08-Jan-2013 12:27 PM

Dalian, Harbin and Shenyang airports propel China's northeast revival as region to see largest FDI

Analysis

Those in the know are aware that China's new growth is out in the west, in cities like Chongqing, where Finnair launched services in 2012, or Chengdu, which British Airways will serve later in 2013. This singular focus on the frontier west, however, obscures China's northeast: a growing section in China's corner that many are unaware of or assume that, being in eastern China, it has slower growth.The former rustbelt region is movign ahead.

The region is anchored by Liaoning province, which is not only growing but forecast by the Economist Intelligence Unit to be China's largest recipient of foreign direct investment by 2014.

The key airports are Dalian and Shenyang in Liaoning, as well as Harbin, in neighbouring Heilongjiang province. Yet, despite the strong growth indicators, the outlook for international air services is mixed. Certainly, this is China and growth there will be strong, but relative to other regions, perhaps not as enticing. Liaoning and Heilongjiang are in the thick of northeast Asia, a mere one or two hour flight from mega-hubs at Tokyo Narita and Seoul Incheon, whose hometown carriers have a large presence in northeast China as they can efficiently provide connections.

In mainland China's de facto international hub, Hong Kong, typically expansionist Dragonair does not serve any of the northeast airports. Lufthansa serves Shenyang, which SIA's Scoot will soon serve as well.

Summary

China's northeast region, particularly Liaoning province, is experiencing significant growth and is forecasted to be China's largest recipient of foreign direct investment by 2014.
The key airports in the northeast region are Dalian, Shenyang, and Harbin, which are in close proximity to major hubs in Tokyo and Seoul.
The growth outlook for international air services in the northeast region is mixed, as major airlines have a strong presence in the nearby mega-hubs and can efficiently provide connections.
The western airports in China, such as Chengdu, Chongqing, and Xian, are larger and experiencing faster growth compared to the northeast airports.
China's high-speed rail network may compete with air services in the northeast region, particularly for routes under 800km.
Japanese and Korean airlines are well-positioned to serve the northeast region, but there is potential for growth and development of air services by Chinese carriers and low-cost carriers.

Airport comparison: growing northeast versus growing west

A handful of airports in the northeast (Dalian, Harbin and Shenyang) and west (Chengdu, Chongqing, Urumqi and Xian) are in opposite corners of China, but with shared characteristics. They are not the largest, although in 2011 (the latest year for which full statistics are available) Chengdu and Xian were sizeable forces. But they are the fastest-growing, recording double-digit growth often around 20%.

China's leading airports: 2011 passengers (size of bubble) and growth (on the horizontal axis)

The western airports are bigger, largely a result of their being far away from main cities: about 1,500km from Chengdu to either Beijing or Shanghai. Shenyang is around 600km miles to Beijing, with its large air - and high-speed rail - hub. High-speed rail will not take hold in the west until later this decade on the most optimistic schedule.

The northeast has a larger share of international seats, although in absolute numbers it is about the same as in the west, a reflection of the western airports having larger domestic footprints. The northeast airports are also on the doorstep of Japan and Korea; the airports are closer to Seoul than Shanghai, and Tokyo is not much further than Shanghai. And historical links with Korea and Japan are still evident in the population profile.

Northeast versus west airport comparison: 07-Jan-2013 to 13-Jan-2013

Airport	System Seat Ranking - Globally	System Seat Ranking - China	International Seats Share of Total	Approximate Number of International Seats
Northeast
Dalian	139	20	13.6%	35,100
Harbin	147	22	4.6%	11,200
Shenyang	141	21	9.7%	24,900
West
Chengdu	49	7	5.8%	37,900
Chongqing	63	9	4.5%	25,100
Urumqi (far west)	126	18	6.3%	19,100
Xian	60	8	2.4%	13,500

What has given the northeast airports a larger international seat share (close proximity to Beijing and other east coast cities than airports in western China) may stifle future growth. But the pendulum could still swing different ways.

China's high speed rail will influence secondary city airline expansion

Long-haul routes into secondary Chinese cities have yet to be consistently operated on a daily basis. By the time daily frequency is sustainable, China's growing high-speed rail network may be so efficiently linked to air travel that direct secondary city services (such as to Shenyang) to nearby major cities (Beijing) take a back seat. (This is unlikely in the west, far away from Beijing and Shanghai.)

Integration between air and rail, common in Europe, is still in its infancy in China. Hainan Airlines was the first to exploit thte opportunities as it offered travellers to/from Haikou and Sanya, the two major cities on Hainan Island, rail connections between the two ports. China Eastern took the boldest step, only last year, in linking cities around Shanghai. China Southern now says it wants to partner with high-speed rail, too.

But primary airports have maxed out slots; and future airports - including a new behemoth in Beijing - could be delayed or see capacity quickly used up. That leads some to invert the equation: rather than use primary airports to link to secondary cities, secondary airports - less-crowded and delay prone - could be linked to major cities, Ryanair-style.

But working with China's massive state-owned railway company brings its own challenges. Whereas Deutsche Bahn and TGV have a long list of airlines they work with, even China's own carriers find their railway company difficult to navigate. Generally speaking, wanting to integrate an air service to a new location requires negotiating directly with that region's branch office. Matters like revenue management are not dreamt of.

Japan's and Korea's airlines are well placed to service China's northeast

Japan and Korea's airlines are expanding long-haul services - witness ANA and JAL, who in about a year have opened Boston, San Diego, San Jose and Seattle, with more to come. They are also integrating closely with partners and alliances, which could lead to their becoming the de facto international carriers for the northeast.

The largest foreign carrier in mainland China is Cathay Pacific's wholly-owned subsidiary Dragonair, which however is absent from the northeast. It is known as something of a bellwether for up-and-coming Chinese cities, but it does not move with the speed of an agile AirAsia. It will expand in 2013, although no new cities besides Vietnam's Da Nang, have been announced in 2013. Two Chinese cities were announced in 2012 for service in 2013, but they are notably in central and eastern China: Zhengzhou and Wenzhou, where its Hong Kong hub is more competitive compared to Seoul and Tokyo hubs feeding traffic from the northeast. Hong Kong Airlines' service to the northeast is confined to Harbin with thrice-weekly A320 services. Hong Kong Airlines is smaller than Dragonair and more regionally-focused whereas Dragonair focuses on feeding Cathay's medium- and long-haul network.

A new long-haul intercontinental service proposition must be quite tight, ideally backed by corporate contracts, rather than launched on the basis of merely identifying an under-served region and hoping to be a net that scoops up traffic. Medium- and long-haul intra-Asia services could be looser, especially if an LCC can use price as a stimulant (as Scoot will try in Shenyang), although to get balanced traffic flows, foreign markets will need to be made aware of what is on offer in the northeast; these are not the natural in-demand destinations like the Gold Coast and Sydney that AirAsia X, Jetstar and Scoot have relied on.

Cargo is an important part of any route development proposal in China and in the northeast volumes are moderately handsome but growing. Dedicated cargo services are the exception. Lufthansa has a weekly MD-11 cargo flight from each of Tokyo Narita and Krasnoyarsk in central Russia to Shenyang while Harbin has a handful of ANA 767-300F cargo services. Harbin has no regularly scheduled cargo services.

Northeast markets are growing, and with the right government support and private enterprise, could become even larger tourist destinations. Harbin could rival Japan and Korea as a popular - and more affordable - snow destination. But in the near future, it is likely the Chengdus, Chongqings, Xians and other western Chinese cities that will captivate intercontinental carriers.

China's northeast: rustbelt to quiet success story

A decade ago as the boom was well underway in Beijing, Guangzhou, Shanghai and Shenzhen, China's northeast was a sore point. Once the epicentre of state-owned enterprises, the northeast had become a rustbelt. Figures on state-owned companies vary; some say they were responsible for two-thirds of the region's GDP (despite being unprofitable) while the oil industry alone was responsible for 80% of profits. As the need for efficiency caught up to the region, state-owned enterprises dismissed workers, leading to significant social unrest.

Shortly after China, with all its central planning might, launched a "Develop the West" campaign, it started a "Revitalise the Northeast" campaign. Whereas the northeast had been centred on oil as well as steel and coal, diversification was the objective. Some reports speak of four key pillars - petrochemicals, metallurgy, machinery and electronics - for the region while others also include automobiles, professional services and power generation.

There is still a bent towards state-owned companies: Liaoning is home to 37 Fortune 500 companies while in the west, the city of Chengdu alone boasts links to half of them. There are a myriad of R&D centres and high-tech zones, which could bode well for carriers: Cathay Pacific reports the IT industry in China accounts for a greater share of premium travel than the industry in other markets.

The Economist reported that from 2006 to 2009 the northeast's GDP "grew faster than that of the country's other three main economic regions, in the east, centre and west. It has outpaced national GDP growth every year since the late 1990s, with a markedly wider lead since 2008." Its sister publication The Economist Intelligence Unit forecasts that Liaoning alone by 2014 will be the largest recipient in China of FDI.

Japan and Korea are the leading the way, but US electronic firm Intel opened in 2010 a USD2.5 billion chip factory in Dalian, in southern Liaoning. Economic growth has not come with the wide social disparity as found in other regions: to quell early discontent and protests, Liaoning was the home of what is generally regarded as China's first experiment with (effective) social welfare.

As disposable incomes increase and business becomes more sophisticated and expansive, the calculation is right for greater air services in northeast China, with three main airports to choose from.

Dalian, largest in the northeast, combines tourism with business

Dalian has been voted China's most liveable city. It is popular with tourists too, offering streetcars (rare in China), a waterfront out to the sea and ever-popular faux-European architecture as well as limited amounts of authentic colonial European and other building styles. A historic hub for Japanese and Korean imports, the city offers some shopping for goods from those countries. It is also big on commerce, from financial services to shipbuilding.

China Southern is the largest carrier despite Dalian having its own hometown carrier, Dalian Airlines, a unit of Air China operating under Air China's CA code. Dalian received a significant route development on 28-Dec-2012 with twice-weekly charter A330 Dalian-Seattle services operated by Hainan Airlines. All scheduled capacity at Dalian airport is within northeast Asia.

Dalian airport domestic seat capacity by carrier: 07-Jan-2013 to 13-Jan-2013

Chna Southern also leads the international market, but the presence of ANA, JAL and Korean, Asiana is strong.

Dalian airport international seat capacity by carrier: 07-Jan-2013 to 13-Jan-2013

So it is unsurprising that the lead destinations are in Japan, Korea and Taiwan, with Hong Kong well down the list.

Dalian airport top international destinations ranked on seats: 07-Jan-2013 to 13-Jan-2013

Dalian Airport is still growing strongly, well into 2012, although cargo expansion is more modest.

Dalian airport monthly passenger numbers: 2010-2012

Dalian airport monthly cargo volume: 2010-2012

Shenyang is Liaoning's capital with biggest long-haul developments - and high-speed railway challenge

The historically vivid Shenyang is a less attractive proposition physically than Dalian, but it is the capital of Liaoning province, its largest city and the centre of some industries. Over the past decade it has made enormous steps towards becoming a more environmentally friendly city, a feature which is most obvious in the change in colour of its previously near-yellow river.

Shenyang has been rewarded with the biggest long-haul route developments: 2012 saw the launch of thrice-weekly service from Lufthansa that also stops in Qingdao, southeast of Beijing, and from 11-Jan-2013, thrice-weekly service from Scoot that will also stop in Qingdao. China's west has seen far greater developments, with BA and Qatar going into Chengdu, complementing Etihad and KLM, while Chongqing has Finnair and Qatar.

For both domestic an international services China Southern is once again the largest carrier in the city, which has no hometown carrier. Seoul Incheon is the most popular international destination by far. Notably Spring Airlines, effectively China's only LCC, has a base at Shenyang that includes thrice-weekly services to Hong Kong, the only link to the SAR city.

Shenyang will need to find a balance with China's expanding high-speed railway. At 606km between Beijing and Shenyang on a relatively straight trajectory, high-speed rail will compete with air services. Air services generally hold an advantage on sectors over 800km. (On paper Dalian is even more affected as it is 444km from Beijing. But Dalian is at the end of a peninsula, and getting there via railway from Beijing would entail first going to Shenyang, a trip that quickly adds up in distance compared to the short flight. Harbin, at 1000km from Beijing, is well insulated against the high-speed railway from Beijing, but at 496km from Shenyang, could see a different story depending how the railway network develops.)

Shenyang airport domestic seat capacity by carrier: 07-Jan-2013 to 13-Jan-2013

Shenyang airport international seat capacity by carrier: 07-Jan-2013 to 13-Jan-2013

Shenyang airport top international destinations ranked on seats: 07-Jan-2013 to 13-Jan-2013

Shenyang airport international seat capacity by region: 07-Jan-2013 to 13-Jan-2013

After a surge in 2011, Shenyang's growth has moderated in 2012.

Shenyang airport monthly passenger numbers: 2010-2012

Shenyang airport monthly cargo volume: 2010-2012

Harbin in the very north is potentially a springboard to North America

Harbin is China's northernmost city with an immediate population of four million and greater population of 10 million. It has a growing and diversifying economy, but for now centred around agriculture and light industry. It is far better known for its winter ice sculpture festival, the main tourist attraction, but cool summers offer a retreat from China's infamous heat. Year-round Harbin has the rare quality in China of being a relaxing city.

The smallest of China's northeast airports, China Southern has the largest presence for domestic and international capacity. Seoul, Taipei and Hong Kong are the top international destinations from Harbin. Owing to its close proximity to Russia, Harbin retains Russian elements, including an Orthodox Church, and sees flights to Russia.

Harbin airport domestic seat capacity by carrier: 07-Jan-2013 to 13-Jan-2013

Harbin airport international seat capacity by carrier: 07-Jan-2013 to 13-Jan-2013

Harbin airport top international destinations ranked on seats: 07-Jan-2013 to 13-Jan-2013

Harbin airport international seat capacity by region: 07-Jan-2013 to 13-Jan-2013

From its smaller base, Harbin Airport has shown strong growth in 2012, propelling it towards the levels of Shenyang.

Harbin airport monthly passenger numbers: 2010-2012

Harbin airport monthly cargo volume: 2010-2012

Being in China's northeast and on the flight path between other Chinese cities and North America, Harbin could, with hub and connection development, function as a springboard for services between China and North America. With a shorter distance to North America (4800 miles to Seattle, for example - less than from Seoul, but longer than Tokyo) Harbin could open secondary North American cities with medium-sized twin-engined aircraft rather than the 777-300ERs, A340s and A380s largely relied upon by Chinese carriers for North American services.

Some missions could be suitable for the A330, which has gained quick popularity in China as a domestic and long-haul aircraft. Flying from Harbin to North America would shave an hour off flight times from Beijing and two from Shanghai.

Outlook: a niche region in China that will see growth - but limited by high-speed rail

China's expanding west will continue to grab most headlines for intercontinental route development, but China's northeast will continue to grow and diversify, and in doing so open further opportunities for route development. High-speed rail will limit some opportunities, mainly in the domestic and regional networks, but if airlines are smart and the railway bureau welcoming, the two could make for a good business pairing.

Japanese and Korean carriers have done well, but their own businesses face challenges, not the least of which are costs. Chinese carriers have yet to hone in on their lower cost base potential, but when they do the market could shift - and also favourably for whoever their partners are.

The northeast may not be every airline's forte, but the region's remarkable turnaround is a reminder of how quickly markets can change in China, and that if a new market is appealing, move fast before another airline finds the latest growth hot spot.

Given the close links with Japan and Korea too, it will probably be the new LCCs which show the way in the northeast. Its airports would do well to be alert to these prospects.