Skift Take

China's biggest carriers have opened scores of long-haul routes in recent years and have improved business class. The only thing holding them back could be an expected jump in fuel prices. Between Chinese airlines' inroads and looming transatlantic moves by Norwegian, with an assist by Ryanair, U.S. legacy carriers could face significant challenges.

Killing four empty hours at Guangzhou airport waiting for a China Southern connection to Sydney may not be everyone’s idea of fun. For Gina Capella, it was a no-brainer.

The 43-year-old Boston resident and her friend saved hundreds of dollars last year choosing China Southern Airlines Co. over a direct flight from Seoul with Korean Air Lines Co. or Asiana Airlines Inc. “We didn’t mind the layover because it was so much cheaper,” she said. “Like, almost half the price.”

Chinese airlines are flooding the world with some of the lowest long-haul fares ever seen — and delivering a hammer blow to foreign carriers trying to keep up. From Delta Air Lines Inc. and American Airlines Group Inc. in the U.S., to Cathay Pacific Airways Ltd. and Korean Air, many operators are feeling the squeeze from the extended reach of mainland Chinese carriers.

They don’t just offer cheap fares on routes long-dominated by national airlines like Korean Air. They’re also adding hundreds of overseas flights from little-known Chinese cities to airports all over the world.

“Chinese airlines are still hardly scratching the surface of their potential, not just in China, but globally,” said Will Horton, a Hong Kong-based analyst at the CAPA Centre for Aviation. “If an airline today cannot compete with or grow alongside a Chinese airline, the future will be bleak.”

According to CAPA, mainland Chinese airlines have opened 75 long-haul markets since 2006, led by Air China Ltd. and Hainan Airlines Co. More than two-thirds of those routes opened only in the past two years. China’s three biggest carriers — Air China, China Eastern Airlines Corp. and China Southern — are state-controlled and listed in Hong Kong and Shanghai.

Cathay, where first-half profit sank 82 percent as Chinese travelers bypassed its Hong Kong base, is now conducting what it calls a “critical review” of its business.

Delta President Glen Hauenstein told analysts in October that China “continues to be challenged” as capacity growth outpaces demand. American Airlines President Robert D. Isom said the same month there’s “continued weakness in China” as excess capacity seeps into the airline’s new services from Los Angeles to Hong Kong, Haneda, Sydney and Auckland.

A round trip with China Eastern between New York and Bangkok, via Shanghai, costs $570.06, according to The same trip with United Airlines through Hong Kong costs $714.80. Flying from Los Angeles to Hong Kong with China Airlines is one third cheaper than with American Airlines.

“U.S. airlines dominated the China-U.S. route in the past, but now it’s the Chinese airlines,” said Chen Suming, an analyst at Shanghai Chongyang Investment Management Co. “Most of the new air travelers are from China, not the U.S.”

China Southern is selling flights from Sydney to Seoul, via Guangzhou, for $588.30. That’s more than one third cheaper than flying direct with Qantas Airways Ltd. Getting from London to Hanoi in Vietnam, also via Guangzhou, costs just $830 with China Southern. British Airways Plc charges $1,216.50.

Price isn’t everything. Cathay and Singapore Airlines Ltd. both have a five-star rating for product and service from airline rating system Skytrax. Hainan Airlines Co. is the only mainland Chinese carrier among the world’s nine top-rated airlines. National carrier Air China has three stars.

There’s little sign the inundation will end. International air routes in China jumped 35 percent to 660 last year, the Civil Aviation Administration of China said. By 2021, Chinese will be the top overseas visitors to the U.S., according to the U.S. government.

For years, the easiest way to get to a second- or third-tier city on the Chinese mainland was to fly to long-established transit centers such as Hong Kong, Shanghai or Beijing and then take a local connection. Now a new world order is emerging. Chinese carriers in these cities are sidestepping hubs such as Singapore and Hong Kong and flying straight to destinations abroad. That poses the biggest threat to airlines such as Cathay and Singapore Air.

This month, Hainan started flying non-stop to Las Vegas from Beijing, its 10th route to North America. Hainan, controlled by billionaire Chen Feng, also operates at least eight flights to European cities. Meanwhile, British Airways is halting its London-Chengdu service in January because it’s not viable.

Underlying Desire

Demographics partly explains the proliferation of flights from China and the lop-sided, mainly-Chinese flow of passengers. Chengdu has a population of more than 14 million. Even the population of Xiamen, on China’s southeast coast across from Taiwan, is nearing Sydney’s 4.3 million.

“While it might not work for foreign carriers to fly to second-tier cities like Chengdu and Xiamen, it will still work for the Chinese because the originating market is very big,” said K. Ajith, an analyst at UOB Kay Hian Pte in Singapore. “There’s an underlying desire to travel.”

That’s borne out in forecasts for new aircraft. Chinese airlines will need 6,810 new planes valued at $1 trillion in the next two decades to meet travel demand, according to Boeing Co.

Meanwhile, U.S. airlines are seeking to bolster ties with Chinese carriers. Delta invested $450 million in China Eastern in July 2015 for a 3.6 percent stake. United Continental Holdings Inc. this year signed a deal with Air China to improve connections and enhance frequent flier benefits between the airlines.

To be sure, rising fuel prices, spurred by OPEC’s production cuts in November, may hold back some of the overseas expansion by China Southern and China Eastern, said Ajith, the analyst at UOB Kay Hian.

“They’re profitable, they’ve had good cost control and they’ve benefited from low fuel prices,” he said. “The only issue is what happens when fuel prices rise?’’ At that point, they may switch resources to domestic routes, where they have more price control, he said.

While capacity growth on routes between the U.S. and Shanghai, Beijing or Guangzhou has been “off the charts,” Chinese airlines have “maxed out” under the current bilateral agreement, said Kris Kelley, an airline analyst at Janus Capital Management.

All the same, Australia’s government announced on Dec. 4 an agreement with China to remove all capacity restrictions between the two nations. In October, Britain agreed to double the number of flights between U.K. cities and China.

Chinese airlines are improving their business class, too, giving them confidence to compete around the world, according to Horton, the analyst at CAPA. With every new generation of aircraft, that level of service only improves, he said.

(Updates with comments from analyst on sustainability in 21st paragraph.)

–With assistance from Michael Sasso Mary Schlangenstein Benjamin Katz Richard Weiss Christopher Jasper and Dong Lyu To contact the reporters on this story: Angus Whitley in Sydney at [email protected], Kyunghee Park in Singapore at [email protected] To contact the editors responsible for this story: Anand Krishnamoorthy at [email protected], Jason Gale, Sam Nagarajan

©2016 Bloomberg L.P.

This article was written by Angus Whitley and Kyunghee Park from Bloomberg and was legally licensed through the NewsCred publisher network.

November 16, 2022
Dallas-Fort Worth, TX and Online
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Tags: air china, china, china eastern

Photo credit: China Southern Airlines and other Chinese carriers are giving competitors a run for their money with low fares on long-haul routes. Pictured is a China Southern A380.