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UK-China airlines: Virgin Atlantic to join AF-KLM/China Eastern JV

In Oct-2019 Air France-KLM and China Eastern announced that from spring 2020 Virgin Atlantic would be entering their joint venture agreement for flights between China and Europe.

Air France-KLM had already widened the scope of its partnership with China Eastern in Jan-2019. The addition of Virgin Atlantic to the JV reflects deeper ties following Air France-KLM's acquisition of a 31% share in the UK airline.

The Air France-KLM/China Eastern JV covers China to France and Netherlands, and the wider JV will add the China-UK routes of Virgin and China Eastern. Both operate London Heathrow to Shanghai Pudong, while China Eastern also operates to London Gatwick from Shanghai. China Eastern operates a further 125 routes from Shanghai Pudong, of which 66 are within China, offering significant domestic connections.

UK-China has been a strong growth market, with a number of new entrants and significant expansion by the market leader Air China. However, number two operator British Airways has shrunk in this market over the past three years. The JV with China Eastern gives Virgin an edge over its main UK rival BA and boosts Air France-KLM's position as the leading European airline group to China.

Summary

Virgin operates Heathrow-Shanghai and Heathrow-Hong Kong

In the market to mainland China, Virgin Atlantic currently operates only London Heathrow to Shanghai Pudong, with a daily Boeing 787-900 service.

It competes on this route with British Airways' 10 times weekly service and with China Eastern's daily service, although the latter will become a partner rather than a competitor when the new JV arrangements come into operation.

China Eastern's three times weekly Gatwick service will also be part of the new JV arrangements.

Virgin also serves Hong Kong daily from Heathrow, again deploying 787-900s, in competition with British Airways' service of up to 35 times weekly and Cathay Pacific's twice daily service.

China/Hong Kong is Virgin's equal biggest non-Atlantic market

For Virgin Atlantic Airways, China and Hong Kong make up its equal biggest market outside its trans Atlantic network to North America and the Caribbean. According to OAG data for the week of 11-Nov-2019, China/Hong Kong represents 5.6% of its seats and 26.4% of its seats to regions other than across the Atlantic.

This is the same proportion of Virgin's seat capacity as for India, where it serves both Delhi and Mumbai with daily flights (it only launched Mumbai in Oct-2019).

In ASK terms, China/Hong Kong is more important, representing 7.7% of its total ASK capacity (India is 5.7%) and 33.9% of its non-Atlantic capacity.

The Air France-KLM/China Eastern JV covers China to France and Netherlands

China Eastern and Virgin Atlantic's Shanghai-London services will be added to the existing Air France, KLM and China Eastern routes between China and France and the Netherlands.

Air France serves Shanghai Pudong twice daily and Wuhan three times weekly from Paris CDG, and KLM operates Amsterdam-Shanghai 12 times weekly.

China Eastern operates from Shanghai to Paris CDG (twice daily) and Amsterdam (four times weekly). It also serves Paris CDG from Kunming (three times weekly) and Qingdao (three times weekly).

UK-China seats have increased 2.5 times since 2012

The UK-China market has enjoyed strong growth in recent years, with annual seat numbers increasing by 25% in 2019, by 17% in 2018, and rising 2.5 times from 2012 to 2019.

Growth is slowing this winter, with capacity due to increase by 7.6% year-on-year (after 18% growth in summer 2019), but this is clearly a market with further growth potential.

UK-China: weekly seats by airline, Sep-2011 to Mar-2020

Heathrow-Shanghai is the biggest UK-China route

According to OAG data for the week of 11-Nov-2019, Heathrow-Shanghai is the biggest UK-China route by seats, ahead of Heathrow-Beijing and Gatwick-Shanghai.

UK-China: routes ranked by total seats, week of 11-Nov-2019

Virgin currently codeshares with Air China

On Heathrow-Shanghai Virgin currently codeshares with Air China – at present its only commercial partner in NE Asia. In addition to Virgin carrying the CA code on Heathrow-Shanghai, Air China carries the VS code on Heathrow-Beijing, Beijing-Shanghai, Shanghai-Chengdu and Shanghai-Chongqing.

It is not yet clear what will happen to the Virgin-Air China codeshare, but China Eastern's Shanghai Pudong network is much bigger (Air China has only 34 routes, of which 21 are domestic).

Moreover, with 652 routes in the week of 11-Nov-2019, China Eastern's overall domestic network is much bigger than Air China's, which has 356 routes. This would give Virgin greater codeshare access to domestic China if it chose to increase the number of gateways it serves in the future.

Air China and BA are the biggest airlines in UK-China

China Eastern may offer Virgin more connections into domestic China in the long run, but Virgin's existing codeshare partner Air China is the largest UK-China airline by seats, with almost 30% of capacity in summer 2019 (based on OAG data for the week of 8-Jul-2019).

BA is number two, with 18%, ahead of three Chinese airlines with 11%-12% each: China Eastern, China Southern and Hainan Airlines, ranked third to fifth.

Virgin Atlantic has just under 8% of seats between the two nations, while Tianjin Airlines, Shenzhen Airlines and Beijing Capital Airlines have 5% or less.

Four airlines have entered UK-China since summer 2016 (Beijing Capital Airlines, Tianjin Airlines, Shenzhen Airlines and Hainan Airlines), bringing the number of operators to nine.

UK-China: airlines ranked by seat share, week of 8-Jul-2019

Rank

Airline

UK-China seat share

Entered UK-China

UK/China codeshare partners

Codeshare details

1

Air China

29.7%

Before

Sep-2011

Virgin Atlantic

Air China carries VS code on LHR-PEK and 3 domestic routes in China.

2

British Airways

17.6%

Before

Sep-2011

China Eastern, China Southern

BA carries MU (China E) code on LHR to Aberdeen, Belfast City, Edinburgh, Glasgow, Leeds-Bradford and Manchester.
BA carries CZ (China S) code on LHR to Amsterdam, Belfast City, Edinburgh, Glasgow and Manchester.

3

China Eastern*

11.9%

Before

Sep-2011

British Airways

BA carries MU code on UK domestic routes

(see above)

4

China Southern

11.4%

Jun-2012

British Airways

Carries BA code on Beijing to Dalian, Changchun and Shanghai to Changchun.

5

Hainan Airlines

10.7%

Jun-2016**

None

-

6

Virgin Atlantic*

7.5%

Before

Sep-2011

Air China

Carries CA code on Shanghai-LHR.

7

Tianjin Airlines

5.3%

Jun-2016

None

-

8

Shenzhen Airlines

3.8%

Oct-2018

Air China

Carries CA code on Shenzhen-LHR.

9

Beijing Capital Airlines

2.1%

Nov-2017

None

-

The JV with China Eastern gives Virgin an edge over main UK rival BA

The combination of China Southern and Virgin will give the JV a seat share of 19%, just ahead of British Airways, in a form of cooperation that goes much deeper than codeshare.

BA codeshares with both China Southern and China Eastern and, earlier this year, it announced that the China Southern partnership was expanding its scope and would include reciprocal frequent flyer recognition.

See related report: UK-China aviation: BA expands China Southern codeshare

BA and China Southern have also talked about a possible joint venture arrangement on UK-China services. A BA/China Southern JV would almost match Air China in UK-China.

However, for now, Virgin Atlantic may have stolen an edge on its UK rival in this market.

If Heathrow's runway expansion goes ahead, Virgin has further plans to develop its network, including new destinations in China.

See related report: Virgin Atlantic Airways plans BA challenge at expanded Heathrow

…and boosts Air France-KLM as the leading European group to China

Although Virgin Atlantic is not part of the Air France-KLM group, its inclusion in the Air France-KLM/China Eastern JV has the same effect, on Europe-China routes, as if it were part of the group.

Air China is the leading group overall between Europe and China but Air France-KLM is the leading European group, a position that is boosted by Virgin Atlantic's inclusion in its JV.

Air France-KLM is second overall, China Eastern is third, and Lufthansa Group is fourth (ranked by seats in the week of 11-Nov-2019, source: OAG). IAG is eighth, while Virgin Atlantic is 10th.

In JV terms, the combination of Lufthansa Group and Air China is the biggest, with the Air France-KLM/China Eastern partnership approximately 60% of the size of its larger rival.

Virgin Atlantic's entry into the Air France-KLM/China Eastern JV only narrows this gap slightly, but it gives the airline a third European country to match the three served by the Lufthansa Group/Air China JV (which covers Germany, Switzerland and Austria).

Moreover, that third country, the UK, is the largest aviation market in Europe.

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