Budget car­ri­ers ready for take­off

Chi­nese air­lines con­sider low-cost op­tions to counter pres­sure from­ris­ing prices and nar­row profit mar­gins, Wang­Wen re­ports

China Daily (Canada) - - BUSINESS -

Low-cost car­ri­ers are set to fly high in China with more com­pa­nies ea­ger to cash in on ris­ing pas­sen­ger num­bers and off­set dwin­dling prof­its, ris­ing costs and low profit mar­gins.

Budget car­ri­ers are ex­pected to clock fast growth in China in the next few years, thanks to their ex­tremely low mar­ket share, com­pared with other re­gions, global air­craft maker Boe­ing Co said on Wed­nes­day.

LCCs cur­rently ac­count for only 5 per­cent of the civil avi­a­tion mar­ket in China, com­pared with 27.1 per­cent glob­ally, said Dar­ren Hulst, mar­ket­ing di­rec­tor for North­east Asia of Boe­ing commercial air­planes. The low level means there is plenty of room for growth, he said.

Ac­cord­ing to Hulst, the ris­ing de­mand from China will lift over­all LCC ca­pac­ity in the Asia-Pa­cific re­gion by more than 10 per­cent each year. That to some ex­tent also ex­plains the flurry of ac­tiv­ity in the sec­tor re­cently, said in­dus­try sources.

Xi­aXinghua, deputy head of the Civil Avi­a­tion Ad­min­is­tra­tion of China, said sev­eral State-owned and pri­vate car­ri­ers are con­sid­er­ing LCC in­vest­ments. In March, the ad­min­is­tra­tion re­leased guide­lines to sup­port de­vel­op­ment of LCCs.

Al­though there are no uni­fied cri­te­ria for LCCs, glob­ally they share sim­i­lar fea­tures such as cheaper tick­ets, lower op­er­a­tional costs and higher in­come from non-flight busi­ness.

China East­ern Air­lines Ltd, the first State-owned car­rier to take the budget air­line route, es­tab­lished Jet­star Hong Kong, a low-cost joint ven­ture with Qan­tas Air­ways of Aus­tralia in 2012. It is still await­ing fi­nal ap­proval au­thor­i­ties.

China East­ern plans to turn China United Air­lines — one of its sub­sidiaries based in Bei­jing — into a low-cost car­rier. If ap­proved, China United would be­come the first budget air­line in the Chi­nese cap­i­tal.

China South­ern Air­lines Ltd, the largest car­rier by fleet, added more econ­omy class seats on four air­craft of its sub­sidiary, Chongqing Air­lines, early this year. Air China Ltd, the flag car­rier of China, plans to trans­form one of its sub­sidiaries into a low­cost air­line soon, in­dus­try sources said.

HNA Group, the par­ent com­pany of Hainan Air­lines, the fourth-largest car­rier in China, al­ready has two low­cost sub­sidiaries — West Air and Hong Kong Ex­press — with other sub­sidiaries work­ing on cut­ting costs.

“All our sub­sidiaries will be


the low-cost car­ri­ers, and Hainan Air­lines will be the only full-ser­vice car­rier,” said Wang Ying­ming, ex­ec­u­tive chair­man and ex­ec­u­tive pres­i­dent of HNA Avi­a­tion Hold­ing Co Ltd.

Ac­cord­ing toWang, most of the big car­ri­ers are main­tain­ing a low pro­file about their LCC op­er­a­tions as the trans­for­ma­tion is not com­plete and there are still some un­cer­tain­ties.

Un­like the State-owned car­ri­ers, pri­vate air­lines are more vo­cal about their LCC op­er­a­tions.

Ji­uyuan Air­lines, a Guangzhou-based low-cost sub­sidiary of Shang­hai Juneyao Air­li­nesCoLtd, got the fi­nal ap­proval from the au­thor­i­ties in Fe­bru­ary and plans to start flights in Au­gust.

The new car­rier also made the largest air­craft pur­chase by a pri­vate Chi­nese air­line, by pur­chas­ing 50 air­craft worth more than $6 bil­lion from Boe­ing.

China Ex­press, a re­gional car­rier con­nect­ing south­west re­gions, also moved to low­cost op­er­a­tions with some tick­ets rang­ing from 8 yuan ($1.30) to 188 yuan in­May. Wu Longjiang, pres­i­dent of China Ex­press, said its fleet of small air­craft is cost-sav­ing and con­nects a net­work of small cities, where de­mand for budget air­lines is high.

“Mar­ket de­mand has played a big role in fuel­ing de­mand for LCCs,” said Wang from HNA Avi­a­tion. Low profit mar­gins and ris­ing fuel and hu­man­re­source costs are driv­ing the shift to LCCs, he said.

Al­though fuel prices have risen steadily, car­ri­ers can­not raise ticket prices due to stiff com­pe­ti­tion, Wang said, adding that the real chal­lenge for most car­ri­ers is to main­tain prof­itabil­ity.

The to­tal profit of Chi­nese car­ri­ers was 16.24 bil­lion yuan last year, 3.72 bil­lion yuan less than the pre­vi­ous year, while their op­er­at­ing in­come in­creased by 5.2 per­cent dur­ing the same pe­riod, ac­cord­ing to CAAC.

The high prof­itabil­ity of LCCs is an at­trac­tive op­tion for most car­ri­ers, said LiXiao­jin, a pro­fes­sor at China Avi­a­tion Univer­sity based in Tian­jin.

How­ever, most of the com­pa­nies still have to sort out sev­eral is­sues be­fore tak­ing the LCC route for growth, he said.

The profit is not just de­pen­dent on cost but also on the load fac­tor, Li said, adding that low-cost car­ri­ers need higher load fac­tors than usual, as their ticket prices are low.

The car­ri­ers have to try their best to at­tract enough pas­sen­gers to fill ev­ery flight, he said, and that is why Spring Air­lines, the largest budget car­rier in China, launches pro­mo­tional events fre­quently.

Pas­sen­gers’ ac­cep­tance and govern­ment pol­icy also play a ma­jor role in the prof­itable op­er­a­tions of budget car­ri­ers, in­dus­try sources said.

Though a low-cost air­line, West Air still pro­vides some additional ser­vices, such as free in-flight meals and free lug­gage check-in, be­cause pas­sen­gers are used to such ser­vices, said Cen Jian­jun, vice-pres­i­dent ofWest Air.

Cur­rent reg­u­la­tions also do not pro­vide enough room for car­ri­ers to cut costs on air­craft and other ma­te­rial pur­chases, fuel charges and other fees.

“Low-cost car­ri­ers still have a long­way to go in China, but they will cer­tainly take off,” saidWang. Con­tact the writer at wang­wen@chi­nadaily.com.cn

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