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Spring Airlines leads Chinese LCCs' international expansion Part 1

This is Part 1 of a two part review of upcoming Chinese LCC international expansion, particularly in North and Southeast Asia. Part 2 will focus specifically on LCC market leader Spring Airlines.

Chinese low cost airlines are about to expand their role in international markets and compete more aggressively. Foreign LCCs have until now dominated China's fast growing international LCC market, currently accounting for nearly 75% of international LCC capacity in China. AirAsia/AirAsia X are the market leader, with a 28% share.

Eight Chinese LCCs now operate international services but five have three or fewer international destinations. Spring Airlines is the market leader by a wide margin and now has more than one quarter of its seats (and more than one third of its ASKs) in the international market (see Part 2 of this report). 

While Spring is independent, most of China's LCCs are part of full service airline groups with the order books and strategic desire to accelerate international LCC expansion. For example, China Eastern recently stated it plans to accelerate international expansion at its LCC subsidiary China United Airlines using China United's new hub at the soon to be opened Beijing Daxing Airport

Summary 

  • There are 11 Chinese LCCs but only three have significant international operations.
  • Chinese LCCs combined have a 26% share of the international LCC market in China and only a 4% share of total international seat capacity.
  • Chinese LCCs started expanding faster than foreign LCCs in 2018 and this trend is likely to continue for the next few years, enabling Chinese LCCs to increase their share of China's fast expanding international LCC market. 
  • China Eastern is planning to use its LCC subsidiary China United to expand its share of the Chinese international LCC market as China United moves its hub to the new Beijing Daxing Airport

Chinese airlines focus on international expansion 

As CAPA highlighted in a comprehensive analysis report published in Mar-2019, Chinese airlines have been accelerating expansion in the international market, helping to stimulate outbound growth while also regaining market share from foreign airlines. 

Over the past five years the number of international passengers carried by Chinese airlines has more than doubled, and the number of Chinese airlines operating international services has grown from 12 to 30. In 2018 Chinese airline international passenger traffic increased by 15% (excludes Hong Kong, Macau and Taiwan), outstripping domestic growth of 11%.

See related report: Chinese airlines: rapid international growth impacts foreign airlines

In the first four months of 2019 this trend has continued, with Chinese airline international passenger traffic up 16% compared to 8% domestic growth.

While all of China’s major full service airlines have been pursuing rapid international expansion, Chinese LCCs have been expanding at an even faster pace. In 2018 Chinese LCC international seat capacity increased by approximately 25%. 

Eight Chinese LCCs currently operate international services 

There are currently 11 Chinese LCCs, according to CAPA data (in China there are several nontraditional airlines that would not qualify as LCCs under some definitions). Eight of these now operate in the international market, but only Spring has a significant international operation. 

Spring is China’s largest and oldest LCC and it currently accounts for an 18% share of international LCC capacity in China (based on CAPA and OAG data for the week commencing 22-Jul-2019). With the inclusion of Spring's Japanese affiliate, which operates five routes from Japan to China, Spring’s share is close to 20%. 

No other Chinese LCC has more than a 3% share of total China international LCC capacity. Five of the eight have a less than 1% share. 

Chinese LCCs ranked by international seat capacity: week commencing 22-Jul-2019

Rank Airline IATA Weekly seats LCC Seat Share
1 Spring Airlines 9C 115,656 18.1%
2 Lucky Air 8L 19,550 3.1%
3 Beijing Capital Airlines JD 18,670 2.9%
4 9 Air AQ 4,536 0.7%
5 West Air PN 2,562 0.4%
6 China United Airlines KN 2,478 0.4%
7 Urumqi Air UQ 1,116 0.2%
8 Chengdu Airlines EU 792 0.1%

AirAsia is the largest competitor in China’s international LCC market 

Foreign LCCs, led by AirAsia, have historically dominated China’s international LCC market. 

The AirAsia Group currently has a 28% share of international LCC capacity in China when both short haul and long haul affiliates are included.

The Lion Group is the second largest foreign low cost competitor with a 15% share of total international LCC seat capacity. (Lion’s share includes Indonesia-based Lion and Thai Lion but excludes Malaysia-based Malindo, which is considered a full service airline.)

Scoot, NokScoot and Nok combined account for another 13% share of total international LCC seat capacity in China. There are several other foreign LCC competitors in China, but none have more than a 3% share. 

Foreign LCCs are starting to lose market share

Although foreign LCCs still account for nearly 75% of international LCC capacity in China, their market is now on the decline as several Chinese LCCs increase their focus on the international market.

In 2018 Spring increased its international seat capacity by 24%, Beijing Capital by 23%, and Lucky by 14% (based on CAPA and OAG data). China United, West Air and 9 Air grew even faster, but on a very small base. 

West Air and 9 Air launched international operations in 2016, followed by China United in 2018. Chengdu Airlines launched international services in Jan-2019, and Urumqi Airlines in May-2019. 

The still very wide gap between Chinese and foreign LCCs will steadily narrow over the next few years, mirroring what has already transpired in the full service end of China's international market. 

China is keen to develop international LCCs

Over the past five years Chinese full service airlines were able to close the gap with foreign full service airlines and overtake their foreign competitors. There is a desire to replicate this achievement with LCCs. 

The Chinese government introduced new policies in 2013 to promote LCCs in the domestic market, particularly in secondary or tertiary rural cities, which need low fare stimulation to grow. LCCs are now being encouraged to expand into the international market as Chinese citizens increasingly travel abroad.

Since outbound traffic dominates China’s international market, the Chinese airlines are often better positioned to grow with the market than foreign airlines. With LCCs now accounting for a relatively large (approximately 15%) and growing portion of China’s international market, there is naturally a desire to develop the local LCCs to ensure that they capture the greatest share of future growth.

Chinese FSCs to use LCC subsidiaries to expand internationally 

In addition to rapid expansion from the independent LCC Spring, China’s main airline groups are starting to use their LCC subsidiaries to pursue international expansion. This is a trend that is only just starting to emerge as Chinese LCC subsidiaries have very limited international operations at the moment. 

Of the 11 LCCs currently operating in China, only two are entirely independent – Spring Airlines and Colorful Guizhou Airlines. Guizhou is China’s smallest LCC, whereas Spring is China’s largest LCC.

Guizhou currently only operates nine aircraft (E190s) on domestic services. However, international expansion is likely, as Guizhou has committed to leasing four A320neos for delivery in late 2019 and 2020 as part of a plan to expand its fleet to 25 aircraft by 2025. 

The Hainan Airlines (HNA) Group has five LCC subsidiaries or affiliates – Air Guilin, Beijing Capital Airlines, Lucky Air, Urumqi Air and West Air. All of these airlines now compete in the international market except Air Guilin, which adopted the LCC model in early 2019.

China Southern has two LCC subsidiaries or affiliates – Chengdu Airlines and Jiangxi Air. Jiangxi does not yet operate international services but plans to enter the international market as it expands. Jianxi currently only operates 10 aircraft, making it the second smallest Chinese LCCs.

China Eastern has one LCC subsidiary in China United. There are also indirect ties between 9 Air and China Eastern as 9 Air is a subsidiary of Juneyao Airlines, which is partially owned by China Eastern

China Eastern to expand in LCC international market using China United 

China Eastern recently stated that its LCC subsidiary China United subsidiary was planning to focus on international expansion over the next three to five years.

China United is particularly targeting services to Southeast Asia, South Korea and Japan from Beijing’s new airport Daxing, which is opening at the end of Sep-2019. The China Eastern subsidiary plans to move its Beijing operation to Daxing from Nanyuan Airport, a military airbase with a small commercial terminal that does not handle international services.

Daxing will open up opportunities for China United to link Beijing with Korea, Japan and part of Southeast AsiaChina United currently has only two international routes: from Yantai in northeast China to Fukuoka and Mount Fuji Shizuoka in Japan

Yantai-Fukuoka was launched in Aug-2018, followed by Yantai-Mount Fuji in Dec-2018. Both flights originate at Beijing Nanyuan and have provided an opportunity for China United to test the waters with one-stop international services from the Beijing market before the opening of Daxing.

Beijing Nanyuan is China United’s only domestic route from Yantai. Beijing Nanyuan is China United’s largest base and currently accounts for approximately 70% of its seat capacity. China United is the only airline using Nanyuan but has been restricted to having a relatively small domestic operation.

Daxing therefore opens up an opportunity to accelerate expansion (both domestic and international). 

China United could operate long range narrowbody aircraft 

China Eastern has stated that China United will become a new player in China’s international low cost market “providing an alternative to existing players”, noting how AirAsia has established a large presence in China.

China United currently operates 49 737NGs and plans to expand its fleet to 80 aircraft by 2024. The China Eastern Group has 737 MAX 8s on order, which could potentially be used by China United to operate longer international routes such as from Beijing to Southeast Asia

China Eastern also has A321neos on order, which could potentially be converted to A321neoXLRs and used for even longer narrowbody routes for any of the group’s subsidiaries, including China United. China Eastern owns 100% of China United and converted the airline into an LCC in 2014. 

See related report: China Eastern to transform China United Airlines into a LCC; first of China's Big 3 to have a LCC

Beijing Capital will also use Beijing Daxing to expand in international market 

Beijing Capital Airlines also plans to move to Daxing. The HNA subsidiary currently has 14 international destinations, but only two (Macau and Male) are served from Beijing

Daxing will open up an opportunity for Beijing Capital to launch several new international routes from the Beijing market, including long haul services. Six of Beijing Capital’s 14 international destinations are long haul (two in Australia, three in Europe and one in North America), but are served from Hangzhou and Qingdao

Beijing Capital is the second largest LCC in China based on capacity and fleet size. It currently operates nearly 80 aircraft and has approximately a 17% share of total Chinese airline LCC capacity. Only Spring is larger, with a 23% share of capacity and more than 90 aircraft. 

Chinese LCCs ranked by capacity share and fleet size: as of 22-Jul-2019

Rank Airline IATA Weekly seats Chinese LCC seat share Number of aircraft in service
1 Spring Airlines 9C 477,990 22.7% 87
2 Beijing Capital Airlines JD 348,366 16.5% 79
3 Lucky Air 8L 298,760 14.2% 57
4 China United Airlines KN 243,906 11.6% 49
5 West Air PN 217,566 10.3% 35
6 Chengdu Airlines EU 165,978 7.9% 43
7 9 Air AQ 124,362 5.9% 17
8 Urumqi Air UQ 71,052 3.4% 16
9 Air Guilin GT 59,544 2.8% 11
10 Jiangxi Air RY 52,700 2.5% 10
11 Colorful Guizhou Airlines GY 45,288 2.2% 9

Beijing Capital and Lucky plan to continue their international expansion 

Beijing Capital is one of two Chinese widebody LCC operators along with Lucky Air. Beijing Capital has 11 A330s and Lucky has four A330s.

Lucky uses its A330s to serve Moscow and Saint Petersburg from its Kunming base along with some domestic services. Lucky has 13 international destinations, or one fewer than Beijing Capital. Lucky’s other 11 international destinations are within East Asia, including 10 in Southeast Asia and one in Japan.  

Beijing Capital and Lucky also operate A320neos, which give it the range to potentially launch long haul narrowbody routes. Lucky also has 737 MAX 8s, which are currently inactive to the global grounding of the MAX fleet.

Beijing Capital’s five A320neos and Lucky’s six A320neos are currently only used in the domestic market on flights of up to three and a half hours (based on Flightradar 24 data).

However, inevitably in future both airlines will use the new type on international services of up to six hours. The HNA Group could also potentially order A321neoXLRs, which would give the group’s LCC subsidiaries the opportunity to open even longer narrowbody routes. 

China’s smaller LCCs have an opportunity to accelerate international expansion

Spring Airlines and West Air also operate A320neos. 9 Air is a 737 MAX operator; it had one of the type at the time of the grounding and has orders for 29 more.

Chengdu Airlines operates A320ceos and Urumqi Air operates 737-800NGs. Both airlines will likely operate new generation longer range narrowbody aircraft in future, potentially by accessing some of the orders placed by their full service parent companies.

As highlighted earlier in this analysis, Chengdu, Urumqi, West Air and 9 Air all now have limited international operations but are expected to focus more on the international market as their fleets expand. 

Chengdu and Urumqi currently have only one international route: Chengdu Airlines operates from Chengdu to Koh Samui in Thailand, and Urumqi operates from Wuhan to Singapore.

West Air has two international routes – Chongqing to Mandalay in Myanmar and Jeju in South Korea. 9 Air has four international routes, those being Changsha and Guiyang to Mandalay in Myanmar; Guangzhou to Sihanoukville in Cambodia; and Guiyang to Phuket in Thailand.

Part 2 of this report will focus specifically on LCC market leader Spring Airlines.

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