Chinese airlines ready to embark on long-haul price war with international rivals

Chinese airlines are ready to rumble. Having freed local carriers to hike fees at home, the government will now let them compete on long-haul routes to overseas destinations. A price war to serve popular destinations is in the offing, as the Big Three – China Eastern Airlines, China Southern Airlines and Air China – fight it out. That will come at foreign rivals’ expense.

Progress in rationalizing the aviation sector has been slow in China. Military limits on where and when commercial planes fly can cause massive airport delays. The central government has asked the three State-owned giants, worth a combined $56 billion, to swallow some smaller rivals – but they also had to take on the extra employees, driving up costs.

The Civil Aviation Administration of China (CAAC) has taken a few steps in the right direction this year. In January it removed caps on fares for 300 domestic routes, which could boost average earnings by around 7 percent, according to estimates by consultancy Crucial Perspective.

Last week, the CAAC said it would remove a long-standing “one route, one airline” rule that has prevented Chinese airlines from competing on expensive-to-serve international routes. The two moves are likely related: Fatter margins at home will allow for aggressive expansion abroad.

Airline shares have outperformed in response, especially China Eastern and China Southern, which will also benefit from a hub in Beijing’s $13 billion new international airport. Shares in China Eastern are up 18 percent year to date in Hong Kong.

According to DBS, international travel accounts for 20 to 25 percent of traffic, as measured by revenue passenger kilometers, at Chinese airlines. That’s 5 percentage points below the US average, so there’s room to catch up.

Chinese carriers have increased their international routes at a rough average of 18 percent per year since 2012, and that will only increase.

Overseas brands that have been happily cashing in on China’s outbound travel boom for years will now face more State-backed competitors. With earnings already under pressure from higher fuel costs and low-cost rivals, this will hardly be welcome news.

The author is Pete Sweeney, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn