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China's airlines pivot towards Africa, after making inroads in Europe, North America and Australia

There are three characteristics of China's airlines flying long-haul: first is the role of government pushing and often subsidising routes, even on outbound-heavy leisure flights, such as to Europe. There are some elements of a herd mentality: witness China Southern expanding in North America after Air China. And then there is domination: China Southern in a few years became a common name in Australia while Air China will soon have three daily flights between Beijing and Los Angeles.

Chinese airlines have grown in Australia, North America and Europe. The missing continent in their growth story is Africa (South America will be only a small component).

Chinese airlines have come and gone in Africa, but 2015 should cement efforts to link Africa with China. China Southern will open a service to Nairobi, in addition to Air China's previously announced Johannesburg service. For the airlines, Africa will be a very different market from Australia, Europe and North America. It will not be as big or sustainable, but it will now start to grow after many quiet years, with strong overtones of trade flows.

Ethiopian Airlines' Chinese growth forces Chinese airlines to expand

The background to Chinese airline growth in Africa is part political (introducing links to meet state objectives) and part competitive (balancing foreign airline growth). As CAPA previously wrote: 

China has influence across Africa's many and varied regions. China is taking an active role in investment (it is the largest trading partner toSouth Africa, amongst other countries) while the number of Chinese workers in Africa is growing, and China is even looking to sell its local aircraft to African nations.

Chinese Premier Li Keqiang in May-2014 proposed cooperation between China and Africa, which as envisioned would see African airlines use Chinese aircraft and for Chinese companies to invest in African airlines, as the HNA Group has done in Ghana-based Africa World Airlines. There are an unverified 400 Chinese built AVIC aircraft in China, and China has sold its latest aircraft, the ARJ21, to Congo.

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Also underlying the entrance of Chinese airlines into Africa is China's aim for its airlines to fly alongside foreign airlines in order to have some balance on international routes. The CAAC can effectively direct Chinese airlines where to go. Beijing has watched African powerhouse Ethiopian Airlines grow in Africa with publicised comments to grow further in China.

See related report: Ethiopian Airlines to continue Asia expansion with Singapore non-stops, giving Changi a needed boost

Ethiopian is the largest African airline in China. In 2015 its Chinese destinations include Beijing, Guangzhou and Shanghai Pudong. Ethiopian had served Hangzhou, near Shanghai, but dropped the service around the time Shanghai was launched.

See related report: See related report: Air China's entry into Addis Ababa and Johannesburg would further China's objectives in Africa

Annual Africa-China capacity of major African carriers (EgyptAir, Ethiopian Airlines, Kenya Airways and South African Airways ): 2005-2015

China Southern returns to regular Africa service with its Nairobi flight

China Southern in Dec-2006 opened a service from Beijing to Lagos via Dubai. The flight coincided with expanded China-Nigeria ties, including a USD8.3 billion railway in Nigeria stretching 1,315km. China Southern served the route mostly three times in 2007 and 2008 before tapering in 2009 and suspending the service in 2010.

The long distance, Dubai stopover and weak yields (especially in premium cabins) likely made the route unsustainable. It is unlikely the route could have been profitable or even could be profitable in the future.

In 2014 China Southern started service from Shenzhen to Mauritius, which it continues in 2015. The flight, technically to Africa given Mauritius' geography, is mostly an outbound leisure service for Chinese tourists. China Southern has also had very limited services to other points in Africa that are technically filed as scheduled services but are effectively charters.

There were reports in 2013 that China Southern would start service to Uganda, a surprising choice - and one that did not eventuate. Hainan Airlines in late 2014 reportedly expressed interest in a Beijing-Guangzhou-Nairobi service, but under Beijing's designation rules, China Southern's service will effectively prohibit this plan from Hainan.

See related report: Hainan Airlines eyes ambitious 2015 with wishlist for nine new long-haul routes

So China Southern's Nairobi service (three weekly A330-200s from 05-Aug-2014) marks a return to regular continental Africa service. This time, prospects are better but the route is expected to be loss-making.

It is seen as being of strategic importance for the Chinese government, both having a link and having market balance between Chinese and African airlines. Nairobi is a stronger market, can be served non-stop and has the advantage of partner Kenya Airways being based there, allowing for onward connections, particularly around East Africa where there is growing Chinese trade. 

Kenya Airways' top 10 destinations from Nairobi ranked on frequency: 09-Mar-2015 to 15-Mar-2015

Destination Frequency Seats

Mombasa

78 8500
Dar Es Salaam 35 3400
Entebbe 35 3558
Kisumu 34 3586
Johannesburg 21 2702
Kigali 18 1728
Bujumbura 17 1632
Juba 14 1344
Harare 10 1058
Lilongwe 9 913

China Southern will need to work more closely with fellow SkyTeam member Kenya Airways. Kenya Airways has a daily 787-8 service to Guangzhou but from Guangzhou only codeshares on China Southern's international services to Australia and Dubai, according to OAG schedules. The African traders in China are heavily concentrated in Guangzhou and near Shanghai/Hangzhou, meaning there is little need for extensive domestic codesharing.

China Southern will be more dependent on Kenya Airways for beyond-Nairobi access. Without cooperating with China Southern, Kenya Airways could face curbs on its growth. Kenya's schedule at the start of the northern summer 2015 season does away with the three weekly non-stop flights, replaced with a service via Hanoi (with no local traffic rights). Kenya's four weekly flights via Bangkok remain.

Kenya Airways serves 38 African cities non-stop from Nairobi, according to OAG data for Mar-2015. Its top 10 markets from Nairobi are mostly in East Africa but include Harare and Johannesburg, which could be important connecting markets for China Southern.

A strong partnership with Kenya Airways could make China Southern's Nairobi service more successful (less loss-making) than Air China's new African service, Beijing-Johannesburg.

China Southern has the advantage of a shorter route, reducing costs, and also allowing for a smaller aircraft (A330) than Air China's 777-300ER (with first class) to Johannesburg. China Southern will also be helped by departing from the southern tip of China, meaning it can pull traffic from across China to Guangzhou.

Air China, departing from Beijing in the north, will not be able to pool traffic as efficiently. Southerly Johannesburg may be a larger local market than Nairobi, but Nairobi is a more convenient connecting location.

China Southern should suffer lower losses in Nairobi than Korean Air

China Southern should experience lower losses in Nairobi than Korean Air, which launched non-stop Seoul Incheon-Nairobi service in 2012. The route was difficult as it was mostly Korean tourists going on African safaris and was very seasonal. Korean Air in Aug-2014 suspended the service, ostensibly because of Ebola, even though Ebola was concentrated on the other side of Africa, far from Kenya (although popular concern made Africa a difficult sell).

The Korean market may wrongly have assumed Kenya was at risk of Ebola, turning what was surely a loss-making route into a much worse one.

Korean Air planned to resume service, setting various dates for resumption (some with inventory closed) and gradually pushed this resumption back to Jul-2015. Korean Air's schedule continues to show the Incheon-Nairobi flight but it is not bookable.

Korean Air continues to sell Nairobi via a codeshare in Bangkok with Kenya Airways. There is limited opportunity for China Southern to take connecting traffic from Seoul, and other markets around Asia, and place it on its Nairobi service.

Air China will operate Beijing-Johannesburg as South African Airways withdraws

There were reports in Jan-2015 of Air China's likely long-haul routes for the year, including Beijing-Johannesburg and Beijing-Addis Ababa. The former has since been confirmed (amongst others, including Beijing-Montreal-Havana) while Beijing-Addis Ababa has not.

See related report: Air China's entry into Addis Ababa and Johannesburg would further China's objectives in Africa

Air China's three times weekly 777-300ER flights commence 18-Jun-2015 and replace South African Airways' three weekly A340-600 flights. There is a slight decrease in capacity with Air China's 777 seating 311 in three classes, replacing SAA's 317-seat A340. SAA has faced losses on the Beijing route since it commenced in Jan-2012.

The route was always political, with effectively no chance for profits. SAA had been pushing the government to support the route financially, thinking a cancellation out of the question, but in the end the South African government came to its senses and let SAA cancel the route.

Prior to the cancellation, SAA mooted a partnership with a Gulf carrier on the Beijing and Mumbai routes. SAA announced an expanded partnership with Air China in Dec-2014. This was against a larger China-South Africa political background and it was unclear what the partnership could provide. It would not have been practical for both carriers to operate on the route.

As CAPA previously wrote:

The decision to cut Beijing and Mumbai was long overdue. Both routes have been highly unprofitable and initially placed on the chopping block along with Buenos Aires in a strategic plan that SAA management initially prepared in early 2013. The government subsequently only agreed to approve the suspension of Buenos Aires. SAA confirmed the suspension of Buenos Aires in Nov-2014 and operated its last flight to Argentina in late Mar-2014.

SAA’s management team initially did not expect the South African government would approve Beijing because of the political importance of maintaining a connection with China, one of South Africa’s largest trading partners. SAA initially proposed that Beijing and other long-haul routes that could not be commercially viable over the long run but were strategically critical for the government be subsidised under a special scheme.

See related report: South African Airways needs to move forward with new strategic plan, starting with Buenos Aires cut

the government has never provided SAA management with the flexibility to implement the required restructuring

But the government has been reluctant to commit long-term funds to cover SAA losses – for the company as a whole or for individual routes, even where it was effectively forced to fly against its commercial judgment. The preference is for the airline to become profitable in its own right but the reality is the government has never provided SAA management with the flexibility to implement the required restructuring.

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Under the new “strategic partnership” announced in Dec-2014, SAA and Etihad expanded the number of codeshare routes to 49, including 32 routes beyond Abu Dhabi and 16 routes beyond Johannesburg. The new agreement also covered the launch of a daily Abu Dhabi-Johannesburg flight by SAA with an Etihad codeshare, resulting in a combined 14 weekly frequencies between their hubs. SAA is commencing service to Abu Dhabi on 29-Mar-2015.

SAA ultimately decided against operating beyond Abu Dhabi to Beijing and or Mumbai.

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the idea of serving Beijing via Abu Dhabi became moot as SAA was also able to forge an expanded partnership with Air China in Dec-2014. Under the new partnership Air China plans to launch services to Johannesburg in May-2015 and codeshare with SAA beyond Johannesburg. Air China previously had a limited partnership with SAA covering only SAA’s Johannesburg-Beijing flights and Air China connecting flights from Beijing to Shanghai.

Air China taking over the Johannesburg-Beijing route is an ideal scenario for SAA and the South African government, which has always viewed having a connection to China as essential but was not enamoured with the idea of having to subsidise the route over the long term. The route is not likely to be profitable for Air China given the huge losses incurred by SAA, which Mr Kalawe said in a Jun-2014 interview with CAPA were about ZAR300 million (USD27 million based on the current exchange rate) per year.

But the Chinese government clearly has the pockets and stomach to cover such losses – as it does with several strategically important Air China international routes. Just as China is strategically important for South Africa, South Africa is strategically important for China, which is keen to grow economic ties throughout Africa.

See related report: South African Airways outlook brightens as recovery plan and partnership strategy roll out

Growth will need to become sustainable

Airbus forecasts Africa-China will have some of the highest growth for the period through 2033, including 8.9% annually between North Africa and China and 8.6% between Sub-Saharan Africa and China. This growth of course is from a low base. 2015 looks to be the year this growth is established for the long-term. Unlike past African routes from Chinese carriers, the planned expansion for 2015 will mostly last, perhaps with some variation.

There are inevitable political undertones, especially around Air China's service, which will make it one of the few airlines to serve every inhabited continent. That will come at a cost for Air China, but many long-haul routes do for Chinese carriers. Returning to the three characteristics of Chinese airlines flying long-haul, the first – political – is apparent. Air China and China Southern's new African services will either receive government assistance or have their losses tolerated.

The second characteristic – the herd mentality – may appear, with other Chinese carriers entering Africa. China Eastern has abstractly thought its budding relationship with Etihad could help it serve Africa more sustainably than flying directly.

Hainan Airlines previously served Luanda. Hainan reportedly received approval for a prime Beijing-New York service (operating in competition with Air China) but with the effective condition that Hainan also serve Beijing-Mumbai-Nairobi, for which it also received approval. Neither service has eventuated, nor a mooted Beijing-Dar es Salaam.

Finally, the last characteristic: domination. This one may not eventuate in Africa. The market is different from Chinese long-haul staples of Australia, Europe and North America. Business and leisure traffic is weak and much growth will likely be at the direction of the government, not commercial planning teams. Chinese airlines may have a presence in the market but African carriers – and specifically Ethiopian and Kenya Airways – will likely be the larger story.

There are arguments for the fragmented Africa-China market to be better served by intermediaries, such as in the Gulf, but closer cooperation between Chinese and African airlines could enhance service and profitability. Ethiopian Airlines for one has said its arms are open to Chinese partners.

Much is said of the growing ties between China and Africa. For aviation, these ties are still in their infancy. They will remain that way until sustainability is achieveable, especially for Chinese airlines.

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