzhou have been reduced from an average 11.5 flights per day to three flights per day in the period. Hainan Airlines and Shenzhen Airlines have withdrawn from the market, leaving only China Southern Airlines. Fares on the sector have been reduced by 15% but passenger numbers have still declined by 48% to 390,000 during 2010.

Beijing and Shanghai next? High-speed rail link to open in Jun-2011

CAAC Deputy Head Wang Changshun said earlier this year the opening of the Beijing-Shanghai high-speed line would be "another blow to the air transport industry". China Southern Chairman Si noted that “the fare for the Beijing-Shanghai high-speed rail will be cheaper than airfare, and the travelling time will also be a lot shorter”.

The USD33 billion high-speed rail link on the lucrative Shanghai-Beijing sector is scheduled to be opened in Jun-2010. The rail link, which commenced construction works in Mar-2008, will reduce travel time between the two major cities from 14 hours to just four hours and is expected to transport more than 80 million passengers one way p/a. 

Shanghai-Beijing is one of the largest city pairs in the world for air travel. China Eastern is the largest operator between Beijing and Shanghai, with 43,548 weekly seats, followed by Air China (30,219 seats), Shanghai Airlines (7,063), Hainan Airlines (3,866) and China Southern Airlines (1980) based on OAG data for the week commencing 11-Apr-2011.

Top 15 busiest route pairs in the world

Origin

Destination

Scheduled seats

Origin

Destination

Scheduled seats

Sapporo Chitose

Tokyo Haneda

568,950

Tokyo Haneda

Sapporo Chitose

567,270

Fukuoka

Tokyo Haneda

420,510

Tokyo Haneda

Fukuoka

420,510

Seoul Gimpo

Jeju  

380,064

Jeju  

Seoul Gimpo

369,846

Melbourne

Sydney

377,411

Sydney

Melbourne

371,943

Taipe Taoyuan  

Hong Kong

334,049

Hong Kong

Taipe Taoyuan  

333,825

Sao Paulo Congonhas

Rio De Janeiro

310,556

Rio De Janeiro

Sao Paulo Congonhas  

310,432

Mumbai

Delhi

304,271

Delhi

Mumbai

287,463

Osaka Itami

Tokyo Haneda

301,200

Tokyo Haneda

Osaka Itami

301,200

Okinawa

Tokyo Haneda

272,340

Tokyo Haneda

Okinawa

267,840

Shanghai Hongqiao

Beijing

268,562

Beijing

Shanghai Hongqiao

252,819

Madrid

Barcelona

267,437

Barcelona

Madrid

262,599

Jakarta

Singapore Changi

223,680

Singapore Changi

Jakarta

223,364

Jakarta

Surabaya

219,673

Surabaya

Jakarta

213,093

Cape Town

Johannesburg Tambo

211,763

Johannesburg Tambo

Cape Town

211,371

Brisbane  

Sydney

210,163

Sydney

Brisbane  

209,612

The 1318 km line will no doubt provide a serious challenge to airlines operating on the sector. The route, connecting China's capital with its most important economic hub, is one of the most lucrative for Chinese airlines. Fares on the lucrative Beijing-Shanghai sector have been steadily increasing over the past six months.

Return fares between Beijing Capital and Shanghai Pudong/Hongqiao

Hong Kong, Hainan resorts and western provinces could be linked too

China's Ministry of Railways has also stated that high-speed rail would eventually connect Shanghai and Hong Kong via a 1300km line. When construction is finished, the Shanghai-Hangzhou high-speed rail will be connected to the Hangzhou-Ningbao section, then Fuzhou, Xiamen, Shenzhen and finally Hong Kong. The Ningbo-Fuzhou and Fuzhou-Xiamen sections have already been opened, while the Xiamen-Shenzhen section will be opened in mid-2012 and the Hangzhou-Ningbo section at the end of 2011.

China's Hainan Governor Luo Baoming stated Hainan Island is likely to be linked to the mainland's high-speed rail network via a cross-Strait connection that may commence by 2015. The link across Qiongzhou Strait would bring more tourists to the tropical island, he said. Hainan has two airports in Haikou and Sanya which handled a combined 9 million passengers in 2010, in excess of the 3 million design capacity. Ferries also operate to Hainan.

China has also approved plans for a CNY70.8 billion (USD10.6 billion) high-speed railway to connect its inland mega cities of Chengdu and Xi'an. Construction of the railway is due to commence later this year. The 510km railway, which is planned to operate at 250km/hr, will reduce travel time between the cities from 13 to around two hours. One-quarter of the rail line will run through tunnels.

China has also stated it would commence bullet train operations between Beijing and Yinchuan, the capital of Ningxia Hui Autonomous Region, from 01-Apr-2011. The train, which has a speed of 160km/h, will reduce the journey time by nearly six hours to just under 13 hours.

High-speed rail – cheaper and more convenient for passengers

High-speed train tickets are selling for approximately 40% less than current air fares, according to China Southern, and train stations are more centrally located than airports, with fewer security procedures for passengers. Clearly, price competition between the modes will be intense, particularly in periods of lower seasonal demand.

Other than pricing, the other key short-term response by China’s domestic airlines has been to improve their product. The major airlines are expanding their ‘Air Express’ networks to minimise a loss of market share, particularly of higher yielding business travel, to the new mode. Air Express offerings typically involve high frequency of services (eg hourly or half-hourly departures in peak times) and streamlined passenger check-in, including dedicated check-in counters, dedicated security channels and additional services such as a specific baggage claim area for passengers, to enhance efficiency and convenience – with speed the key competitive factor.

For example, Xiamen Gaoqi International Airport reportedly plans to launch air express routes from the airport as part of efforts to better compete with the high-speed rail network around Xiamen. Services from Xiamen to Wenzhou, Ningbo, Hangzhou, Shanghai, Shenzhen, Guangzhou and Zhuhai will be affected by the increasing number of high-speed rail lines around Xiamen. A total of 100 daily flights will reportedly be affected, or 35% of the total domestic services. At present, there are 20 daily services between Xiamen and Shanghai, nine daily Xiamen-Hangzhou services, nine Xiamen-Guangzhou flights and seven Xiamen-Shenzhen services per day. The airport will also introduce automatic check-in, online check-in and SMS check-in to improve efficiency.

New route opportunities needed for airlines as domestic rail expands

China’s airlines, in reaction to the threat of high-speed rail, are examining new route opportunities as the impact of high-speed rail on some ‘bread-and-butter’ Mainland Chinese domestic routes becomes apparent. As part of this, the nation’s ‘Big Three’ carriers are increasing the pace of international expansion. Chinese airports are likewise having to turn their attention to new opportunities, particularly offshore.

This in turn will place pressure on aviation regulators to ensure Chinese carriers and airports can gain new and expanded access to key regional markets, to provide opportunities for an industry that must now seek to expand its horizons.


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