Loading

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

China Eastern Airlines plans to convert wholly-owned subsidiary China United Airlines into a low-cost carrier (LCC), making it the first major carrier to partake in China's new aviation agenda that encourages LCCs. China sees LCCs – new, converted, private or affiliated with a state carrier – as jump-starting growth, expanding air links in the economically young western region and fighting against inefficiency and wastefulness.

Beijing-based China United is ideal for conversion to a LCC given its point-to-point focus, short routes, operation out of Beijing's second airport at Nanyuan, and small scale that limits potential for corporate travel. China Eastern is larger in Beijing but China United serves more secondary destinations that are potentially more suitable to LCC service.

There is already extensive cooperation between China Eastern and China United, with China Eastern codesharing on nearly every China United flight. There are opportunities for continued cooperation but the two will have to define what this dual-brand strategy entails and how much infrastructure – particularly IT – is in place to support it.

China in Nov-2013 introduced reforms to encourage new growth in its aviation sector, the world's second largest. The reforms encourage new carriers, including private ones and low-cost carriers. Besides having private LCCs, China encouraged state-owned carriers to consider dual-brand strategies and have LCCs. The exact balance between encouragement and subtle request is unclear, but with LCCs being the buzzword with regulators, China Eastern was surely not going to ignore the opportunity. Air China and China Southern are also likely to have LCCs in the future. Private full-service Shanghai-based carrier Juneyao Airlines has proposed a LCC, Jiu Yuan Airlines, to be based in Guangzhou. Spring Airlines has predicted China will see five to eight LCCs in the near future.

See related reports:

China United Airlines enjoys unique position in Beijing

China United Airlines' origin is that it was run by China's army, the PLA. After China decided the PLA could not run a commercial airline, Shanghai Airlines eventually took over the modern China United. The merger between China Eastern and Shanghai Airlines saw China United fall under China Eastern. China United still enjoys some affection from the military, which permits it to operate from Beijing Nanyuan Airport, a military facility. China United is the only carrier to operate from Nanyuan, which is closer to most key parts of Beijing city than Capital Airport. Nanyuan Airport offers domestic-only facilities, and it is due to close to commercial flights once the second main Beijing airport opens later this decade.

For now, China Eastern enjoys China United's position in an otherwise heavily slot-constrained destination with critical – and high-yielding – traffic. China United has grown by at least 23% in each of the past four years.

China United Airlines passenger numbers: 2008-2012

2013 should be one of China United's largest for growth, with the carrier in the first nine months of the year carrying at least 35% more passengers every month than in 2012. The carrier will likely end 2013 with around five million passengers.

China United Airlines monthly passenger numbers: 2011-2013

China United Airlines is ideal for LCC conversion

China United Airlines is an ideal vehicle for China Eastern to directly experiment with the LCC concept. China Eastern already has some experience from its involvement with Jetstar Hong Kong, in which it is a stakeholder. Being Beijing based, China United is far enough away from China Eastern's Shanghai home to limit any potential cannibalisation of China Eastern's core business. The Beijing base also means China Eastern can experiment with the LCC model in the backyard of Air China, based at Beijing Capital and China Eastern's competitor.

Finer details of China United's operation also support its conversion to a LCC. China United in Dec-2013 is China's 14th largest domestic carrier. Its network is spread out rather than concentrated, limiting its ability to retain business passengers compared to other carriers with more robust schedules. For example, China United's largest major route based on frequency is Beijing Nanyuan to Shenzhen, one of China's trunk city-pairs: Beijing Capital to Shenzhen is the country's third-largest domestic route based on seats. But China United only offers three daily flights, with its latest flight leaving Beijing at 12:40 in the afternoon. Similarly, China United has two daily flights to Chengdu, but the first flight does not leave Beijing until four in the afternoon.

Of China United's 48 destinations, 21 are served only daily. Three (including Shenzhen) are served three times daily. China United's only destination to see higher frequency is Ordos in inner Mongolia. China United is the second-largest carrier there.

China United Airlines destinations (horizontal axis) served by frequency a week (vertical axis): 23-Dec-2013 to 29-Dec-2013

Such scheduling limits the potential for high yields to recoup a comparatively expensive cost base. Connections are also lacking owing to China United's position as well as there being no other carriers operating at Beijing Nanyuan that could feed China United.

China United's network is heavily bent towards short flights, where LCCs have demonstrated their sharpest success – a combination of the market being more willing to embrace LCCs for short flights in addition to short flights being able to achieve a lower cost base than longer flights compared to full-service carriers. (On longer flights, inflexible costs like fuel comprise a greater share of total trip costs.) About 35% of China United's flights are around one hour while 70% are around two hours. This compares to China Eastern having 22% of its domestic flights being around an hour while it too has about 70% of its flights being around two hours.

China United Airlines frequency based on length of flight: 23-Dec-2013 to 29-Dec-2013

China Eastern Airlines domestic frequency based on length of flight: 23-Dec-2013 to 29-Dec-2013

Meanwhile the small nature of Nanyuan airport gives it similar characteristics to an alternative airport. Indeed, Nanyuan may be one of the few airports in Asia that is a viable secondary airport. Nanyuan's small size also makes it an efficient airport to fly in and out of, as well as turn aircraft around at. Nanyuan, which received a new but basic terminal in 2013, does not have jetways. 

China Eastern larger in Beijing while China United serves more (smaller) destinations

China Eastern is twice the size of China United in Beijing, with China Eastern offering about 126,000 weekly seats to China United's 58,000. But overlap is at an absolute minimal: of China United's 38 destinations from Nanyuan, all but four are not served by China Eastern.

China United and China Eastern route comparison from Beijing (Capital and Nanyuan airports) ranked on each carrier's largest routes by seat capacity: 23-Dec-2013 to 29-Dec-2013

China United

       

China Eastern

       

China United Rank

System Rank

Airport

 

Total Seats

Movements

China Eastern Rank

System Rank

Airport

 

Total Seats

Movements

1

50

DSN

Ordos Airport

4,256

28

1

3

SHA

Shanghai Hongqiao Airport

34,537

117

2

2

CAN

Guangzhou Baiyun Airport

3,192

21

2

6

KMG

Kunming Airport

12,243

70

3

4

SZX

Shenzhen Airport

3,192

21

3

7

XIY

Xian Airport

10,303

58

4

49

UYN

Yulin Airport

3,066

21

4

17

NKG

Nanjing Lukou International Airport

6,165

35

5

51

BAV

Baotou Airport

2,280

15

5

28

TYN

Taiyuan Airport

5,820

36

6

72

CIH

Changzhi Airport

2,128

14

6

8

PVG

Shanghai Pudong Airport

5,403

27

7

65

HLD

Hailar Airport

2,128

14

7

12

WUH

Wuhan Airport

4,562

28

8

86

WUA

Wu Hai Airport

2,128

14

8

18

TAO

Qingdao Airport

4,463

29

9

10

XMN

Xiamen Airport

2,128

14

9

11

HGH

Hangzhou Airport

4,312

21

10

61

LYI

Linyi Airport

2,128

14

10

33

LHW

Lanzhou Zhongchuan Airport

3,849

24

11

5

CTU

Chengdu Airport

2,128

14

11

29

KHN

Nanchang Airport

3,767

23

12

16

SYX

Sanya Airport

2,128

14

12

37

HFE

Hefei Xinqiao International Airport

3,002

19

13

35

HET

Hohhot Airport

2,128

14

13

22

DLC

Dalian Airport

2,465

15

14

66

CIF

Chifeng Airport

2,128

14

14

36

NGB

Ningbo Lishe International Airport

2,427

14

15

13

CSX

Changsha Huanghua International Airport

1,520

10

15

25

HRB

Harbin Airport

2,345

14

16

81

LYG

Lianyungang Airport

1,064

7

16

44

XNN

Xining Airport

2,212

14

17

87

NNY

Nanyang Airport

1,064

7

17

42

YNT

Yantai Laishan Airport

2,111

13

18

136

JUZ

Juzhou, Zhejiang Province Juzhou Airport

1,064

7

18

78

LZO

Luzhou Airport

1,869

14

19

112

BFJ

Bijie Airport

1,064

7

19

43

WUX

Wuxi Airport

1,738

11

20

162

FUO

Foshan Airport

1,064

7

20

39

INC

Yinchuan Hedong International Airport

1,738

11

21

157

AVA

An Shun/Huang Guo Shu Airport

1,064

7

21

99

TGO

Tongliao Airport

1,239

7

22

105

ENY

Yan'an Airport

1,064

7

22

30

WNZ

Wenzhou Airport

1,148

7

23

115

NZH

Manzhouli Airport

1,064

7

23

31

CGQ

Changchun Airport

1,106

7

24

68

XFN

Xiangfan Airport

1,064

7

24

96

HIA

Huai'an Lianshui Airport

1,106

7

25

48

CZX

Changzhou Airport

1,064

7

25

82

LYA

Luoyang Airport

1,106

7

26

30

WNZ

Wenzhou Airport

1,064

7

26

23

SHE

Shenyang Airport

948

6

27

9

CKG

Chongqing Jiangbei International Airport

1,064

7

27

51

BAV

Baotou Airport

866

5

28

102

XIL

Xilinhot Airport

1,064

7

28

81

LYG

Lianyungang Airport

854

7

29

62

NTG

Nantong Airport

1,064

7

29

61

LYI

Linyi Airport

854

7

30

124

HLH

Ulanhot Airport

1,064

7

30

95

JNG

Jining Airport

536

4

31

92

DAT

Datong Airport

1,064

7

31

126

JXA

Jixi Shi Xingkaihu Airport

474

3

32

128

NDG

Qiqihar Airport

1,064

7

32

139

JIQ

Qianjiang Wulingshan Airport

435

3

33

76

HSN

Zhoushan Airport

760

5

34

127

JUH

Chizhou Jiuhuashan Airport

608

4

35

137

ACX

Xingyi Airport

608

4

36

150

IQN

Qingyang Airport

608

4

37

156

JIC

Jinchuan Airport

456

3

38

46

SWA

Shantou Airport

304

China United's network is more populated with smaller cities that are still emerging economically. This makes them more suitable to LCC service since LCCs should have lower cost bases. This means not just growing price-sensitive traffic more than full-service carriers can, but profitably operating thinner routes. China's main carriers have struggled to make smaller destinations profitable.

Cooperation to be defined between China Eastern and China United – once China United defines itself

China Eastern and China United are closely integrated: China Eastern codeshares on almost every China United flight. China Eastern and China United will have to work out what the cooperation will be between them. Every dual-brand strategy largely in place today varies from one to the next. This is not an impossible task for China Eastern and China United, but they are venturing into unchartered territory in China. Thankfully, there are numerous examples to learn from, ranging from low to no integration between Peach and All Nippon Airways to the high integration between Jetstar Japan with Japan Airlines or Jetstar (Australia) and Qantas.

But before this can be considered, China United has to define how exactly it will be different as a LCC. There are a number of network changes that could improve its cost base without impacting what passengers directly experience. Other changes could impact the passenger experience: currently luggage and meals are complimentary while aircraft are in two classes: there is a small, and often unoccupied, premium cabin. Simply making better use of the existing fleet will not change the partnership with China Eastern, but taking away luggage and meals may require China Eastern to re-consider how – or if – it sells China United flights. China's airlines are largely dependent on TravelSky for distribution, which has limitations for LCCs and product un-bundling.

The plan for China United's transformation is unknown. One of many questions will be how to gain greater fleet efficiency since China United operates 737-700/800s alongside a small number of young A319s. 

China United Airlines Fleet Summary: as at 27-Dec-2013

Aircraft In Service In Storage On Order*
Total: 28 0 0
Airbus A319-100 3 0 0
Boeing 737-700 10 0 0
Boeing 737-800 15 0 0

Rapid fleet growth is planned – perhaps optimistically – as China United expects to nearly double its fleet to 50 aircraft by the end of 2015, by which point it expects to carry 10 million passengers per annum. To show the gap in efficiency China United must close, Spring Airlines passed the 10 million p/a passenger mark with less than 40 A320s.

China United will overlap with LCC Spring Airlines at Shijiazhuang

One smaller aspect of China United's transformation into a LCC is possible changes to the competitive outcome at Shijiazhuang. Shijiazhuang, about 250km southwest of Beijing, is a base for Spring Airlines, which is the largest carrier there. China United also has a base at Shijiazhuang but is the seventh largest carrier there. Shijiazhuang will be one of the first airports to see domestic LCC competition.

Spring Airlines overlaps on every China United flight from Shijiazhuang except China United's Shijiazhuang-Sanya service. Spring and China United both operated from Shijiazhuang to Chengdu, Hangzhou, Kunming and Xiamen. Spring also serves Chongqing, Hohhot, Hong Kong and Shenyang from Shijiazhuang.

Shijiazhuang Daguocun Airport system seat capacity by carrier: 23-Dec-2013 to 29-Dec-2013

China United's transformation is a small but important first step for China Eastern

China United's transformation into a LCC may be small but it is not insignificant. China United is an effective medium for China Eastern to test the LCC model. Some details await, but overall the top-level strategy is rather clear and logical. As details unfold and the carrier re-launches, it will be interesting to see what, if anything, China United learns via China Eastern's involvement in Jetstar Hong Kong, which has not launched but already shown China Eastern a very different – and more efficient – kind of operation.

There are seldom big bang moments or developments in China; gradual progression with experimentation is the rule of thumb. This is encapsulated in Deng Xiaoping's proverb that is increasingly making the rounds following announcements of limited de-regulation. Deng spoke of "crossing the river while feeling the rocks".

There is limited room for innovation in aviation, so it is likely China Eastern will not be alone amongst the country's major carriers in taking smaller subsidiaries for a walk to the riverbed.

Want More Analysis Like This?

CAPA Membership gives you access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find Out More