05-Jan-2013 9:00 PM

China enters 2013 with new long-haul routes from BA, Finnair, Hainan, Qatar – and more to come

Analysis

China is overwhelmingly a domestic market and will be home to the majority of growth, followed by regional Asian flights, but not to be overlooked are long-haul routes. 2012 finally captured the market's attention of China being a long-haul destination, in no small part due to China Southern making aggressive moves into Europe and Australia. China Southern's expansion was complemented by foreign carriers further entering secondary Chinese cities in a bid to capture untapped markets but also because slots at primary airports continue to be maxed out at all but midnight hours.

With that situation unlikely to change, long-haul Chinese growth in 2013 will continue to be anchored around secondary cities. Already planned developments in 2013 are British Airways and Qatar Airways entering Chengdu, a familiar secondary city, and Finnair being the first non-Asian carrier to serve Xian. At the tail end of 2012 China Eastern launched Nanjing-Sydney services while Hainan opened Dalian-Seattle flights. Also on the cards for 2013 are further developments from Air France-KLM, United entering secondary cities, Sichuan Airlines expanding to Australia, and 787 deliveries to China Southern and Hainan opening new routes.

Summary

China's long-haul growth in 2013 will be focused on secondary cities, with airlines like British Airways, Qatar Airways, and Finnair entering Chengdu and Xian.
Only 5% of seats to China are from long-haul destinations, with the majority of seat capacity being for domestic and short-haul international flights.
The United States and UAE are the only long-haul destinations from China, with the US serving O&D traffic and the UAE serving as a connection hub.
Air China plans to open a Beijing-Houston Intercontinental service, connecting its Beijing hub with Houston, a key O&D city and a hub for partner United Airlines.
British Airways is expanding its China network by launching thrice-weekly London Heathrow-Chengdu services, becoming the last of Europe's major carriers to enter secondary Chinese cities.
Sichuan Airlines plans to extend its reach to Melbourne and Paris from its Chengdu base, while Xiamen Airlines is expected to announce network plans for its new 787 aircraft, potentially opening routes to Australia, Europe, and North America.

5% of seats to China are from long-haul destinations

About 21% of seat capacity in China is for international markets; the remaining share is comprised of domestic seats, a ratio similar to that of the United States (23% international) but less balanced than other large domestic markets like Australia (37% international), Canada (56% international) or India (38% international).

Of international seats, they are predominantly short-haul (76%) and heavily concentrated in Northeast Asia to Hong Kong, Japan, Korea, Macau and Taiwan, a region that comprises 55% of all of China's international seats and 12% of China's system-wide seats.

China international seat capacity by region: 31-Dec-2012 to 06-Jan-2013

Only the United States and UAE rank as long-haul destinations from China, the US for O&D traffic and the UAE largely for connections.

China top 10 international arrivals by country: 31-Dec-2012 to 06-Jan-2013

Air China goes big with new Houston service

Air China intends to open a Beijing-Houston Intercontinental service from 11-Jul-2013, according to regulatory paperwork filed on 28-Dec-2012. The four weekly service on Air China's new 777-300ER flagship will connect Air China's Beijing hub with Houston, a key O&D city but also hub to partner United Airlines. From Houston are extensive connecting opportunities to Latin America, a market Air China is eager to explore although United may be reticent as such trans-Pacific traffic could come at United's expense, even though it does not serve China from Houston.

Houston will add to Air China's continental US network of Los Angeles, New York and San Francisco. North Asian peers, especially All Nippon Airways and Korean Air, already have extensive US networks, although Air China's service will be the first direct Asian flight for Houston (Singapore Airlines serves the city but via Moscow). Sixth-freedom traffic from China via hubs at Seoul Incheon and Tokyo Narita is an important part of those carriers' networks.

Elsewhere in China's so-called "Big Three" grouping of carriers, China Eastern and China Southern will be a bit quiet as they wait for 777-300ER deliveries, which from 2014 will usher in additional frequency on existing long-haul routes and then new destinations. Air China is planning to increase frequency on existing North American destinations before using 787s later this decade to open new cities.

China Southern in 2013 will still be honing in on the performance of its Los Angeles route, which it increased capacity on by 78% when it replaced the 777-200ER on the route with the A380.

China Eastern in Apr-2013 will resume Shanghai-San Francisco services, to be operated daily on A330-200s. The carrier last operated into San Francisco between 1997 and 2000 on twice-weekly MD-11 flights via Beijing. The carrier said it suspended the service because it "found it unprofitable to have two destinations on the West Coast" - a situation that is changing now, exemplifying China's rise. United Airlines operates between San Francisco and Shanghai while Air China operates into San Francisco from Beijing.

British Airways, emboldened by bmi acquisition, launches Chengdu

British Airways on 22-Sep-2013 will launch thrice-weekly London Heathrow-Chengdu services on four-class 777-200s. Chengdu is the capital and largest city of Sichuan Province. Along with neighbouring Chongqing, Chengdu is a capital of China's so-called "Go West" campaign to open more of the country's vast interior after focusing on coastal regions that have seen tremendous, and by some (relative) accounts, saturating growth. Chengdu boasts that half of Fortune 500 companies have an office in the city. Chengdu is finishing construction of New Century Global Centre, due to be the world's largest standalone structure.

Foreign carriers have taken the lead in opening services from secondary cities, a combination of inertia at mainland Chinese carriers but also mainland carriers' ability to secure slots at primary airports (Beijing, Guangzhou and Shanghai Pudong) when the slots become available.

British Airways' China network is confined, in the winter season, to six weekly 747-400 services to Beijing and six weekly 777-200 services to Shanghai Pudong. British Airways is the last of Europe's major carriers to enter secondary Chinese cities, with Air France, Finnair, KLM and Lufthansa already serving secondary points.

Western European passenger routes to China, excluding Beijing and Shanghai: 20-Aug-2012 to 26-Aug-2012

Carrier	Chinese city	European city	Frequency	Equipment	Commencement
Air China	Chengdu	Frankfurt	n/a	n/a	2013 - proposed
Air France	Guangzhou	Paris CDG	4 x weekly	777-200	2004
	Wuhan	Paris CDG	3 x weekly	777-200	2012
China Southern	Guangzhou	Amsterdam	Daily	A330-200	2011
	Guangzhou	Paris CDG	Daily	A330-200	2004
	Guangzhou	London Heathrow	3 x weekly	A330-200	2012
Finnair	Chongqing	Helsinki	4 x weekly	A330-300	2012
KLM	Chengdu	Amsterdam	4 x weekly	747-400	2006
	Hangzhou	Amsterdam	4 x weekly	777-200	2010
	Xiamen	Amsterdam	3 x weekly	777-200	2011
Lufthansa	Nanjing (Nanking)	Frankfurt	3 x weekly	A340-300	2008
	Shenyang-Qingdao	Frankfurt	3 x weekly	A340-300	2012

Chengdu, China's seventh-largest airport, sees intercontinental service from Etihad Airways (four weekly A330-200s to Abu Dhabi) and KLM (four weekly 747-400 Combis to Amsterdam). KLM is known for its extensive feeder network from the UK into Amsterdam and beyond; BA no doubt will look to re-capture some of this traffic. Qatar Airways will open a Doha-Chengdu route from 19-Mar-2013, announced mere weeks prior to British Airways' entry decision. BA has taken long lead times between announcement and first flight on new long-haul routes. Chengdu is BA's third new long-haul route to be announced after Seoul Incheon and Sri Lanka's Colombo (via the Maldives).

BA's expansion, long over-due and now receiving high degrees of attention, is being made possible by its acquisition of bmi and its precious London Heathrow slots. BA is also receiving new aircraft (777-300ERs have already arrived while A380s and 787s are due to join in 2013) that will help expansion, although network changes are also freeing up aircraft.

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The challenge for British Airways and other oneworld members (save Cathay Pacific) is the alliance's lack of a mainland Chinese partner to facilitate connections. BA has made up for the shortfall by forging interline agreements, including with Air China, China Eastern and Dragonair, but securing a Chinese member will certainly continue to be high on the agenda of oneworld and Willie Walsh, the CEO of International Airlines Group (owner of BA). Privately owned Hainan Airlines is the obvious candidate for oneworld, but its ascension faces challenge from a jealous Cathay Pacific and the Chinese government, protective of the country's state-owned carriers.

Chengdu marks second secondary Chinese city for Qatar Airways

Also entering Chengdu is Qatar Airways, with thrice-weekly flights from 19-Mar-2013. Chengdu becomes the carrier's second secondary Chinese city after Chongqing, which it also serves thrice-weekly (daily long-haul services from Chinese cities other than Beijing, Guangzhou and Shanghai are non-existent). Qatar Airways also serves Beijing and Shanghai.

Gulf carriers have been surprisingly low on penetrating China. Emirates only serves Beijing, Guangzhou and Shanghai while Etihad only reaches Beijing, Chengdu and Shanghai (but does not serve Hong Kong, which Emirates and Qatar do). Etihad serves Chengdu with four-weekly A330 flights.

Air China in 2012 flagged the possibility of opening Chengdu-Frankfurt services in 2013 but has not yet made further plans. Chengdu's international capacity is overwhelmingly accounted for by international, and with the exception of Etihad, Asian airlines.

Chengdu airport international seats by carrier: 31-Dec-2012 to 06-Jan-2013

Finnair to open service to Xian, making it the first non-Asian carrier in the city

Finnair is continuing its Asian expansion, the centrepiece of its strategy to link North America, but primarily Europe, to Asia, where its Helsinki hub offers some of the shortest transit times for flights to Asia, and North Asia in particular. Finnair serves Beijing, Chongqing and Shanghai and from 14-Jun-2013 thrice-weekly flights to Xian, in central northwest China and an anchor for the region. Finnair will be Xian's first non-Asian carrier and sixth foreign carrier after Asiana, China Airlines, Dragonair, Korean Air and Thai Airways.

Xian is a heavily domestic city, with 98% of seat capacity in the domestic market. The city is known for tourism (it is an ancient capital and hub for visitors seeing the Terracotta Army) but is still a burgeoning economic city. The industries that do exist there are largely tied to government initiatives in space and defence, and any travel would be given preference to mainland carriers.

Xian international seat capacity by carrier: 31-Dec-2012 to 06-Jan-2013

Xian, at 3,990 miles from Helsinki, fits neatly in Finnair's objective to have long-haul return flights operate within a 24 hour window for ease of scheduling. Weeks before Finnair announced Xian, it selected Vietnam's Hanoi for new service. Finnair was slightly more bullish on sister city Ho Chi Minh, but the city did not fit in a 24 hour window, pushing Finnair to select Hanoi. Short of a network shakeup, Finnair is unlikely to open further Asian cities until late 2013 at the earliest due to no new aircraft deliveries.

China Eastern and Hainan open intercontinental services from secondary cities

The tail end of 2012 saw secondary Chinese city expansion from China Eastern and Hainan. China Eastern on 21-Dec-2012 opened thrice-weekly Beijing-Nanjing-Sydney A330 services. It is the first route into Australia from a secondary Chinese city. Air China, China Eastern and China Southern had served the country from Beijing, Guangzhou and Shanghai. Nanjing is a large cultural and economic city in eastern China. The route into Sydney complements China Eastern's existing nine-weekly Shanghai-Sydney services.

China Eastern's service is Nanjing's second intercontinental route after Lufthansa's thrice-weekly service from Frankfurt.

Nanjing international capacity by carrier: 31-Dec-2012 to 06-Jan-2013

Hainan Airlines meanwhile launched into an existing foreign port from a new Chinese city, opening twice-weekly chartered Dalian-Seattle A330 service on 28-Dec-2012. Hainan serves Seattle from Beijing with four weekly A330 services. Dalian is the second largest city in Liaoning province in China's northeast, which is undergoing an economic revival. Dalian is a centre for finance and logistics, being a major port city. The province's largest city and capital is Shenyang, which has attracted service from Lufthansa and Scoot. Shenyang is also the intermediary point for Sichuan Airlines' Chengdu-Vancouver service, although much traffic to/from Vancouver originates in Chengdu. Dalian in comparison has seen no direct long-haul developments.

Dalian international capacity by carrier: 31-Dec-2012 to 06-Jan-2013

Sichuan Airlines to extend reach to Melbourne and Paris in 2013

Sichuan Airlines intends to complement its Vancouver long-haul service with flights in 2013 to Melbourne and Paris direct from its Chengdu base. While dates remain very fluid, local reports in Dec-2012 indicated Jun-2013 has been pegged for Chengdu-Paris while Melbourne could see service as early as Feb-2013, although this seems optimistic considering 2012 was previously flagged. Chengdu does not see service to Melbourne or Paris, or anywhere in Australia and France. Western China does not have direct services to Australia while there are a handful, and growing number, of routes to Chengdu from Europe and the Middle East.

Sichuan plans to become one of China's top five Chinese carriers. With the top four spots fairly safely held by Air China, China Eastern, China Southern and Hainan Airlines, Sichuan will vie with Xiamen Airlines, amongst others, for the spot. Xiamen will kick off its own long-haul expansion with 787 deliveries from 2014. Sichuan Airlines in Jan-2013 is China's seventh largest carrier ranked on capacity.

Next name to watch: Xiamen Airlines, receiving 787s from 2014, after China Southern and Hainan

While Xiamen Airlines - privately owned, efficiently run for a Chinese carrier and the world's most profitable airline by its own calculation - will not launch long-haul routes until 2014 when its first of six 787s arrive, 2013 could see the carrier announce network plans for those aircraft. Xiamen is based in its namesake city of Xiamen in southern China, although it does more flying outside of Xiamen than to or from. It is almost entirely a domestic carrier but is slowly expanding, with mixed results, to short-haul international destinations.

Xiamen has flagged potential to use its 787s possibly to Australia, Europe and North America. Xiamen will be able to draw on its traffic around Fujian province, whose population has extensive international ties around the world, especially North America and New York in particular. There is considerable traffic to and from the region, but being light on premium flows, no direct service. Much traffic is captured by Cathay Pacific/Dragonair via Hong Kong, as well as Air China and China Eastern via their respective hubs in Beijing and Shanghai. Xiamen's efficiency, status of home carrier and the step-change in operating cost of the 787 could finally land the region a direct service.

Before Xiamen receives its 787, however, China Southern and Hainan will receive theirs. China Southern was due to receive its first 787 in 2H2012, but delays on the Chinese regulatory side of a very unclear nature - various theories abound - have held the aircraft back (they have largely been sitting with Boeing waiting for delivery). China Southern has not stated its network plans, but the aircraft could be used to continue international expansion or replace existing services. China Southern now expects its first 787 as early as Mar-2013.

Hainan's first delivery will follow sometime after that - the carrier now only says it expects the aircraft by the end of 2013. Hainan will use the 787 to open Beijing-Chicago service, which will be its most high-profile service to date.

Air France-KLM and United waiting in the wings

While no firm network development plans have been announced from Air France-KLM and United, both could be expected to open further Chinese cities in 2013. KLM was an early pioneer and the group's most recent Chinese city was Wuhan, opened by Air France in Apr-2012. The group has been pleased with performance of secondary cities and is even looking at other Asian regions, with KLM to open a route to Japan's Fukuoka.

United has flagged its intent to open secondary Chinese cities with its 787s but details - cities, timeframe - are few. United is the largest North American carrier by far in China and will herald the start of North American carriers opening secondary cities, a new era as they leverage their large networks, including with international connections (Latin America-Asia is a large and under-served market).

Not even a month into 2013 and China continues to prove to be a very quickly growing market, and no doubt further announcements throughout the year will increase flights. Long-haul access will also start to occur through smart partnerships as Hainan and China Eastern cosy up with Etihad Airways. Hainan took some time to realise further benefits from its Dec-2011 codeshare with Etihad but in late 2012 announced it would shift its Dubai service to Abu Dhabi and codeshare on limited Etihad destinations beyond Abu Dhabi. China Eastern is looking to rely on Etihad to access certain markets but is waiting to have enough bandwidth to complete the project.

The Chinese government will be watching these route developments, not just to see figures go up but how its airlines are holding against foreign carriers. Beijing is concerned open access to its sky would disadvantage its carriers, still relatively young. More Chinese carrier routes will lead to balance, which in turn will open up more access as Chinese carriers continue to learn and improve. That is far less qualitative than the number of new routes and seats, but will be equally important to the story of China's growth.