Shenzhen Airlines to boost Star Alliance’s presence in southern China

Star announced on 06-Jul-2011 that its board had approved Shenzhen Airlines as a future member. The carrier expects to formally join the alliance in late 2012.

Star currently only has one Chinese member in Air China, which owns 51% of Shenzhen Airlines and is sponsoring Shenzhen Airlines' membership in the alliance. Star had two Chinese members until Oct-2010, when Shanghai Airlines left the alliance. Shanghai Airlines and its new owner, China Eastern Airlines, joined rival SkyTeam in Jun-2011.

See related report: Before and After: The impact of China Eastern and Shanghai Airlines joining SkyTeam

Adding Shenzhen Airlines will give back the market share in China that Star lost when Shanghai Airlines left the alliance. But Star will still be smaller in China than SkyTeam, which also has China Southern Airlines as a member. SkyTeam also approved in Jun-2011 Xiamen Airlines, another subsidiary of China Southern Airlines, as a future member.

While SkyTeam seems for now to have edged out Star as the leading alliance in China there are still several unaligned Chinese carriers. Star Alliance CEO Jaan Albrecht says Star continues to seek opportunities to further grow its membership in China. "This market is incredible," Mr Albrecht said on the sidelines of the ceremony celebrating Shenzhen Airlines as a future member. "We are looking for opportunities to expand our footprint in China."

Star Alliance will command a 26.5% capacity share to/from/within China after Shenzhen Airlines joins the grouping (up from 21.0%), while SkyTeam will consolidate its position as the leading alliance in China, from 37.5% capacity share currently to 44.3% after Xiamen Airlines joins.

NB: The 'Before' and 'After' charts below show capacity shares to/from/within China now (Jul-2011) and after Shenzhen joins Star and Xiamen Airlines joins SkyTeam next year, based on current capacity levels and assuming no other changes in alliances. The colours of the graphs below default to blue for the largest carrier, yellow for second largest, green for third, red for fourth and blue for fifth.

China total capacity (seats) share (to/from/within) by alliance

Before	After (Shenzhen Airlines in Star, Xiamen Airlines in SkyTeam)*

Source: Centre for Asia Pacific Aviation & Innovata
*NB: Assumes no other changes to alliances, based on Jul-2011 capacity

Star could still add more Chinese members

Mr Albrecht said Star has not yet had any talks with Hainan Airlines, which is by far the largest of the remaining unaligned Chinese carriers. He instead expects any new Chinese member of Star would likely come as a result of consolidation being pursued by Air China - as was the case with Shenzhen Airlines. Consolidation in the once highly fragmented Chinese market is expected to continue and Mr Albrecht said he wouldn't be surprised if Air China buys more small independent carriers.

While Shenzhen Airlines is primarily a domestic carrier, Mr Albrecht says its home base is important to Star because Shenzhen has emerged as an important business destination. While only two Star members currently serve Shenzhen - Air China and Asiana - Mr Albrecht expects other Star members will be enticed to serve Shenzhen now that Shenzhen Airlines is joining the alliance. "I wouldn't be surprised if many airlines now launch flights to Shenzhen in the foreseeable future," Mr Albrecht said.

Several Star members already serve nearby Hong Kong and Guangzhou. But Mr Albrecht believes there is enough demand in the Pearl River Delta to support long-haul services by some Star members to all three of the region's major airports. "This is China," he says. "China is different. The growth here is amazing."

Mr Albrecht called accepting Shenzhen Airlines as a new member "the right decision at the right time" given the explosive growth in southern China. He said network fit was also a key driver in the decision to accept Shenzhen Airlines because having the Pearl River Delta as a new home market will enhance the alliance's global network.

He pointed out how Hong Kong has significant local demand, making it an attractive airport for members although it lacks Star connectivity to the Mainland. Shenzhen, however, has the potential of becoming a Star hub for connections to other cities throughout China - making potential long-haul routes to Shenzhen by Star members viable. Shenzhen Airlines already codeshares with three Star members - Asiana, Air China and All Nippon Airways.

Shenzhen Airlines president Feng Gang says Star Alliance passengers arriving in Hong Kong will also in the future be able to connect via high speed rail to Shenzhen Airlines flights operated from Shenzhen Airport. He says the direct high speed rail connection between Hong Kong and Shenzhen airports is expected to open in five years.

Star passengers will also be able to connect to Shenzhen-operated domestic flights at Guangzhou. Eight Star carriers currently serve Guangzhou - Air China, ANA, Asiana, EgyptAir, Ethiopian Airlines, Lufthansa, Singapore Airlines and Turkish Airlines. Guangzhou is Shenzhen Airlines' second largest base with 25 domestic routes. A quarter of Shenzhen Airlines' fleet is now based at Guangzhou.

Guangzhou is the main hub for SkyTeam member China Southern. While Shenzhen Airlines is the second largest carrier at Guangzhou, China Southern is the second largest carrier at Shenzhen. The two airlines are archrivals in Guangdong province and the two airports also compete for traffic as they are only about 110km apart.

Both airports are among the largest in all of China and serve a booming economic zone which has the highest concentration of factories in China. The two cities are also rivals. Shenzhen, which 30 years ago was a small fishing village, has grown so rapidly in recent years that it is now almost the size of Guangzhou. Combined the two cities have a population of about 20 million people.

Star Alliance's position at Shenzhen Airport will strengthen dramatically when Shenzhen Airlines joins, from a 13.9% capacity share presently to over 45%. SkyTeam will grow from 31.6% to 36.7% under Xiamen Airlines' influence. oneworld is not represented.

Shenzhen Airport total capacity (seats) share (to/from/within) by alliance

Before	After (Shenzhen Airlines in Star, Xiamen Airlines in SkyTeam)*

Source: Centre for Asia Pacific Aviation & Innovata
*NB: Assumes no other changes to alliances, based on Jul-2011 capacity

SkyTeam's dominance at Guangzhou Baiyun Airport will be entrenched at close to 60%, while Star's share rises from around 15% to one-quarter of weekly seats.

Guangzhou Baiyun Airport total capacity (seats) share (to/from/within) by alliance

Before	After (Shenzhen Airlines in Star, Xiamen Airlines in SkyTeam)*

Source: Centre for Asia Pacific Aviation & Innovata
*NB: Assumes no other changes to alliances, based on Jul-2011 capacity

While Star and SkyTeam are both now well positioned in southern China, Shenzhen Airlines joining Star has little impact in the Shanghai and Beijing markets because Shenzhen Airlines does not have large operations in China's two largest cities. See the Background Information section at the end of this report for Alliances shares at Beijing and Shanghai Hongqiao.

Besides Guangzhou and Shenzhen, the carrier has small bases in six regional cities - Chongqing, Nanjing, Nanning, Shenyang, Xian and Wuxi. Shenzhen Airlines will bolster Star's presence in these six cities as Shenzhen Airlines is the largest or second largest Chinese carrier at most of these airports.

Shenzhen Airlines currently serves 90 destinations - 87 domestic destinations, Seoul, Osaka and Taipei - with an all-narrowbody fleet of 102 aircraft. It plans to serve 109 destinations with a fleet of at least 171 aircraft by the end of 2015.

See related report: Shenzhen Airlines plans ambitious narrowbody fleet expansion, new international routes

CAAC deputy administrator Liang Ningsheng recalled how Shenzhen Airport has rapidly grown in recent years and said joining Star will allow Shenzhen Airlines to further develop the hub. He said major Chinese carriers have already benefited significantly from joining global alliances and believes Shenzhen Airlines will similarly benefit. Mr Liang said the global alliances have proven they can help Chinese carriers improve airline management, the image of Chinese aviation abroad and speed up development of hubs.

Star aims to have two members from India

While at the Shenzhen ceremony, Mr Albrecht said Star believes it needs two Indian members to adequately cover that market and he has informed the Indian government Star will only let Air India join if the government allows the alliance to add a second Indian member. "It will be two (members) or nothing," Mr Albrecht said.

Air India was accepted over three years ago as a new member of Star but has repeatedly delayed formally joining as it has struggled to meet the alliance's membership requirements. Star earlier this year said Air India had been provided a final deadline of 31-Jul-2011 to meet the membership requirements. An audit is now being conducted to see if Air India is finally in compliance with all the requirements. If Air India is in compliance and if the Indian government does not insist that Air India can be the only Star member, a formal joining date will be announced.

However, Mr Albrecht said Star will not let Air India proceed with joining if the Indian government insists Air India can be the only Star member. He says all airlines in India need ministry approval to join a global alliance and Star needs to know if the government would be willing to provide approval to a potential second Indian member. Star wants to recruit a second member after Air India joins because the Indian market is too big and important to have just one Indian member. "We're meeting with the ministry in two weeks to discuss what the next step will be," Mr Albrecht said.

Background Information

SkyTeam's dominant position at Shanghai Hongqiao will extend from 40.5% to 45.7% after Xiamen Airlines joins, while Star gains marginally from Shenzhen's entry, rising from 30.9% to 32.2%.

Shanghai Hongqiao Airport total capacity (seats) share (to/from/within) by alliance

Before	After (Shenzhen Airlines in Star, Xiamen Airlines in SkyTeam)*

Source: Centre for Asia Pacific Aviation & Innovata
*NB: Assumes no other changes to alliances, based on Jul-2011 capacity

Star's strong position at the capital Beijing will rise a percentage point thanks to Shenzhen Airlines, but SkyTeam gains more from Xiamen, rising from 29.4% to 31.8%.

Beijing Capital International Airport total capacity (seats) share (to/from/within) by alliance

Before	After (Shenzhen Airlines in Star, Xiamen Airlines in SkyTeam)*

Source: Centre for Asia Pacific Aviation & Innovata
*NB: Assumes no other changes to alliances, based on Jul-2011 capacity