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Spring Airlines is a Chinese low-cost carrier which operates domestic service from its base at Shanghai Hongqiao International Airport. The airline has enjoyed great success in the Chinese market, due to its being the sole LCC operating in the market as well as its association with one of China's leading travel companies (owner of Spring International Travel Service Ltd).
Location of Spring Airlines main hub (Shanghai Hongqiao Airport)
LCCs will continue to evolve into hybrids of the original core model. CAPA and OAG consider Spring Airlines fits the LCC profile and it is included in our reporting on this basis. Please note: when reporting for an airline is changed from or to LCC the historical data is not affected and it can lead to a distortion in the current reported data. Contact us if you have any queries.
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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….
China is planning reform in the world's second-largest airline sector. Where past initiatives focused squarely on volume expansion, the intent this time seems to be around efficient growth. The changes coincide with the Nov-2013 Third Plenary Session of the 18th CPC Central Committee, which itself is expected to bring significant reform now that the country's new leaders have been elected for about a year.
China's aviation regulator the CAAC has already signalled greater support for low cost carriers, existing and new. LCCs have occupied an undefined space where they are neither prohibited outright nor permitted, but the CAAC has now taken note of their efficiency. Less clear reform areas are the country's one airline-one route policy as well as breaking up technology monopolies, a policy towards government travel, airspace reform and ultimately structural changes in bloated state-owned enterprises.
The challenge is to move airlines along without disrupting the status quo, so full deregulation is understandably off the cards. As a result of reforms, state-owned carriers will likely have to deal with more competition, but they could benefit from other reforms in areas such as technology.
As to be expected – witness the Shanghai Free Trade Zone – goals will be apparent, but details will take some time to work through. But there is little doubt there will be positive - and perhaps even momentous - change.
The expansion in late 2013 of Shenzhen Airport’s terminal three will see capacity growth of up to 57.9% as hourly movements increase from 38 to 60. The capacity will grow the local market, a relatively prosperous area that was China’s first free trade zone and has benefitted by tight relations with Hong Kong, just over the border. Shenzhen Airlines and majority owner Air China are the largest carriers and will benefit from the capacity increase.
But rivals are looking to establish a presence, mindful that capacity increases in key Chinese cities will be rare, having already experienced restraints in Beijing and Shanghai but also Guangzhou.
China Southern intends to launch international flights from Shenzhen despite being based in Guangzhou, 99km away. Spring Airlines has larger ambitions, eyeing Shenzhen as its first southern China base. Spring also wants to lure traffic from congested Guangzhou and Hong Kong. The distance from Guangzhou and Hong Kong is close but ground transport restraints make them far away. In other markets LCCs have established successful ground transport options – can Spring replicate that?
Juneyao Airlines and Spring Airlines will make advances with their forthcoming entry into the highly lucrative cross-Strait market between mainland China and Taiwan, where yields approach an astronomical USD30 cents/km for the one to two hour flights. While they are due to initially serve Kaohsiung, a Taiwanese port city, they should gain entry on the key Shanghai-Taipei route later in 2013. The two privately-owned airlines are the most prominent of the carriers that launched mid-last decade during a period of relative liberalisation. Being new carriers, they have lean bases unencumbered with legacy baggage. Spring also has the distinction of being China's largest LCC by some degree, and will be the first LCC on the cross-Strait market.
The two will be expected to offer lower fares than competitors, but not by much, at least on the Shanghai-Taipei route. Demand far exceeds current supply, tightly controlled by the respective governments since scheduled cross-Strait services recommenced in 2008 as relations between the two governments warmed. There is little incentive to offer cut-throat fares as might be expected in other markets. The routes should do well for Juneyao and Spring from a marketing and profitability perspective, but their limited frequency against a backdrop of high demand means competitors should have little to worry about for the medium term. In the long term, however, these short point-to-point routes seem perfect for LCCs, if airlines are willing to make a fundamental change to their business.
As Jetstar Hong Kong prepares to launch, Hong Kong Airlines weighs transforming Hong Kong Express into an LCC, Spring Airlines moots a Hong Kong base and other LCCs evaluate Hong Kong as a hub, the market has been left wondering about Cathay Pacific's response. Cathay and its Dragonair subsidiary account for about half of Hong Kong's capacity.
Cathay effectively has no public response. While deep down it is watching the market and undoubtedly weighing possible reactions, from a business perspective it says LCCs will not impact its business while to the general public its push has been to offer a limited number of discounted web-only tickets, "Fanfares", as a reminder that it can offer fares on par with LCCs.
Any airline can cut fares, but few can do so profitably. Fanfares account for less than 1% of seats, relatively isolating Cathay from any pricing detriments, but reminding the carrier this is no response to LCCs either taking existing traffic or creating new demand Cathay will be unable to tap. Structural change is needed.
Shanghai Pudong expects its fourth runway to be completed at the end of 2013 but new slots are unlikely to be available until some point in 2014. It is not clear – not even to Chinese carriers – how many new slots will be available, but an early estimate of 242 additional movements (121 roundtrips) between 07.00 to 22.00 each day could be possible. A more deciding factor will be how much additional airspace is opened by China's military for the runway.
The majority of the new slots at Shanghai Pudong Airport – and even upwards of 75% – will likely be allocated to China's domestic carriers. China Eastern, based at Shanghai, will have to battle Air China, which is based at Beijing but looking to establish a hub at Shanghai. As the national flag carrier, Air China and its lobbying network may do well. Private carriers Juneyao and Spring Airlines will also look to expand their home bases.
A number of carriers, including LCCs, will seek to move midnight services to daylight hours while any number of foreign carriers will seek to expand their presence or enter Shanghai for the first time. Strategic allocation will help Pudong, but the decision will be heavy, almost entirely, political.
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