13-Dec-2013 7:57 PM

China air travel: airline CEOs jump on the express train about to steam through world aviation

Analysis

In the first CEO panel at the CAPA World Aviation Summit in Amsterdam in Nov-2013, the heads of four airline companies from Asia, the Middle East, Africa and Europe discussed their strategies towards China. With the centre of gravity in world aviation moving east, and China the largest market in Asia-Pacific, this is an express train that must be boarded before it becomes unstoppable.

While Ethiopian Airlines, IAG, Emirates and Air Astana have very different experiences and approaches, all agree that China represents a huge opportunity for air travel. Chinese airlines remain more focused on domestic markets than on international markets, but this is starting to change as demand for goods from Europe and America grows. This may lead to new developments in partnerships with international carriers.

Constraints on growth in air travel to and from China include cultural differences, traffic rights and visa restrictions. Concerning airport capacity, China is undertaking massive investment in infrastructure to accommodate expected traffic growth. This is a lesson that more than one of CAPA’s panellists would like their own government to heed.

Ethiopian Airlines was one of the first to fly to China and benefits from Chinese interest in Africa

One of the first airlines to fly to China that did not come from the communist world was Ethiopian Airlines, which launched operations there as long ago as 1973 with a single weekly frequency to Shanghai. It was a very different world for the carrier 40 years ago. The Ethiopian government controlled traffic, the carrier invoiced the State at the end of each month and so there were no sales costs. Ethiopian was one of only four airlines flying to China from the western hemisphere and the only one from Africa.

Now, it flies to four destinations with 28 weekly frequencies and is a beneficiary of China’s strategic interest in Africa. Chinese investment in Africa is growing as a result of its interest in the continent’s natural resources, oil and energy. Ethiopian offers 46 destinations in Africa and its hub in Addis Ababa is located at what CEO Tewolde GebreMariam calls “the political capital of Africa” as it is the home of the African Union. Ethiopian positions Addis as the gateway to Africa for Chinese passengers and it is a “stepping stone for Chinese carriers” into the continent.

World passenger traffic (RPK billion): 1992, 2012 and forecast 2032

British Airways was 'late into China'

IAG CEO Willie Walsh admitted that British Airways was late into China. It entered Beijing as long ago as 1980, but Shanghai only in 2005 and Chengdu as recently as 2013. BA was “well behind Air France-KLM” in developing Chinese destinations. Trade between the UK and China was not very significant: “The UK used to export more to Ireland than all the BRICs”, noted Mr Walsh, but this is now changing and trade is a major factor in aviation demand.

He described China as a “huge market”, although he admits that he had not heard of Chengdu five years ago. He has now visited the Sichuan city of more than 14 million people three times. It is an important economic centre and host to a large number of multinational corporations. BA chose the route after asking its corporate customers to prioritise cities in China.

Visa restrictions constrain China-UK traffic

Demand for air travel between China and the UK is growing, but is being held back by artificial constraints: Mr Walsh laments the UK’s “restrictive tourist visa regime”, noting that a visa for Shengen Europe costs three quarters of the price of a UK visa, which has to be applied for separately.

“Travellers skip the UK”, said Mr Walsh, adding that, while the UK government highlights China as a priority (it is “talking a good talk”), such restrictions contradict this rhetoric. He asserts that BA’s newest China route, Chengdu, is performing well, but “visa restrictions still bite”. With the right regime, the opportunity for air traffic between the UK and China is “unlimited”, in Mr Walsh’s view.

A further constraint is the lack of slots at BA’s London Heathrow hub, although the acquisition of bmi has brought additional slots and this has eased the situation for BA.

China 'not a major play' in Emirates’ network

According to Emirates' president Tim Clarke, the Chinese government is “pre-determinist” in its thinking on air links with the rest of the world and this is restricting access for foreign carriers.

The result is that “China is a play in our network, but not a major play”. Emirates flies only to three cities in mainland China – Beijing, Guangzhou and Shanghai – and also to Hong Kong, but the potential is there to do more: “China is a colossal story” and it has “fantastic plans for infrastructure”.

Airports in China: passenger numbers versus passenger growth: 2012

“The aeropolitical platform has moved, but not significantly enough to embrace all foreign carriers” that want to access growth in the Chinese market, said Mr Clark.

Mr Clark is hopeful that the recent 10 year change of government will lead to a more open stance from China, but “it is important that the opening of China is open for all”. Until now, China has been fuelled by demand from elsewhere for Chinese products, but pressure is now coming from China as demand grows for goods from Europe and America.

Air Astana’s opportunity arises from 'fluke'

For Air Astana CEO Peter Foster, investment in China is the result of “a fluke of nature and a fluke of geography”. The border between China and his airline’s home country Kazakhstan is one of the longest land borders in the world and Kazak natural resources are a target for investment by its neighbour. “Chinese involvement in extractive industries has grown massively,” he noted, adding that this is a “geopolitical issue”. This has also helped to motivate the interest China shows in Africa that Ethiopian’s Mr GebreMariam highlighted.

Moreover, according to Mr Foster, Chinese organisations bring people in numbers when they invest. “This is good for airlines”, he noted, although it is “not always good for the investee country… it can lead to visa retaliation issues”.

Mr Foster sees significant potential in northwest China, the closest part of the country to Kazakhstan. “Traditionally, south and southeast China drove economic growth, leaving a gap in northwest China… The Chinese government is now trying to spread the wealth there”. Air Astana flies to Urumqi, the capital of Xinjiang province in northwest China, in addition to Beijing (and Hong Kong).

Unlike Emirates’ Mr Clark, Air Astana’s Mr Foster has no problems with access to China after capacity to Kazakhstan was trebled in recent years. Moreover, Air Astana can fly anywhere in China, can reach almost the entire country with next generation narrowbody aircraft and there are no restrictions on sixth freedom rights.

As Mr Foster puts it, his carrier is based “slap bang in the middle between north and southeast Asia and Europe”, providing Air Astana with a major opportunity.

Airport construction and development activity by region (USD) as of Dec-2013

Partnerships with Chinese airlines are 'not easy' but Ethiopian offers them a platform for Africa

The next stage in Ethiopian Airlines’ approach to China is to develop its links with Chinese carriers. Ethiopian has codeshare agreements with Air China and Shenzhen Airlines, but Mr GebreMariam said that, until now, Chinese carriers have been “preoccupied with the domestic market”.

Developing partnerships with Chinese airlines is not easy, according to Mr GebreMariam: “There is the language barrier and they are more interested in their domestic market”, than in forging new partnerships. Moreover, in terms of traffic rights, their focus is on third and fourth freedom rights and so the focus of his discussions with Chinese partners is on hub to hub connections.

Nevertheless, the Chinese carriers are now coming under pressure from the Chinese government to develop internationally. “They will come to Africa, but not everywhere, so they need a hub”. In addition to Ethiopian’s main hub in Addis Ababa, he plans additional hubs in west Africa (Togo), southern Africa (Malawi) and central Africa (Democratic Republic of Congo is reported to be under consideration). This will enable Ethiopian to offer its partners a significant codeshare network across the continent.

Mr GebreMariam said he hopes that this will lead to greater opportunities for his airline in China: “The Chinese strongly believe in reciprocity. We have to think of providing them with the platform when they are ready to fly to Africa.”

Emirates: 'We could use partners if we had 15 or 20 more destinations' in China

Emirates’ Mr Clark is surprised that the Chinese presence in the UAE is not significant, given the importance of the Middle East and North Africa as a region. Moreover, the Chinese community in Dubai - famous for its Dragon Market - is large and growing.

Currently, Emirates has no partnerships in China. With just three destinations in mainland China, Mr Clark said that his airline’s “flights are full anyway” as the markets are big enough. Nevertheless, he is pragmatic about the possibility of partnerships in the future: “We could use partners if we had 15 to 20 more destinations. If partnership is a means to an end, we will go and do it”.

Forecast growth in passenger traffic (RPK billion): 2013 to 2032

Cathay Pacific is 'a good partner over Hong Kong' for BA

IAG’s Iberia does not fly to China, while its UK subsidiary British Airways has Cathay Pacific as its partner in the region, albeit based in Hong Kong and not mainland China. Mr Walsh describes Cathay as “a good partner over Hong Kong, giving access to cities we don’t serve direct”.

Regarding the oneworld alliance’s lack of presence in the domestic Chinese market, he acknowledges that this is a weakness for the alliance, “but it doesn’t have to be a weakness for BA”.

Referring to BA’s existing routes, he argued that some destinations do not need a domestic partner, due to their sheer size as point-to-point markets. There is still scope for BA to grow traffic and he said that the UK-China bilateral still has some capacity headroom and that “this will increase if necessary”, noting that BA currently has more capacity to China than do Chinese carriers use to the UK.

Air Astana: 'Why would you need feed…?'

Air Astana has no plans to develop partnerships with Chinese carriers. One impediment is the airline's lack of scale. “We have 30 aircraft,” said CEO Peter Foster, “and the Chinese carriers are huge. They have no interest in deals with carriers of Air Astana’s size”.

But he also questions why he would need partners at the moment: “The markets are so huge in terms of catchment areas and urbanisation. Why would you need feed, unless you were operating an enormous network across a clearly defined hub strategy?” In addition, he pointed to practicalities to overcome: “The established Chinese airlines are very large bureaucracies. It is difficult to know even who to talk to”.

China is a clear strategic focus for Air Astana and its geographic proximity is its biggest advantage in approaching this market. “We are lucky to be where we are”, said Mr Foster. However, “the biggest problem is the infrastructure in Kazakhstan, which has not kept pace with 15%-20% per annum market growth.

"If anything, runway quality is going down. We need to take a long, hard look at infrastructure. Zurich is being brought in to manage the (Kazak) airports, but it is late.”

'The opportunity is limitless'

There were some differences among CAPA’s CEO panellists regarding issues such as partnerships with Chinese carriers and on constraints relating to traffic rights, visa restrictions and infrastructure at their own end of the routes. Yields too were a constant undercurrent, as the market matures. Nevertheless, all agreed on the significance of the opportunity represented by China.

Recent policy moves by the Chinese government will allow more private start-ups. In addition to stimulating the development of domestic LCCs, this and other liberalising moves are also likely to lead to more private Chinese carriers flying to Europe and the rest of the world. There may also be more investment by Chinese carriers in European airlines.

What is certain is that Europe and other regions will see inbound tourism flows on an unprecedented scale. IAG’s Mr Walsh sums up the largely untapped potential: “It is different to do business with Chinese companies, but very positive when you do. Growth will be massive… It’s a very different country today than it was five years ago. The opportunity is limitless”.

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