You think it's tough to start an airline in the U.S.? Try going up against both established players and a federal government that tips everything in their favor.
Author: Jason Subler
Wang Zhenghua employs a simple philosophy for surviving as a private airline in China’s state-dominated aviation sector.
“You have to take it a bit slowly, rather than being too aggressive and making enemies everywhere,” says Wang, founder and chairman of Shanghai-based Spring Airlines, of the approach that has enabled him to successfully carve out a piece of the $56 billion-a-year Chinese airline industry.
Wang has come a long way since his start in 1981 running a tiny tourist agency in central Shanghai, beating the odds to build up not just one of the country’s most prominent travel agencies but also its biggest private budget carrier, with nearly 60 routes in China and seven overseas.
His tale underscores the challenges private Chinese companies face, even as Beijing pushes for them to play a bigger role in driving growth in the world’s second-largest economy.
For Wang, one of the biggest obstacles to expanding has been resistance to his opening new routes from state-owned airlines.
“Whenever we open a new route they get tense, and sometimes they take an unfriendly approach,” Wang said in an interview inside the mock-up airplane fuselage that staff at his spartan headquarters use to train new flight attendants.
“The approving authorities are also in a tough position – they’re afraid of the big companies.”
Working at the Margins
In some cases, aviation regulators have held up applications for prized routes for years on end, Wang said. He is still waiting for permission to fly to Taipei, for instance.
In others, they have given him only unenviable time slots, such as his Shanghai-Beijing route, for which his flights arrive in Beijing after midnight and leave again before 7 a.m.
And at times, officials squeezed between the lobbying by state carriers and a desire to offer passengers more options have suggested that Wang fly to his destination via a smaller city that is otherwise not served, adding to his costs.
Having learned from difficult experiences in the past – he was famously threatened with a 150,000 yuan ($23,500) fine in 2006 by a regulator in Shandong province for supposedly disrupting market order with promotional tickets selling for 1 yuan each – Wang now takes a more conciliatory approach.
“Whenever we want to fly somewhere new, we first get in touch with the big companies flying there, tell them we’re starting flights, explain that we have a different segment of the market … and ask for their support and guidance,” he said.
That strategy, and synergies between Wang’s travel agency and airline, have helped Spring stand out in a field littered with other private airlines that have tried and failed.
Spring Airlines, launched in 2005, made 470 million yuan ($73.8 million) in profit in 2010. It has not disclosed 2011 results because it is currently applying for an initial public offering (IPO) in Shanghai.
Wang’s experience is shared by many private and foreign companies in various industries, which face an uphill battle against dominant state-owned enterprises, or SOEs, but find ways to work around those obstacles, said Kent Kedl, managing director of Greater China and North Asia for Control Risks.
“There are some companies that are finding it profitable to be working at the edges. You don’t necessarily have to be in the scrum, in the center, to make money in China,” Kedl said.
It’s All Relative
As such, players such as Spring are unlikely to pose a serious threat to the likes of Air China, China Southern and China Eastern Airlines anytime soon, industry players say.
“State-owned airlines have a longer history and are bigger in terms of capital size compared with privately owned airlines,” said Wang Jian, board secretary of Shanghai-based China Eastern. “In terms of routes, we don’t have direct competition (with Spring Airlines).”
China Southern did not respond to requests for comment; Air China declined to comment.
China has one of the world’s fastest growing aviation markets, although its top three state-owned airlines are currently suffering from a slowdown in the domestic economy and uncertainty overseas that is leading their parents to line up massive cash injections.
China Southern and Air China are set to receive a combined 3.05 billion yuan from their parent companies, while aid is also on the way for China Eastern.
And, in a sign of Chinese expansion in the aircraft manufacturing sector, Beijing city government-linked Superior Aviation is in talks to purchase bankrupt U.S. business jet maker Hawker Beechcraft.
Despite the hurdles for Spring to expand, which also include a dearth of trained pilots in China, Wang is optimistic about the company’s future growth.
The current economic slowdown is actually prompting many passengers to favor his low-cost tickets, he said, and he hopes that the company’s long-planned IPO can happen as early as this year, enabling him to expand his fleet beyond the 31 Airbus A320s he currently has in service.
He is also hopeful that the conditions for doing business as a private company will become easier over time, though experience leaves him with no illusions.
“Of course I want things to open up more,” he said. “But fairness is all relative.” ($1 = 6.3714 Chinese yuan)
Additional reporting by Jane Lanhee Lee and Melanie Lee in Shanghai and Alison Leung in Hong Kong; Editing by Raju Gopalakrishnan