The Takeoff Episode 03: Why Team and Culture Matter for Travel Startups Sponsored This content is created collaboratively with one of our sponsors.
The regulation change lifts limits on fare discounts, which means carriers can charge less to increase load boosting growth and revenues.
There can be more Chinese budget airline carriers following the regulation change by the Civil Aviation Administration of China.
The administration released a notice to cancel limits on the lowest price, which means airlines can provide more discounts. The largest discount for air tickets had been 45 per cent, according to the former regulations.
Meanwhile, the administration is encouraging Chinese main carriers and private capital investors to put money into budget airlines.
The civil aviation authority also is working on some specific policies to support the growth of budget airlines, including airplane purchases and route applications, Xia Xinghua, deputy director of the administration, said in a seminar on budget aviation.
Airplane purchases, route applications and jet fuel prices were the main obstacles for Chinese low-cost airlines. The situation may change because of the authority’s support.
The authority is also considering developing standards for budget airlines because there is no official definition of them in China yet.
Generally speaking, some items are features of budget airlines globally, such as cheaper tickets, higher income from non-flight business and lower operational costs.
“It is definitely good news for privately owned airlines to change the lowest price,” said Wang Zhenghua, chairman of Spring Airlines, the largest budget carrier in China.
Spring Airlines was fined by the local pricing bureau in Jinan, Shandong province, in 2006 because the carrier provided some tickets at 1 yuan on its Shanghai-Jinan route. The price broke the Civil Aviation Administration of China’s former regulations. The carrier withdrew from the route.
“According to the new rules, tickets costing only 1 yuan will not be forbidden anymore,” Wang said.
The budget airline also noticed it is now much easier to purchase new aircraft.
Wang said it used to take four to five months for Spring Airlines to apply to buy a new aircraft but the period has been shortened dramatically.
Spring Airlines plans to enlarge its fleet by 40 aircraft by 2015. It already has 39 airplanes, and its fleet will total 46 aircraft by the end of this year.
“We still plan to purchase eight to 10 aircraft every year,” Wang said.
West Air, a subsidiary of HNA Group, which completed its transformation to budget airline at the end of 2012, also has a plan to increase its fleet. Four aircraft will be added in 2014.
Some other airlines are also trying to turn into low-budget airlines because of the business opportunities they present.
China United Airlines Co Ltd, a Beijing-based subsidiary of China Eastern Airlines Co, is working on a specific plan to turn into a low-cost carrier.
Juneyao Airlines Co Ltd, a privately owned carrier in China, also applied to develop a low-cost airline called Jiuyuan Airlines. It means the airline will provide special air tickets priced between 9 to 49 yuan at certain times.
“We can expect more budget airlines in China because the authority’s support may make it easier to enter the business,” said Li Xiaojin, a professor at China Aviation University in Tianjin.
The Chinese are getting used to traveling by air, with air traffic growing fast and providing more customers to budget airlines, he added.
Chinese airlines transported 319.36 million person-trips in 2012. The number reached 326.1 million in the first 11 months of 2013, according to the Civil Aviation Administration of China.
But it is still difficult to operate budget airlines, which need to lower their costs and improve load factors at the same time, Li said.
“The low-cost airlines need enough passenger flow to make a profit because their ticket price is low,” he added.
Improving efficiency is a main method for budget airlines to lower their operational costs.
West Air’s overall costs in 2013 were reduced 15 per cent over 2012 through improving plane-use rates and upgrading operational systems.
The daily use rate of an airplane by West Air is about 12 to 13 hours, while the average number of the whole industry is about 9.8 hours a day, said Liu Feihu, control manager of the carrier’s operations center.
“Reducing the ground handling time is an important way to improve the use-rate,” he added.
The carrier, which uses the 13 Airbus 320 family aircraft, runs more than 70 domestic flights daily.
Accordingly, the airline’s ticket price is about 15 per cent lower than the market’s average level.
The carrier provided more than 10,000 tickets with 70 to 90 per cent discounts. Some tickets were only priced at 8 yuan in November 2013.
After the transformation from being a traditional airline into a low-cost airline, West Air’s flights load factor also increased by 5 per cent, reaching 90 per cent.
However, Chinese low-cost carriers still have to cultivate the market before they can gain more market share.
“People’s acceptance of budget airlines is still a challenge for us,” said Cen Jianjun, vice-president of West Air.
As a low-cost airline, West Air still provides in-flight food and a free luggage check-in service, which incur fees at other budget airlines, Cen said.
On the other side, Chinese budget airlines also need to increase their income from non-flight business, which is common among low-cost airlines as a main income source globally.
The income from non-flight business accounted for only 3 per cent of West Air’s total income in 2013, while the percentage for Air Asia was about 20 per cent.
Currently, West Air’s non-flight business includes insurance, hotel booking, tourism and vehicle rental.
The carrier plans to increase income from non-flight business to 5 per cent in 2014 through offering extra services.
“We will provide full travel services in the future,” said Xiao Lin, general manager of the carrier’s marketing and sales department.
It is an advantage for the carrier that its parent group has other tourism subsidiaries covering hotels, travel agencies and tourism destinations.
“It is easier for us to cooperate,” Xiao added.
(c)2014 the Asia News Network (Hamburg, Germany). Distributed by MCT Information Services.