Chinese airline growth in direct services will reduce New Zealand dependency on Australian transfers

China Southern's 777 deployment will surpass Cathay Pacific's Auckland capacity

China Southern is continuing to grow in New Zealand. China Southern entered the market in Apr-2011 with three-weekly flights to Auckland. This was increased to daily at the end of 2012, with regular service by the A330 (the A380 made token appearances). China Southern started deploying its 787 towards the end of 2013. Dec-2013 brought the start of additional frequencies each week. These mostly continued through 2014, and from Nov-2014 China Southern is offering double daily service in the peak southern summer. Double daily 787 service will be up-gauged to one daily 787 and one daily 777-300ER. Initially this was for three months from Jan-2015 but extended to four months from Dec-2014. Auckland is China Southern's only regular New Zealand destination. There have been limited charter flights in the past to Christchurch.

The 777/787 schedule will offer 18% more seats than double daily 787 service. The proportion of premium seats (first and business) will be the same, but China Southern will be unlikely to gain high yields in its premium cabin for the leisure-heavy route, and this will be exasperated by the 777's larger size. The 777-300ER will see the introduction of China Southern's premium economy (not offered on the 787), although again attaining a yield premium will be challenging. China Southern's 777 premium economy is eight-abreast (with more legroom) compared to nine-abreast in economy.

This deployment means China Southern in the peak southern summer season will for the first time have more capacity from greater China to New Zealand than Cathay Pacific. This is a remarkable achievement given China Southern has been in the market for less than three years. China Southern will also offer a longer peak season than Cathay, but for only part of it will offer more capacity than Cathay. Only in China Southern's utmost peak (777 and 787 deployment) will China Southern offer more capacity than Cathay.

China Southern starts its second daily Auckland services in Nov-2014 compared to Dec-2014 for Cathay. China Southern ends its second daily service in mid-Apr-2014 while Cathay ends its second daily service in mid-Feb-2014. Cathay's peak season is longer than in past years. While Cathay pulls traffic from China for its Auckland route, Cathay is also pulling traffic from across its network, and especially Europe.

Nonetheless, Cathay has been challenged by China Southern on the Auckland route. China Southern in comparison is mainly catering to the Chinese market. Air New Zealand's Hong Kong capacity is relatively flat throughout the year (one daily) while its Shanghai service is growing, partially through aircraft up-gauging.

New Zealand-China and Hong Kong seats per week one-way: 02-Apr-2012 to 30-Mar-2015

Source: CAPA - Centre for Aviation and OAG

The viability of China Southern's service however faces difficulties, like most of China Southern's long-haul network.

See related report: China Southern Airlines to move long-haul focus from growth to sustainability and partnerships

China Eastern will enter New Zealand during the peak season only

China Eastern had been put off by growth in Australia and New Zealand but lately has been warming up, growing in Australia and now over the southern summer offering a limited Auckland service to test the market.

Auckland International Airport to Shanghai Pudong Airport (seats per week, one way): 19-Sep-2011 to 26-Apr-2015

Source: CAPA - Centre for Aviation and OAG

The China-New Zealand air service agreement was expanded in 2012 to allow for 21 weekly flights from each country. China Eastern's seasonal A330-200 flight will use up that last allocation, but in Nov-2014 the allotment was doubled to 42 weekly flights from each side. The 2012 expansion caused some frustration for Air New Zealand, which was unable to use as much capacity as its larger Chinese peers.

The Nov-2014 expansion has probably caused even more frustration, but New Zealand however appears to be putting the tourism interests of nation ahead of the national carrier.

Chinese visitor numbers to New Zealand have doubled in four years

New Zealand has experienced a rapid increase in Chinese visitors since 2011, when visa procedures were simplified for Chinese nationals. China Southern's 2011 launch of direct China-New Zealand services has also grown the market. Visitors from mainland China to New Zealand have doubled from 102,000 in 2009 to 229,000 in 2013, according to Statistics New Zealand. Visitor numbers in the first nine months of 2014, the latest data available, are up a very slow 2.6% compared to the large double digit rates of recent years. However, these figures do not yet include arrivals from Oct-2014 (during one of China's main holiday periods) and Dec-2014 (which starts the peak of New Zealand's summer travelling period).

These statistics include passengers identified as having arrived from mainland China. About 95% are travelling on a mainland Chinese passport. The balance are on a Hong Kong or US passport, with most such passport holders likely mainland Chinese citizens entering New Zealand on a secondary passport that has easier entry requirements. A small portion could be expatriates or sixth-freedom passengers.

Visitors from mainland China to New Zealand: 2006-2013

Source: CAPA - Centre for Aviation and Statistics New Zealand

New Zealand estimates that 509,000 Chinese will visit New Zealand by 2020.

Australia has been the traditional gateway for New Zealand - but this is changing

In 2006, over 70% of Chinese visitors arrived in New Zealand via Australia, according to Statistics New Zealand. The remaining 30% arrived from various cities in greater China or other Asian hubs. This has progressively changed. The balance was almost equal in 2013 with a 49%-51% split between Asian and Australian hubs. In the first nine months of 2014, Asian hubs for the first time transported more Chinese nationals (53%) than Australian hubs (47%).

Share of Chinese visitors to New Zealand by location of departure point: 2006-9M2014

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Source: CAPA - Centre for Aviation and Statistics New Zealand

But Australia no doubt retains a significant influence. Australia's 51% share in 2013 compares with 42% coming from cities in greater China, including Hong Kong. The balance arrive from other Asian hubs. Shanghai has slightly grown market share while Beijing has lost all traffic following the exit of Air New Zealand from Beijing. Guangzhou has been a clear grower.

Hong Kong was on the wane earlier this decade but made a resurgence in 2013. Singapore appears to be making small gains while Seoul, like Hong Kong (but on a smaller scale) is on the mend after decreasing earlier this decade.

Share of Chinese visitors to New Zealand by departure point: 2006-2013

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Source: CAPA - Centre for Aviation and Statistics New Zealand

Whereas Hong Kong was once the second-largest departure point (after Australia), Guangzhou and Shanghai now rival it.

Chinese visitors to New Zealand by departure point: 2006-2013

Source: CAPA - Centre for Aviation and Statistics New Zealand

The popularity of Australia as a departure point reflects Australia's geographic advantage as well as the popularity of Australia and New Zealand being dual destinations for Chinese visitors. This was one factor in the partnerships between Qantas and China Eastern/China Southern. While Qantas gained access to China, the Chinese carriers gained access to domestic and trans-Tasman feed.

One Qantas Sydney-Auckland flight carries a medley of codeshares including from its old-world partnership (British Airways), new-world partnership (Emirates) and Chinese partnerships (China Eastern and China Southern).

A potential partnership between Air New Zealand and Air China could bring domestic New Zealand destinations as well as trans-Tasman services, but these could be less important to a Chinese partner than those provided by Qantas in the larger Australian market. What Air New Zealand lacks in size it can offer to Air China insights on how to be a well run airline. That is knowledge Chinese carriers desperately seek - sometimes more than passenger feed - and is knowledge Air New Zealand, one of the smartest little airlines around, undoubtedly has.

See related reports:

• Qantas and China Southern Airlines to partner, clawing back at gains from Cathay Pacific & SIA
• China Eastern's new-generation partnerships provide a unique platform for its long-haul network
• Qantas & Virgin Australia look for new Asian partners: China Eastern for Qantas, Cathay for Virgin?

Statistics New Zealand identifies four Australian cities as being the main transport point for Chinese visitors to New Zealand from Australia: Sydney with a 32% share, Brisbane 29%, Melbourne 28% and Gold Coast 11%. (Other points, like Cairns, were not counted.)

Air New Zealand lacks with China the geographical advantage it has with the US

Australia's defining role in bringing Chinese to New Zealand contrasts with North America. 42% of Chinese travellers arrived in New Zealand from flights originating in greater China.

47% of US visitors arrived in New Zealand from flights originating in the US. US arrivals via Australia comprised only 35% compared to the 50% figure for Chinese arrivals via Australia. (The balance of US arrivals to New Zealand includes Cook Island, Fiji and Tahiti transfers.)

There are various factors at play. Chinese capacity to Australia is far greater than to New Zealand. In comparison, New Zealand has a larger amount of North American capacity. This is partially made possible by New Zealand being closer than Australia to North America, enabling New Zealand and Air New Zealand to be a small transfer hub. Such hub capabilities will be far less in China. Whereas Auckland has a geographical advantage (shorter trip length) over Sydney for North American points, Auckland has a disadvantage (longer trip length) for Chinese points.

Distance from Auckland compared to Sydney for select Chinese and North American points

Source: CAPA - Centre for Aviation and Great Circle Mapper

Outlook: Air New Zealand may need another Chinese airline partner

The implication of Auckland's geographical disadvantage is that it will be difficult to offer triangular trips that take in Australia and New Zealand because of the backtracking through New Zealand. Air New Zealand lacks an option for outbound flights from Australia to China. Virgin Australia's long-haul international expansion appears to be postponed, and in any event will be small - and might not even include China. Singapore Airlines is not partnering with Air New Zealand out of Australia, and in any event SIA has a relatively limited Chinese network and Singapore is slightly out of the way between Australia and China.

Air New Zealand's Cathay partnership does not cover Australia and Cathay probably sees little benefit if any to extend it to Australia. With Australia's policy generous on codeshare liberalisation, Air New Zealand could theoretically codeshare with Air China out of Australia. That would also give Air New Zealand a far wider reach into connecting Chinese markets in terms of destinations and frequencies over Cathay. The limits of the Cathay partnership are evidenced by Air New Zealand's proposed joint venture with Air China.

However, Air China's northern hub in Beijing is not convenient and Air New Zealand may ultimately need another Chinese partner. Air China's hub in Shanghai is still small while its Chengdu hub is too weak a point to launch long-haul Australia/New Zealand services, as Sichuan Airlines is finding. Air China partly owns Shenzhen-based Shenzhen Airlines, but its geography is too close to Hong Kong and lacks premium yields.

China Eastern is bedding down with Qantas while China Southern has a codeshare with Qantas. Qantas may very well want to partner with as many airlines as it can. But if Qantas and China Southern cannot continue their partnership, China Southern could theoretically partner with Air New Zealand and consider Virgin Australia for domestic Australian access. It would be interesting to see China Southern try to partner with both Qantas and Air New Zealand. Stranger things happen today, as bilateral needs overlap.

The risk in this analysis is thinking too narrowly about Australia and New Zealand competing. Their biggest competition is not with each other but the rest of the world.

Short-haul markets like Japan, Korea and Taiwan are natural and inexpensive destinations for Chinese visitors. North America and Europe are well known. Australia and especially New Zealand need to sell themselves. The UK offers a lesson: the UK competed with continental Europe by requiring Chinese visitors to have a UK-specific visa rather than the more encompassing Schengen visa that granted travel to multiple European countries. Chinese did not bother with a UK visa, simply skipping the UK. The message: countries should not see neighbours as competitors but as a potential draw. This could apply to airlines, too.

Growth of visitors from China is still in its infancy, and continued growth will necessitate airlines re-evaluating partnerships as well as the extent to which they can accept their partners' promiscuity. In the case of China's airlines, holding the key to the massive Chinese market, they are likely to be the ones to set the parameters. To date they have been much less fastidious about observing partnership principles established by the long established international airlines.