It is widely accepted that global air transport is becoming centered in the Asia Pacific region. Within this region China has the potential to develop into a mega-market surpassing the rest of the region and the world. The air transport industry of China is reaching strategic importance at regional and global levels.
The big three (B3) airlines of China are pursuing expansion programs. Air China, China Eastern, China Southern and some of the smaller domestic airlines have the potential to become major global players.
Global Level
At the global level the race for control involves international expansion and the biggest targets for many airlines include the prize cities of China. However, although Asia and China are becoming the biggest markets, connectivity is a major strategic goal within the wider airline industry. Global mergers and alliances are among the major developments in airline strategic management. They provide instant expansion and the fastest route to global control.
Despite the abundance of airlines globally and the constant stream of startups, exponents of the consolidation school believe the world will eventually contain only a few large carriers which should have swallowed up all the smaller players. This theory is being attempted now in the large global alliances: OneWorld, Sky Team and Star.
However from within these alliances a form of mega-merger has emerged. In Europe Air France and KLM have combined and in the US; Delta has consumed Northwest and United has merged with Continental. These moves have created what are described in the press as the biggest airlines in history.
The trans-Atlantic American Airlines / British Airways / Iberia deal includes American’s links with Japan Airlines and their flights into China. It creates a powerful group which might force Virgin Atlantic to look for strategic partnerships. Presently Virgin Atlantic and the growing Middle Eastern airlines: Emirates and Qatar Airways are going it alone without mergers or major alliance groupings. Significantly however, Abu Dhabi based Etihad Airways have entered an “agreement” with Virgin Blue of Australia according to their website.
These larger groupings are positioned to take advantage of bilateral air service and open skies agreements using hub status, slot control, networks etc, to block smaller players, new entrants and each other in the bid for dominance.
Many airlines are utilizing the powerful alliance model. However several airlines have switched alliances in recent history. B3 are involved in global alliances and it remains to be seen if they become involved in any international mergers, further domestic consolidation or continue solo expansion.
Regional Level
At the regional level; the importance of the Chinese air transport industry is illustrated by the amount of regional airline flights to Chinese destinations. Korean Air and Asiana each fly to over 20 chinese cities. Singapore Airlines in conjunction with its subsidiary Silk Air serves 10 and from Taiwan; China Airlines has routes to 14 and EVA airlines 18 mainland destinations.
Further west; Qatar and Etihad respectively serve Beijing, Guangzhou, Hong Kong and Shanghai. Spearheading the Middle Eastern global expedition is of course Emirates from Dubai. Several of the approximately 50 Airbus A380 the airline has on order can be used to vacuum traffic out of Chinas” main centers.
Hong Kong is a semi-autonomous special administrative region and flights to China are stipulated as regional flights. Cathay Pacific flies to Beijing and Shanghai but utilizes its subsiduary Dragonair to reach 15 mainland destinations.
LCC Developments
The Low Cost Carrier (LCC) airline is a radical style of airline management pioneered most successfully by Southwest in the US and epi
tomized by Ryanair in Europe. These airlines focus on short haul flights with the smaller Boeing 737 and Airbus A320 aircraft and operations that can include no food, internet bookings, fast turnaround times and the lowest prices possible.
The Asia Pacific regional sphere presents a rapidly growing LCC industry which is reaching into China where there is a growing domestic LCC presence. Cebu Pacific from the Philippine hubs of Cebu, Clarke and Manila strike Guangzhou, Hong Kong, Macau, Shanghai and Taipei. Tiger Airways the Singapore Airlines LCC currently advertise flights to Guangzhou, Haikou, Hong Kong, Macau and Shenzhen.
Jetstar the Qantas LCC subsidiary lists Haikou, Hong Kong, Macau and Shantou on their itinerary. They have merged with Valuair and recently announced a major alliance with Air Asia. This LCC alliance is very powerful in the region and reinforces the argument for consolidation. Air Asia is already engaged in JV with Indonesia Air Asia, Thai Air Asia and now Vietjet Air Asia is being formed. The group flies from six Asian centres to Guangzhou, Guilin, Hong Kong, Macau, Shenzhen and Taipei.
The LCC Air Arabia based in Alexandria, Casablanca and Sharjah covers both western and eastern Europe and reaches as far as India leaving them a step away from the main Asian theatre of LCC operations. In addition; LCC developments in India, Japan and Korea could easily follow the traditional and larger airlines into China.
The medium and long haul versions of the LCC model present further complexity. Jetstar have inaugurated long haul flights with the larger A330 aircraft and Air Asia fly the A330 to Australia, UAE, China, India, Japan, Taiwan and the UK. This could provoke current European LCC champion Ryanair to retaliate by entering the long haul LCC business from Europe to Asia and China.
Analysis of these movements indicates a race for regional and global control in the LCC market heading in the same direction as the full service mega-merger race. It could become concentrated in China and outlines the need for a much larger and stronger chinese LCC domestic and regional operation subject to CAAC and MOT guidelines. This might involve JV or merger with one of the foreign regional LCC airlines and again underlines the importance of the chinese market.
Alternately; B3 could form a large JV subsidiary LCC or pursue a ‘tiered’ service level. This would attract more passengers, generate the funding needed for some of Chinas” smaller airports and provide one of the available strategic responses to the emergence of high speed rail. A dedicated LCC variant of the new C919 aircraft from COMAC could be positioned accordingly.
Capital Airlines, Hainan, Juneyao, Spring, Tianjin and other smaller airlines although currently very successful in their own right might consider further consolidation.
Cargo
The chinese cargo market is another massively expanding area attracting competition. One race is for bulk cargo and the other the small parcel market where the global facilitators: DHL, FedEx, TNT and UPS now continue their ongoing struggle in China alongside China Post, EMS and a host of smaller local courier companies.
Airports Council International lists Hong Kong first and Shanghai third busiest in international freight movements. Potential freight volumes would suggest future consolidation in this segment.
The air transport market in China has the potential to expand enormously. B3 was originally designed to avoid excessive industry fragmentation. The concept is still relevant and the challenge is to strike the balance between consolidation and competition.
The global economy is now deeply integrated and depending heavily on China. China is a major link in the critical global supply chain and its air industry is assuming global importance.
