Red star rising

And so they should.

It is now the world’s 3rd biggest airline by passengers carried and the largest in Asia and after refining its domestic business model has moved its sights to the international arena and the impact has been immediate.

Return business class fares from Sydney to Europe for $4000 are a portent to come for its competitors and while the airline may not snare the blue chip corporate accounts it will pick up many smaller ones while the fare level itself puts downward pressure on travel contract negotiations.

And while some will argue that there are only a limited number of seats the airline plans to triple its 32 flights to a week to Australian cities by 2015.

As always in aviation there are a variety of factors at play to change the landscape.

According to Air Transport World’s China Editor Katie Cantle, an expert on China’s airlines, China Southern is accelerating the pace of its international expansion in response to mounting competition from China’s expanding high-speed railway network.

China Southern’s GM Tan Wangeng told Ms Cantle that said the Guangzhou-based carrier hopes to boost international flying to 30 per cent of the total routes it operates, up from 18.5 per cent last year.

The problem for China Southern according to Ms Cantle is that it is in “the unenviable position of having 80 per cent of its domestic route network, and nearly a quarter of its city pairs, competing with high-speed rail. According to Xinhua News Agency, “China aims to have more than 16,000 km. of high-speed railway by 2015. More than 8,000 km. of high-speed rail line is in operation, already the most in the world.”

China Eastern Airlines also plans to raise the ratio of international flights to 40 per cent up from 30 per cent.

Worse for its competitors is that China Southern is making money.

In 2010 it reported net income of CNY5.8 billion ($883 million), fifteen times greater than the CNY381 million net profit earned in 2009.

Operating revenue climbed 38.8 per cent to CNY77.79 billion while operating expenses rose 27.2 per cent to CNY62.57 billion including a fuel expense of CNY23.49 billion that accounted for 37.5 per cent of costs.

Passenger boardings rose 15.4 per cent to 76.5 million with an average load factor of 79.2 per cent up 3.9 points over 2009. Cargo traffic volume increased 29.6 per cent to 1.1 million tonnes.

As of December 31, 2010, the airline operated a fleet of 357 aircraft and was planning to add 55 through 2011 and phase out 16.
And into 2011 the financial numbers continued to be robust.

For the first nine months China Southern posted net income of CNY5.9 billion up 15 per cent on the prior year while revenue jumped 20.5% to CNY69.7 billion.

On the international front the airline has just taken delivery of the first of five A380s and is initially deploying them on domestic routes prior to launching on international services.

Powered by Rolls-Royce Trent-900 engines, the A380s are initially being operated on the routes between Beijing, Shanghai and Guangzhou.

The aircraft are fitted with 506 seats, comprising what the airline calls eight luxurious first-class seats, which are similar to Emirates first class suites, 70 first-class seats which are the business class in the Emirates 8-across offset layout and 428 economy.

The carrier is awaiting CAAC approval to operate the aircraft on international routes, reportedly either Beijing -New York or Beijing-Paris, Air China’s two most profitable routes.

China Southern is the only Chinese airline to order the A380 and was due to have two in service by December.

In June, the Chinese government blocked an order from Hainan Airlines’ subsidiary Hong Kong Airlines for 10 A380s to express its disapproval of Chinese carriers’ inclusion in the EU ETS.

China Southern today is a merger of many airlines.

In 2000 the Chinese government decided that it aviation industry needed to consolidate and directed what are now the big three to absorb smaller airlines.

China Southern absorbed Zhongyuan Airlines in 2000 and the following year acquire China Northern Airlines and China Xinjiang Airlines.

Later in the decade it took over Xiamen Airlines (51%) and Chongqing Airlines (60%) and is also a shareholder in Sichuan Airlines.

Passenger Service

One area of China Southern’s operation that needs – and is getting attention – is passenger service and in-flight product. The reviews of the airline on Skytrax are mixed with a score of only 4.5 out of 10 in the Customer Reviews and Passenger Trip Reports section.

On the high side a British national scored them highly with this comment:

9/10: “I know China Southern may not have the best reputation, but have just flown to Amsterdam from Guangzhou, on a brand new A330. In business class it was great, flat bed very comfortable and a great night’s sleep. The evening meal was excellent for and service was OK. If they guaranteed planes like this for long haul, I would use them all the time.”

However two Australian travellers in October last year rated them thus;

5/10: “Sydney-Guangzhou older and very tired looking B777, cramped 10 abreast seating, cabin crew attentive but disinterested, catering adequate. Guangzhou-Incheon more pleasant flight on A321 with wider seats but marginally smaller seat pitch. Incheon-Guangzhou cabin crew were unable to finish announcing in English that landing would be delayed due to weather (had to ask another passenger). Guangzhou-Sydney newer A330-300, comfortable seats, bad catering, filthiest lavatories I have seen.”

3/10: “A tale of two airlines. Sydney-Guangzhou-Melbourne in Premium Economy. What a contrast between 2 flights. Sydney-Guangzhou was an airbus with a 2-3-2 configuration. The seats were like the old Qantas business class seats and were more than adequate. The food was hot and tasty and the staff friendly and courteous. The IFE was very poor and the TV screens must have been the original 4 or 5 inch units which were blurred and fuzzy. Fortunately we had our iPads to watch some movies on. The return flight was a totally different story. The seats were 2-4-2 and were exactly the same as the economy seats behind. The only difference was more leg room. There was no PTV and the IFE was on the fixed panels on the bulk heads. The food was awful, the toilets were filthy and smelt. The stewardess assigned to our section was sullen and did not smile once.”

Despite the mixed reviews the airline rates as a four-star airline with Skytrax and achieves a four-star rating in the first and economy class cabins and 3.5 stars in business and premium economy class in long-haul.

With 357 aircraft in the core fleet upgrading product is a massive undertaking.

The most recent cabin innovation was the expansion of premium economy across the airline’s domestic fleet in March 2010.

The airline introduced Premium Economy Class between Guangzhou and Los Angeles more than a decade ago and offers passengers about 40 per cent more legroom.

Routes and fleet

For it most recent timetable the 2011/12 Winter-Spring Flight Schedule from October 30 the airline was touting 495 scheduled routes with 34 new routes that include 26 domestic and 8 international/regional routes.

The total of 495 is made up of 380 domestic, 79 international and 20 regional with 19 international code-shares.

The airline highlighted that in the new schedule it is focusing on the links and transit times between international routes, as well as enhanced links between domestic routes and international routes.

Another area of growth for the airline is the cross-strait routes to Taiwan.

In the latest schedule the airline is increasing its flights by 20 a week to 54.

New routes include flights from Haikou, Changchun, Changsha, Dalian, Guilin, Harbin, Nanning, Shenyang and Zhengzhou to Taipei.
With the new destinations China Southern serves Taiwan from 17 destinations in China.

The airline’s fleet numbers 357 and like most large Chinese carriers is made up of a wide mix of aircraft brought for political reasons, not that today they are not all the right types.

China Southern’s menagerie is made up of: 41 A319s, 76 A320s, 57 A321s, 13 A330-200s, 8 A330s, 2 A380s, 25 737-300s, 32 737-700s, 55 737-800s, 15 757-200s, 4 777-200, 6 777-200ER, 6ERJ145 and 7 E-190s.

On the horizon are 3 A380s, 20 787s and 20 COMAC C919 amongst the 147 aircraft on order.

On the cargo front China Southern has ordered six 777Fs for delivery between 2013 and 2015 to join its fleet of five plus two 747-400Fs.

But while expansion is the order of the day achieving it is a challenge due to infrastructure limitations.

Major airports are a key problem with the four main airports—Beijing Capital, Shanghai Hongqiao and Pudong and Guangzhou Baiyun—at capacity with no slots for airlines that apply for new routes or additional flight frequencies

China Southern has signed a cooperation agreement with the Beijing government for the airline to enhance its position at the new Beijing Daxing airport, which is due to open in 2016.

The airline has said that it intends to have 200 aircraft transferred from Beijing Capital International, to the new airport by 2021.

China Southern is feeling the heat from Hong Kong-based Cathay Pacific and its Dragonair subsidiary, and is accelerating the pace of gaining a deeper foothold in Beijing.

In contrast to the wishes of the CAAC China’s big three airlines have been keen to grow their presence at each other’s hub cities.

As well as its core hub in Beijing, Air China for instance is building an international gateway at Shanghai, home to China Eastern.

CAAC Minister Li Jiaxiang told ATW that, “so far there is no Chinese carrier that can successfully operate two domestic hubs. Domestic airlines should focus on their own operating base to avoid scattered capacity allocation and disorderly competition; otherwise, it would weaken [the] overall competitiveness of China’s airline industry as a whole.”

While there are constraints on the ground the major issue is airspace restrictions by the Chinese military which allows commercial airlines only 20 per cent of the airspace.

As a result flight delays have become a major problem and according to CAAC airlines on time performance is around 75 per cent but according to an ATW report the figure is more like 40 per cent.

The CAAC has responded by introducing RVSM in 1993, 2001 and 2007 – the latest being 300m between 8,500m and 12,500m
And the pressure on the system is increasing at a rate of about 10 to 12 per cent a year.

Looking outwards

One way to grow without the domestic constraints is the international arena.

CAAC Minister Li Jiaxiang has stated that “by 2030, China is set to achieve the historical transformation from a big aviation nation into a strong aviation nation.”

With strong financial results for the major airlines and solid domestic growth underpinning operations the time is right to look outward.
But a challenge will be to unshackle the mentality that to secure a place in world aviation a higher standard of product and delivery is required.

Reflecting that need the CAAC’s 12th Five-Year Plan for the Civil Aviation Industry (2011—2015) is focused on attaching “more importance to growth quality rather than growth rate.”

“Chinese carriers can’t catch up with the growing trend of accelerating international air transport liberalization because of their collective weak international competitiveness,” CAAC’s Li told ATW.

Chinese airlines share of international traffic actually contracted from 45.3 per cent in 2005 to 44 per cent in 2010.

However the percentage share for cargo traffic rose from 23.9 per cent in 2005 to 32 per cent in 2010.

At the same time says ATW’s Chine Editor Ms Cantle “Chinese carriers have been reluctant to invest in loss-making international routes while the domestic market has been so lucrative.”

But this will change says Ms Cantle as “domestic carriers face increasingly fierce competitive pressure from the rapid development of domestic high speed rail services that cover parts of eastern, central and southern China, the golden business areas for these carriers.”

“It is hard to believe that Chinese carriers can maintain their profit tracks if they do nothing to enhance their international competitiveness, adds Ms Cantle.

China Southern is sending this and in November announced it is recruiting Australian cabin crew for its down-under operations.
And it would appear that the airline has appeal with over 400 applicants in the first two days.