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China's airlines accelerate international growth; possible Hainan Air interest in Virgin America

The international growth of Chinese airlines is increasingly evident. Air China will have upwards of three daily flights to Los Angeles; China Eastern has received investment from Delta Air Lines; Xiamen Airlines will launch four long haul routes in 10 months; and Hainan Airlines has invested in airlines as far flung as Brazil and South Africa. Closer to home, visitors from China are the number one source market for many Asian countries and growing fast.

Chinese airlines have been growing at double digit rates in international and domestic markets for a number of years. It is only in recent times that international growth has taken its place in a structural shift where international gains more prominence.

In 2016 Air China could fly more internationally than domestically. China Southern has increased international's share of capacity from 27% in 2014 to a projected 34% in 2016. Chinese airlines are realising their potential, are benefitting from increased outbound travel demand and are being pushed by the government to grow internationally. Yet as much as Chinese airlines have already had an impact, there is no sign that they have yet reached their peak. The growth of international traffic on Chinese airlines in the 12 months of 2015 was the same as in the previous three years combined.

2015's international growth was the same as previous three years combined

In 2015 international passengers to/from China reached 42 million – unsurprisingly, a new record. This is for international excluding 'regional'  traffic (Hong Kong, Macau and Taiwan), carried only on Chinese airlines. It thus excludes international passengers arriving/departing on non-Chinese airlines. The international China market is one of growth, so this scenario is not a case of Chinese airlines carrying passengers (counted under these statistics) who used to fly on non-Chinese airlines (not counted under these statistics). The total market has experienced growth, but there has undoubtedly been market share shift as Chinese airlines come to dominate foreign markets.

For example, Chinese airlines are now larger than their US counterparts in the China-US market.

The year 2015 recorded 33% growth, equating to 10.5m additional passengers compared with 2014. These 10.5m additional passengers in a single year (2014-2015) are the same number as the 10.5m additional passengers carried in the three years between 2011 and 2014. What the market used to add over three years has now been achieved in a single year. The 42m international passenger figure  in 2015 is double the 21m carried in 2011. 

China international traffic: 2008-2015

The 10.5m additional passengers in 2015 equated to 33% growth. Yet the 4.5m additional passengers carried in 2010 equated to 31% growth since the base was lower. This serves as a reminder of how growth rates can be misconstrued. In the future growth rates will slow, but because the base figures will be larger the net additional passenger numbers could still be high – or even a record.

Net additional China international passengers and annual growth rate: 2008-2015

As impressive as the international growth may seem, it still represents the minority of traffic to/from/within China. At the same time as a doubling of international traffic over four years, domestic traffic has also grown but received far less attention. As a result, international's share of mainland China passenger numbers grew to only 10% in 2015.

International passenger share of mainland China traffic: 2008-2015

These figures exclude 'regional' traffic to Hong Kong, Macau and Taiwan. This is a political category used to reflect aviation markets. Yet the regional traffic to Hong Kong, Macau and Taiwan features its own nuances, separately from wholly mainland domestic traffic and international traffic. If regional traffic is included with international, this grouping's share of system passengers has grown from 10% in 2006 to 12% in 2015.

International and regional passengers in China and their share of mainland China traffic: 2008-2015

China's Big 3 airline groups are increasing international focus

International and regional traffic together constitute a low double-digit share of total traffic. However, the share is significantly larger at the major domestic airlines, which are also the biggest internationally. The Big 3 – Air China, China Eastern and China Southern – comprise groups/holding companies containing the flagship airline and also a growing number of smaller airlines.

The flagship airlines have the most significant international exposure. On a group level (which is what operating data reports) the international exposure is reduced by the smaller airlines, which are primarily domestic operations. Over the past decade, airlines have been added to the groups (for example, Shanghai Airlines), distorting historical comparisons.

Yet despite the incorporation of data for primarily domestic airlines international exposure has increased this decade, with noticeable increases since 2013. For Air China Limited and China Eastern Holding, the 2015 international exposure is lower than in 2006 and at other past points, but again this comparison brings cautions in its interpretation.

Air China Limited, China Eastern Holding and China Southern Holding share of international (including regional) RPKs: 2003-2015

Air China to fly more internationally than domestically; China Southern making the biggest leap.

An alternative evaluation of international (including regional) exposure is the share of capacity from the three airlines, leaving out other airlines in the group/holding company. (This data is from OAG and is reliant on the airlines filing accurate schedules). From it there are similar conclusions: international exposure dipped after the Global Financial Crisis and has been increasing in recent years. For Air China, China Eastern and China Southern, international exposure is at record highs.

China Southern's share of its capacity placed in international markets has increased from 26% in 2013 to a forecast 34% in 2016. This 8ppt gain since 2013 is the same as Air China's, which has increased from 42% to 50%. However, historically Air China's was approximately 40%, whereas China Southern's was approximately 20%. China Southern has made a bigger pivot to international markets over the last decade than Air China or China Eastern has. China Southern's increase is largely part of its strategy to use its southern China hub at Guangzhou as a hub for Australia and New Zealand.

China Southern has also been expanding in Europe and North America, and in regional markets.

See related report: China Southern Airlines exceeds 55x flights target to Australia/NZ

For China Eastern, both the China Eastern (only) operation and the combined China Eastern/Shanghai Airlines operation are included. China Eastern and Shanghai Airlines have a different relationship from those of airlines in other groups, such as Air China with Shenzhen Airlines, or China Southern with Xiamen Airlines. China Eastern wholly owns Shanghai Airlines, whereas in those examples the parent company does not own 100% of the airline, and the two airlines operate out of different bases. China Eastern and Shanghai Airlines both have Shanghai as their main hub. As a result of this and the same ownership, there is some strategic coordination and route/capacity allocation. This makes it difficult to separate out China Eastern from Shanghai Airlines.

For China Eastern (only), international exposure has marginally increased over a historical period. As at Air China and China Southern, international exposure is projected to increase 8ppt from 2013 to 2016. The combined China Eastern/Shanghai Airlines calculation shows a slightly faster acceleration of international focus, in part because Shanghai Airlines has embarked on international growth.

Air China, China Eastern and China Southern share of international (including regional) ASKs: 2006-2016

Air China is the largest international Chinese airline, but China Southern has standout growth from 2010

At a group level, Air China Limited remains the largest Chinese airline (group). Its RPKs were twice the size in 2015 compared with 2009. China Southern Holding has notably overtaken China Eastern Holding. China Southern is boosted by Xiamen Airlines, part of the group, expanding internationally with its 787-8s and forthcoming 787-9s. Xiamen Airlines plans to open four long haul routes in 10 months.

See related reports:

Air China Limited, China Eastern Holding and China Southern Holding international (including regional) RPKs (billions): 2003-2015

As impressive as Air China's international growth has been – a doubling since 2009 – China Eastern Holding and China Southern Holding have grown faster, evident on the chart by the gap narrowing between them and Air China. Creating an index of group RPKs (2010=100), China Eastern has grown marginally faster than Air China.

This is from a lower base, and China Eastern's Shanghai hub has not been as severely congested for so long as Air China's hub, where it is limiting international growth. The standout is China Southern Limited, whose 2015 RPKs are nearly three times greater than in 2010.

Air China Limited, China Eastern Holding and China Southern Holding international (including regional) index of RPKs (2010=100): 2003-2015

Internationalisation of Chinese airlines has yet to reach its peak

There is no sign that this pivot towards international markets is reaching its peak. Chinese airlines are realising their potential. They have been emboldened to a degree by an increasingly improving on-board product and growing partnerships.

Delta's stake in China Eastern has brought the airline greater awareness in the US. On 23-Mar-2016 Air China and United, distant partners, announced closer cooperation that will "prepare both companies for future joint opportunities" – which could be interpreted to mean a joint venture, once that becomes possible under the regulatory framework. Air China has a growing number of JVs in place or in works, and likewise for China Eastern. China Eastern has confirmed talks with Etihad Airways about a partnership.

Hainan Airlines, privately owned and not one of the Big 3, could be the reported bidder interested in Virgin America.

Such a move would greatly accelerate Hainan's expansion in the US market, which Chinese airlines regard as their biggest long haul opportunity.

See related report: HNA investment in a US airline would boost Hainan Airlines in US-China market, reshape competition

There have been a dozen start-ups in the short haul space in China in recent years. These companies are starting to move beyond domestic flying. Loong Air with 14 A320s and a desirable base in Hangzhou, was approved on 23-Mar-2016 to expand its business scope to international flying. CAPA in Nov-2015 identified 10 Chinese airlines to have been publicly linked to widebody operations. Since then, two more airlines – Juneyao Airlines and Okay Airways – have been linked to widebody operations, likely to be used eventually for long haul flights.

See related reports:

 The international growth of Chinese airlines is reshaping international markets and delivering significant tourism benefits. Fortunately for many parties in the realm of aviation there is no indication of the peak being reached.

See related reports:

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