“Going global” has become a major focus of China’s airlines, thanks to lower fuel prices and fast growth of Chinese citizens’ outbound travel.
Since 2013, China has become the largest outbound tourism country. According to the World Tourism Organization, the number of Chinese outbound tourists in 2015 increased by 12% over the previous year to reach 120 million and this figure is expected to continue to grow, reaching an estimated 133 million this year and 200 million in 2020.
Chinese carriers are accelerating the pace of their international expansion plans to tap into market demand. Air China opened a total of 29 new international routes in 2015, taking its number of international routes to 111 and making the airline the only one carrier in Asia that operates international routes to all six continents except Antarctica.
According to the Civil Aviation Administration of China (CAAC), Beijing-based Air China applied to open six international routes in 2016, comprising 3X-weekly Beijing-Zurich, 7X-weekly Chengdu-Sydney, 3X-weekly Chongqing-Dubai, 5X-weekly Shanghai (Pudong)-San Jose, California, 4X-weekly Shanghai (Pudong)-Manchester, UK, and 4X-weekly Shanghai (Pudong)-Barcelona service. These routes will be operated by the Boeing 787-9s that Air China is taking delivery of this year. In the first half of 2016, Air China saw 20.7% growth in turnover volume of passengers on international routes compared with 5.3% growth on domestic routes.
It’s a similar story at China Southern, which last year opened 15 new international routes from Guangzhou and Shenzhen, and achieved a collective profit for the first time on its international network. This year, the Guangzhou-based carrier opened eight new international routes to neighboring Asian countries including Japan, Vietnam, Korea and Thailand. For the summer-fall China, Southern is operating a total of 149 international routes and 26 regional routes (to Hong Kong, Macau and Taiwan), accounting for more than 30% of the carrier’s total network covering 73 destinations in 38 countries with 989 weekly international departures. For the first six months of this year, China Southern experienced a staggering 30.2% growth in volume of passengers on international routes, while domestic passenger growth was just 0.95%.
China Southern now holds about a 30% share of the Sino-Oceania market, and has opened seven new routes in this market alone this year: Guangzhou-Sydney, Guangzhou-Melbourne, Guangzhou-Brisbane, Guangzhou-Perth, Shenzhen-Sydney, Guangzhou-Aukland and Guangzhou-Christchurch. The carrier transported a total of 1.1 million passengers on Sino-Oceania routes in 2015, an 18% jump over 2014. This year, China Southern also plans to further strengthen its position in the Sino-Oceania market by boosting existing flight frequencies and operating the Airbus A380 on Sino-Oceania routes. Combined, this will increase China Southern’s capacity by six times compared to 2009 when the carrier first launched a Sino-Oceania route. The company is also expected to open Guangzhou-Adelaide in December.
China’s other carrier heavyweight, China Eastern, has long been the country’s international leader, but it is also shifting priorities. China Eastern’s international route network used to focus on Japan, Korea and Southeast Asian countries, but those markets are also seeing fierce competition from low-cost carriers like Shanghai-based Spring Airlines and its subsidiary Spring Japan, which now flies 25 China-Japan routes of which 18 routes were launched since 2015. Spring now holds a 30% share of the Sino-Japan market in terms of passenger boardings.
In response, China Eastern turned to other international markets and has implemented a “Pacific strategy” and a “Europe profit plan.” The carrier has boosted flight frequencies on routes to New York, Los Angeles, Hawaii, London and Paris over the past two years.
“In 2016 we will add 49 long-haul aircraft to increase international capacity by 30% and open six new routes to Prague, Madrid, Amsterdam, St Petersburg, Chicago and Brisbane, all starting from Shanghai. It is quite rare for China Eastern to open so many international long-haul routes within one year,” China Eastern CEO Ma Xulun said.
In the first half of this year, the company saw 32.8% growth in passenger volumes on international routes compared with 8.4% growth on domestic routes.
China Eastern also increased capacity on European routes by 30% and boosted its European flights frequencies to a total of almost 40 weekly flights, growing its share of the European market by 5%. The carrier is also enhancing its European presence through more partnerships, launching a joint venture with KLM on the Shanghai-Amsterdam route and discussing the potential to build Prague as a European transfer hub in a possible partnership with Czech Airlines.
The 787 Dreamliner is a common factor in much of the Chinese carriers’ international network growth. The new widebody makes it economical to open more direct flights from Chinese secondary cities to the US and Europe. In 2013, China Southern became the first Chinese carrier to put the 787 on routes to US.
With the Airbus A350 now in service with several airlines, that aircraft too is being put to use on these “long, thin” international routes. China Eastern’s Ma, for instance, said the carrier plans to increase international capacity by 20% over the next five years and that is why it ordered 15 787-9s and 20 A350-900s in April. The carrier is scheduled to take delivery of the 787-9s between 2018 and 2021 and will operate them on the lucrative Sino-US routes. The carrier expects to take delivery of the A350s between 2018 and 2022.
Hainan Airlines is the largest Chinese 787 operator with 10 -8s in service. The Haikou-based carrier also has 30 787-9s on order, with eight -8s to be delivered this year and the rest between 2017 and 2021. Hainan operates all its 787s on Sino-US and Sino-Europe routes.
China Southern’s subsidiary Xiamen Airlines is another example. The Xiamen-based carrier started to operate intercontinental routes in 2015 after taking delivery of six 787-8s. Xiamen’s network now includes Xiamen-Amsterdam, Fuzhou-Sydney, Xiamen-Sydney, Xiamen-Melbourne and Xiamen-Vancouver – all begun within a year.
Xiamen CEO Che Shanglun said the airline would also launch Xiamen-Shenzhen-Seattle in September and Fuzhou-New York in January 2017. Xiamen ordered six 787-9s in July, scheduled for delivery between 2016 and 2018.
Air China took delivery of its first 787-9 in May and is scheduled to take delivery of another six -9s this year. The carrier ordered a total of 15 -9s that will complete delivery by 2018; it uses the aircraft on routes from Beijing to Frankfurt and Rome and plans to expand to other European and US destinations.
Air China also ordered 12 Airbus A330-300 aircraft in March, scheduled for delivery between 2016 and 2018, and six Boeing 777-300ERs in January, scheduled to be delivered between 2016 and 2017. These will all help boost international expansion.
HNA expands and invests
Hainan Airlines’ parent company, HNA Group, has adopted a different business model for its international expansion, both acquiring new aircraft and taking stakes in foreign airlines and aviation companies to support its global growth plans.
Hainan Airlines international affairs director Li Xiang said the carrier is targeting premium passengers and international business routes, which are mainly “China’s first cities to foreign secondary cities” or “Chinese secondary cities to foreign first cities.”
Another HNA carrier, Beijing-based Capital Airlines, is more focused on international leisure routes, so the company is working with local travel agencies. Tianjin-based Tianjin Airlines, also part of HNA, is prioritizing building Tianjin as “the second access city to Beijing” by opening international routes out of Tianjin to foreign first cities, avoiding slot-congested Beijing Capital Airport.
In 2015, Hainan Airlines opened six intercontinental routes comprising by Beijing-Prague; Beijing-San Jose; Shanghai-Boston; Shanghai-Seattle, Xi’an-Rome; and Xi’an-Sydney. This year the carrier is opening five more intercontinental routes: Changsha-Los Angeles; Beijing-Tel Aviv; Beijing-Manchester; Tianjin-Moscow; and Tianjin-Chongqing-London.
Finally, HNA’s Capital Airlines has launched Beijing-Copenhagen and is applying to begin Hangzhou-Beijing-Lisbon.
In addition, HNA Group has initiated its “buy buy buy” overseas campaign announcing an A$159 million ($114 million) investment to buy a 13% stake in Virgin Australia, a $450 million investment for a 23.7% stake in Brazil’s Azul Airlines, and plans to take a 23% share in TAP Portugal, in a €30 million ($33 million) deal.
HNA Group has also increased its stake in SWISS airline’s catering and logistics services company, Gategroup, from 61.7% to 96.1%, and taken an 80% stake in Zurich-based MRO provider SR Technics. The company is looking to buy a 49.9% stake in Air France catering unit Servair.
The increased pace of international expansion is not contained just to China’s large airlines; small and medium carriers are following similar tracks. Sichuan Airlines, for instance, has launched more than 10 international routes since 2015. New routes include Chengdu-Prague, started in August, and Sichuan has applied to begin Chengdu-Hangzhou-Los Angeles and Chengdu-Jinan-Los Angeles.
Hangzhou-based Zhejiang Loong Airlines has secured approval to begin new international routes this year, while Kunming-based Ruili Airlines finalized an order for six 787-9s that will enable its international expansion plans.
Challenges remain. Industry analysts note that yields on China’s “big three”—Air China, China Eastern and China Southern—have softened on international routes since 2015 because of overcapacity, especially on routes to Japan and Korea. The continued rapid long-haul fleet expansions may exacerbate the situation. But everyone expects Chinese carriers to continue to accelerate their international expansions. What will be interesting to see is whether they focus on market share more than profit—a strategy that hurt the US major carriers until they restructured and became more capacity disciplined. As more new aircraft enter service across all of the China’s carriers, chances are that the next few years will be about a market grab.