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China’s aviation industry is growing rapidly, in line with its burgeoning economy. The CAAC is the aviation authority under the Ministry of Transport of the People's Republic of China responsible for civil aviation and the investigation of aviation accidents and incidents. The military controls Chinese airspace (restricted), in addition to flight clearances and authorisations. Non-commercial air travel is subordinate to military traffic and as such, general and private aviation in the country is rare.
Airports in China
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China Airlines plans to resume Taipei-London service with the A350 by the end of 2016. The swift interest and compressed timescale may reflect the airline's new government-appointed chairman wanting to refocus the airline. The number of Taiwanese visitors to the UK has grown since China Airlines exited London in 2012, but volume is still small and one-stop competition has grown in what is mostly a leisure and price-sensitive market. China Airlines is stressing the opportunity to connect London with its growing Australian markets, but its three online Australian cities are served less than daily. Australia-London/Europe competition has also grown, so China Airlines – despite an improved product to London – will likely pick up fringe traffic. There are stronger opportunities for the relatively sleepy airline in the dynamic and booming Northeast Asia.
China Airlines will become the last major Asian flag airline at London Heathrow following the previous entry of Garuda, Philippine Airlines and Vietnam Airlines. Only Mongolia's MIAT is absent. 12 Asian airlines fly long haul but do not serve London. Besides MIAT and Hong Kong Airlines, the only Asian airlines not in London are Mainland Chinese airlines or long haul LCCs.
Asia aviation outlook: high demand, low fuel, but overcapacity and uncertainty (Brexit) hurt profits
Asian aviation should be experiencing boom times. So why isn't it? The region is unique for alignment of three key factors: low fuel, high demand and geopolitical stability. Yet financially the market is subdued, largely the result of overcapacity at most airlines. There are some special features too: Cathay Pacific and Singapore Airlines' benefit from low fuel prices has been muted by to hedging, currency swings have hurt the financials of Chinese and Korean airlines.
Strategically most airlines in Asia remain confident of long term opportunities but identify short term challenges, starting with overcapacity. The region's growth is above the IATA average, but financial performance is below. Airlines are watching Europe to see if demand has plateaued or will further weaken due to security concerns. Freight – especially important at Northeast Asian airlines – is facing its usual challenges. New consumer electronics – iPhone 7, for example – may deliver a short-term boost, but will not be as high or profitable as it used to be. The collapse of Hanjin container shipping might deliver some relief, but not on the scale of the 2015 US port closure.
China Southern Airlines may be Asia's largest airline, but it has one of the smallest long haul networks. China Southern has shifted growth to international markets, which represented only 17% of capacity in 2009 but doubled to 34% in 2016. Its long haul plank has been Australia and New Zealand, funnelling traffic from around China down to its southern hub at Guangzhou. China Southern has met its objectives for Australia/NZ and now turns its focus to the market that has preoccupied most other Northeast Asian airlines: North America.
China Southern plans to increase flights from five daily to 11 daily, about the size that ANA is today – and larger than Air China and China Eastern. Although China Southern can build on the principle of using Guangzhou as a North-South hub, North America is a radically different proposition. Guangzhou's southern positioning limits exposure to the Chinese market that China Southern knows best. China Southern will need to target connections to Southeast Asia and India, which have only been a small component of Air China and China Eastern's network.
Part 1 of this report on Aeroflot's connecting sixth freedom traffic noted that Aeroflot is the 13th largest carrier of passengers between Western Europe and Northeast Asia, whereas Finnair – whose "Nordic Shortcut" strategy is well-known – is slightly larger and is the 10th largest operator. After Emirates, Aeroflot is the largest airline flying passengers between the regions but is not based in either of them; all the other operators are Western European or Northeast Asian airlines.
This second and final part examines Aeroflot's growing connecting market in depth. Of the airline's connecting Western Europe-Northeast Asian passengers, 54% are travelling to/from mainland China. This correlates with the share of Aeroflot capacity allocated to China. Among Finnair, Turkish and the Gulf 3 "superconnectors", Aeroflot has the fewest destinations in Northeast Asia. Yet its frequency in prime Chinese cities is unmatched. Aeroflot has the benefit of good aeropolitical relations with China while benefitting from other airlines being restricted over Chinese airspace. This may appear to be a short term advantage that will reduce as competition grows.
Yet a review of the city pairs where Aeroflot is the strongest on transfer traffic indicates growth opportunities as more markets are incorporated into JVs and complacency settles in. This may increase already tense relations between Aeroflot and its SkyTeam partners. Pursuing stronger transfer traffic will be a delicate decision for Aeroflot management.
Airports in the US energy capital of Houston appear to be effectively weathering the downturn in that business sector due, in part, to a diversification scheme undertaken three to four years ago. This scheme was designed to shore up the number of foreign airlines serving the area’s largest airport – Houston Intercontinental. International passenger growth at the airport has helped to alleviate some of the pressure created by fewer domestic connecting passengers from its biggest operator United.
Houston Hobby is also posting solid growth, partially attributable to new transborder services that Southwest started up from a new international terminal at the airport in late 2015. The new service has helped to sustain overall passenger growth of 1.3% in the Houston area for 1H2016. For the first five months of 2016 Hobby recorded 10% passenger growth year-on-year.
With two airports offering commercial service for the metro area Houston has a unique operating profile. Southwest’s dominance at Hobby and Frontier, and Spirit’s operations at Intercontinental, also ensure a solid mix of full service and low cost airlines.
Kazakhstan’s Air Astana is increasing its focus on sixth freedom transit traffic as part of a new strategy aimed at capitalising on its low cost structure and geographic position at the crossroads of Asia and Europe. More transit traffic is necessary to unlock a new phase of growth and reduce its reliance on its home market.
Air Astana has nearly doubled its transit traffic over the past year in response to challenging market conditions in Kazakhstan. The Kazakhstan economy has weakened significantly as oil prices have collapsed, leading to rapid currency devaluation that has impacted Air Astana’s top line. The airline’s revenues have fallen 25% since 2013 while passenger traffic has been relatively flat.
Increased sixth freedom traffic, slower expansion and reduced costs have enabled the airline to maintain profitability. A further and bigger transit traffic push is risky but should drive improved scale, a resumption of growth, and a stronger long-term position – which in turn will make Air Astana more attractive as it revisits long-delayed IPO plans.