With the approach of the 2012 Summer Olympics in London, Qantas added a special touch to the famous “flying kangaroo” emblem on one of its Boeing 747s—yellow boxing gloves were painted on the ‘roo’s paws.                                                                        The symbol of a fighting kangaroo may be appropriate at more than one level as competition steps up on some of its most established routes. China Southern Airlines (CZ) is intensifying its focus on operations between Australasia and major European gateway cities as part of an overall strategy to grow its international network and attract more business travelers.
  Using its Guangzhou base as a connecting hub, CZ plans to grow its “canton routes” that funnel traffic between Australasia and European cities such as Amsterdam, London, Moscow and Paris.
  Beginning with London Heathrow, from where the carrier will increase its three-times-weekly service to Australia via Guangzhou to a daily service beginning October, CZ plans to apply the same strategy to Amsterdam and Paris, boosting their service frequencies on these predominantly business routes. The canton routes expansion is also part of an increased focus on growing international business and transitioning to a network that is more hub-and-spoke, less point-to-point.
  CZ CEO and general manager Tan Wangeng said these routes are already operating well, with about 60% of passengers being transit and the numbers growing. 
   “The success of our international routes helps to push up load factors on our domestic routes. For example, 53% of the passenger traffic on the Guangzhou-Australia routes are transit passengers from other parts of China, which directly increases the load factors of our domestic routes,” Tan said.
  The carrier operates five routes and 42 weekly flights from Guangzhou to Australasia, making Guangzhou China’s number one gateway to the region. Last year CZ transported almost 600,000 passengers to Australia. 
   “Our success in the Sino–Australia market is bolstered by our strong domestic route network. Passengers who fly with us to visit Australia are not only from Guangzhou, but also from other parts of China. And foreign passengers can also transfer at our Guangzhou hub to other parts of China through our comprehensive domestic route network.” 
Expanding in tough times
For this reason, the carrier plans to open new international routes every year despite the economic uncertainties and even though Tan acknowledges the challenges of expanding in tough times. CZ reported a 2011 net income of CNY5.11 billion ($805.7 million), down almost 12% compared with the previous year. Tan remains cautious about the financial outlook for this year given the continued economic uncertainties and high fuel prices—both of which contributed to last year’s dip. “I don’t think our financial performance this year will outperform that in 2011,” Tan said. 
  The difficult economy makes for a double hit if you are one of mainland China’s three major carriers, Tan points out.  “As the global financial crisis deepens and economic uncertainties increase, more and more foreign airlines see the China market as a ‘big pie’ and look to further explore the Chinese market potential. Under such circumstance, as Chinese carriers, we not only have to maintain our own domestic market share, but we must also expand internationally, which really presents with us both opportunities and challenges,” Tan said.
  Tan is confident that Chinese carriers can compete. He draws a parallel between the environment in which Chinese carriers now operate with the situation that Chinese banks were placed when China joined the World Trade Organization in 2001. At that time, there was a widespread speculation that China’s domestic banks would go bankrupt or close down. Instead, however, they become more competitive and stronger.
   “There are two reasons for this,” Tan said.  “First, Chinese companies are driven by fierce external competitive pressures to improve their international competitiveness and enhance their service levels. Second, Chinese companies have very rapidly set up different branch offices in different domestic cities to get more market share. As one of the major Chinese carriers, we can take a lesson from this, which is that we should not only improve international competitiveness and enhance our service levels, but we also need to increase our domestic market share by expanding our route networks.” 
  For CZ’s part, this means forging ahead with its growth strategy. “We will adjust our international expansion pace accordingly, but in the long run, we will continue our international expansion because sometimes it’s better to do that in a market downturn. That’s because it is much more difficult for carriers to grab market share when the market is booming and competition is more fierce,” Tan said.
   The carrier plans to open more routes from Guangzhou, Adelaide, Cairns, Frankfurt, New York, Toronto and Washington, DC. It is also considering launching new routes to South America. 
  With rapid international expansion comes the need for a new long-haul fleet.  Earlier this year, CZ placed a firm order for 10 Boeing 777s, which will be delivered next year and be the workhorses of these new international routes.
  The carrier is also scheduled to take delivery in September of its fourth of five Airbus A380s on order and it expects to take delivery of its first of 10 Boeing 787s in the third quarter. The A380s are operated out of Beijing to Guangzhou and Hong Kong, but Tan said they will transition to the major international hubs when the time is right.  The 787s are also being earmarked for routes to Europe and the US. 
  Tan acknowledges that CZ has work to do to get brand recognition in some of the international cities it is now targeting. “We still lag behind some world class carriers in terms of marketing levels and global service standards because we are short of people who are really good at international marketing management,” Tan said. “We are determined to become a global renown brand, but we are fully realize that there is still a long way to go for us. It will take time, but we are confident we will achieve our goals.” 
  Controlling costs is another key to successful expansion. Fuel accounts for about 40% of the carrier’s total operating expenses. CZ is therefore accelerating the retirement of its older aircraft, including its MD-82s, MD-90s, ATR 72s and 737-300s. 
Beyond Guangzhou
CZ’s growth plans are not all about Guangzhou. Beijing, Chongqing and Urumqi are also focus points. According to Tan, the carrier will boost frequencies from Beijing—where it has only a 17% market share based on passenger boardings—to Guangzhou, Zhang Jiajie, Anshan and Nanchong. Some news routes will also be launched, including Beijing–Baise.
   “If there are more slots available, we would like to enhance our position in Beijing by adding more flight frequencies on routes starting there and also opening more new routes,” Tan said. Expansion is difficult, however, because of a severe shortage of available slots.
  Another important domestic gateway in west China is the Xinjiang hub. “We hold a more than 50% share of Xinjiang market and will continue to maintain our dominant position there. The Xinjiang domestic market has a big potential and could be an important gateway to west Asia, the Middle East and Europe,” Tan said.
   Last year, CZ transported 560,000 passengers from Xinjiang to 13 international destinations. Over the next five years, the carrier plans to open more new international routes and is looking at Bucharest, Madrid, Prague and Stockholm. 
At its Chongqing hub, where CZ holds a 60% market share, the carrier plans to become the first domestic carrier to create a domestic hub through which passengers can transfer to secondary and tertiary Chinese cities through its subsidiary Chongqing Airlines. “So far, China doesn’t have a domestic hub that connects with these secondary and tertiary Chinese cities.  Beijing, Shanghai and Guangzhou are more inclined to be international hubs. I think Chongqing could become our hub for transfer passengers to the plateau area, to places such as Lhasa and Jiuzhai, and we are working on that now. But we also want to expand Chongqing hub’s function as a domestic hub,” Tan said.