China Eastern-Hong Kong Airlines partnership bolsters them in a market dominated by Air China-Cathay
The melting pot of increasingly tangled and conflicting alliances is perhaps bigger nowhere else than in Greater China. Driving the partnerships is an entanglement of its own, the cross-holding between the state-favoured, Star-aligned Air China and powerhouse but oneworld member Cathay Pacific. The message that formidable force sent – a region divided between Air China-Cathay and The Rest – is producing smart partnerships amongst the comparatively smaller participants.
The latest is a codeshare between China Eastern and Hong Kong Airlines covering flights between Hong Kong and mainland China. So far it is a limited partnership on reciprocal routes that gives a larger offering of flight times. That appeases the corporate market which China Eastern reckons it has under-captured due to its lack of widebody flights compared to competitors. The partnership also allows China Eastern to regain momentum in the Hong Kong market, where it has decreased capacity following the opening of cross-strait flights to Taiwan in 2008.
China Eastern has seen a decline in Hong Kong traffic
Capacity in the Hong Kong market peaked for China Eastern in Oct-2005 when it offered approximately 187,000 seats. In Oct-2012 its scheduled offering will be approximately 83,000 seats, representing a 56% decline in capacity. The largest sustained falls occurred as mainland China and Taiwan agreed to open and then expand direct cross-strait flights. Previously passengers had to take circuitous routings typically via Hong Kong, which China Eastern was able to facilitate.
As cross-strait flights have expanded, demand for Hong Kong has decreased, leading China Eastern to decrease flights. But this reduces options for O&D passengers, which China Eastern is now looking to address via its codeshare with Hong Kong Airlines (as well as Hong Kong Express, which is effectively the same as Hong Kong Airlines) as well as via its new LCC joint venture with Jetstar.
See related article: Qantas expands Asian strategy with Jetstar Hong Kong venture with China Eastern
While Cathay Pacific and sister carrier Dragonair were large participants in the mainland China-Taiwan market, their far greater regional and global network has created demand for transfer traffic, enabling them to maintain significant capacity between Hong Kong and mainland China. The robust schedule, partially catering to transfer passengers, benefits O&D traffic.
China Eastern monthly scheduled seats from Hong Kong: Jan-2002 to Dec-2012
Source: CAPA – Centre for Aviation & OAG
Adding to woes, China Eastern reckons it has been disadvantaged by not operating widebody aircraft into Hong Kong, which can offer a higher business product and command a yield premium. Cathay and Dragonair operate numerous widebodies between Hong Kong and the mainland, as does Air China, which has a larger widebody fleet than China Eastern. With aircraft orders under state control, China Eastern has primarily deployed widebodies on long-haul routes or trunk routes within mainland China that are higher-yielding than services to Hong Kong.
Codeshare covers five routes to four cities
The combination of China Eastern's and Hong Kong Airlines' services makes them a more formidable entity against Cathay Pacific and its Dragonair subsidiary, which actually performs the bulk of flying on China Eastern and Hong Kong Airlines' codeshare routes, with Cathay contributing capacity only to Shanghai. Air China does not overlap on any of the flights.
From Hong Kong to Hangzhou, Nanjing and Shanghai Pudong the combined China Eastern and Hong Kong Airlines flight offering is more competitive to Cathay-Dragonair. To Kunming, China Eastern and Hong Kong Airlines jointly offer more daily services (two) than Dragonair's sole service. China Eastern already had greater frequency between Hong Kong and Shanghai's often more convenient airport, Hongqiao, with two daily flights to Dragonair's one. The addition of Hong Kong Airlines' single daily service to Hongqiao will strengthen that position.
The codeshare, introduced in Jul-2012, also initially covered Hong Kong-Xian but Hong Kong Airlines in Aug-2012 ended the service for the season. China Eastern and Dragonair each had one daily service on the route while Hong Kong Airlines had three weekly services.
Typical daily capacity (number of daily flights) overlap on codeshare routes: Aug-2012
|
Route/Return Flights |
China Eastern/ |
Hong Kong Airlines/ Hong Kong Express |
Cathay Pacific/ Dragonair |
Other |
|---|---|---|---|---|
| Hong Kong-Hangzhou | 1 | 1 | 4 | 0 |
| Hong Kong-Kunming | 1 | 1 | 1 | 0 |
| Hong Kong-Nanjing | 1 | 1 | 3 | 0 |
| Hong Kong-Shanghai Hongqiao | 2 | 1 | 1 | 0 |
| Hong Kong-Shanghai Pudong | 6 | 2 | 16 | 1 (Juneyao), 3 (Spring) |
Dragonair has largest seat offering
China Eastern and Hong Kong Airlines' gains against Cathay-Dragonair in terms of seats is proportionately lower than frequency given Dragonair's more frequent deployment of larger aircraft, including A321s and A330s, although Dragonair has a considerable transfer rate onto Cathay Pacific or other Dragonair flights whereas China Eastern and Hong Kong Airlines are more O&D focused. Cathay-Dragonair retains the largest offering of seats to Hangzhou, Nanjing and Shanghai Pudong.
In Kunming, Dragonair has a 49% share of capacity with its single daily flight whereas China Eastern and Hong Kong Airlines' two daily services account for 51% of capacity since they use narrowbodies while Dragonair deploys A330s. Kunming is more of a leisure than business destination, reducing any urgency from Dragonair to switch from one A330 to two A320/A321 services, but depending how the China Eastern-Hong Kong Airlines codeshare relationship develops, Dragonair in the future may need to place higher emphasis on frequency in smaller markets. This will reduce scale and favorable economics of a widebody service over two narrowbodies.
At Shanghai Hongqiao, Dragonair has a 33% share of capacity with its single daily flight whereas China Eastern and Hong Kong Airlines hold the remaining 67% with their three daily flights, split between an A330 from Hong Kong Airlines but two A321s from China Eastern.
Hong Kong-Hangzhou seat share: 27-Aug-2012 to 02-Sep-2012
| Carrier(s) | Seat Share |
|---|---|
| China Eastern-Hong Kong Express | 26% |
| Dragonair | 74% |
Hong Kong-Kunming seat share: 27-Aug-2012 to 02-Sep-2012
| Carrier(s) | Seat Share |
|---|---|
| China Eastern-Hong Kong Express | 51% |
| Dragonair | 49% |
Hong Kong-Nanjing seat share: 27-Aug-2012 to 02-Sep-2012
| Carrier(s) | Seat Share |
|---|---|
| China Eastern-Hong Kong Airlines | 42% |
| Dragonair | 58% |
Hong Kong-Shanghai Hongqiao seat share: 27-Aug-2012 to 02-Sep-2012
| Carrier(s) | Seat Share |
|---|---|
| China Eastern-Hong Kong Airlines | 67% |
| Dragonair | 33% |
Hong Kong-Shanghai Pudong seat share: 27-Aug-2012 to 02-Sep-2012
| Carrier(s) | Seat Share |
|---|---|
| China Eastern-Hong Kong Airlines | 25% |
| Cathay Pacific-Dragonair | 64% |
| Spring | 8% |
| Juneyao | 3% |
China Eastern is dominant carrier in codeshare markets
The five codeshare routes are where China Eastern and Hong Kong Airlines overlap, in addition to Fuzhou, which is not covered under the codeshare. China Eastern is the dominant carrier by far, except in Hangzhou where it is the fourth largest carrier without much gap. Seeing further strength in home markets from the codeshare could lead to further expansion.
Hangzhou airport capacity (seats) per week: 27-Aug-2012 to 02-Sep-2012
Source: CAPA – Centre for Aviation & Innovata
Kunming airport capacity (seats) per week: 27-Aug-2012 to 02-Sep-2012
Source: CAPA – Centre for Aviation & Innovata
Nanjing airport capacity (seats) per week: 27-Aug-2012 to 02-Sep-2012
Source: CAPA – Centre for Aviation & Innovata
Shanghai Hongqiao airport capacity (seats) per week: 27-Aug-2012 to 02-Sep-2012
Source: CAPA – Centre for Aviation & Innovata
Shanghai Pudong airport capacity (seats) per week: 27-Aug-2012 to 02-Sep-2012
Source: CAPA – Centre for Aviation & Innovata
China Eastern is in the driving seat
While benefits of the codeshare are reciprocal, China Eastern's larger market position – it is the ninth largest carrier in the world by available seats – sees it gain more out of the partnership.
Top 10 airlines between Hong Kong and China ranked on seats: 27-Aug-2012 to 02-Sep-2012
| Rank | Airline | Total Seats | |
|---|---|---|---|
| 1 | KA | Dragonair | 76,000 |
| 2 | MU | China Eastern Airlines | 19,128 |
| 3 | HX | Hong Kong Airlines | 16,961 |
| 4 | CA | Air China | 13,859 |
| 5 | CX | Cathay Pacific | 11,172 |
| 6 | UO | Hong Kong Express | 6,960 |
| 7 | CZ | China Southern Airlines | 6,898 |
| 8 | 9C | Spring Airlines | 4,176 |
| 9 | ZH | Shenzhen Airlines | 3,381 |
| 10 | MF | Xiamen Airlines | 2,366 |
China Eastern is also in the driving seat based on its other partnership in the Hong Kong market: Jetstar Hong Kong. Partnerships outside of alliance lines have typically resulted in difficult if private questions of competition, such as if Virgin Australia favours its partners Etihad or Singapore Airlines (competitors to each other) for itineriaries through to Europe. Likewise Delta and Virgin America are competitors but both work with Virgin Australia. Etihad is finding itself in a similar position as it manages an awe-inspiring but also complicated network of over 30 partners.
Whereas those partnerships can overlap on the origin and destination, Hong Kong Airlines will see direct hub competition out of China Eastern's partnership in Jetstar Hong Kong. While Jetstar Hong Kong and Hong Kong Airlines may target two different markets, there will of course be overlap. Jetstar Hong Kong is expected to avoid service to China Eastern's main destinations, and so is unlikely to appear on the route China Eastern codeshares on with Hong Kong Airlines, but the rest of Asia will be fair game between Jetstar Hong Kong and Hong Kong Airlines.
From China Eastern's perspective, that is a different game from Hong Kong-mainland China, and with the force of Air China-Cathay Pacific, it needs a solution for specific markets, irrespective of the overlap or conflict elsewhere. Like elsewhere in the world, as carriers in China grow and add partnerships, the contention will build. There are upsides to these partnerships, but they require careful managing.