Austerity measures

Apparently not, according to John Leahy, top salesman for European planemaker Airbus. He’s just been on a visit to China and says carriers there have one major complaint; their lucrative first and business class cabins are almost empty. Why? “Because it is very clear the President of the country and the State Council are discouraging luxury,” he says.

Apparently, the ferocious campaign being waged by President Xi Jinping to stamp out corruption and overspending and impose austerity since he took office in March 2013 is continuing to have a real impact, forcing the nation’s elite to tighten their purse strings and move their bottoms back into cattle class, eschewing the entire concept of anything that smacks of luxury.

“The fact is they (business and government officials) don’t want to be seen there (in the front end of the aircraft). A lot of companies are just acting like the Chinese government,” explained Leahy. In his usual jovial mood, speaking to a swarm of aviation journalists in Toulouse at the company’s annual Innovation Days briefings for the media in late May, the master salesman said he had come up with a brilliant idea. His suggestion was that the carriers just leave the business class seats in place and rename the cabin premium economy, a class he believes is the “wave of the future” anyway.

Not quite good enough, said the Chinese airline executives, who seemed to believe the word “premium” still echoed a little but too much of the high life. “So, you could just call it ‘A Little Bit Better Economy’”, was Leahy’s less than helpful rejoinder.

But joking aside, it’s no laughing matter for the Chinese carriers. Some local operators have already eliminated or downsized their first class cabins and reduced the size of business class.

“Now, the consumption of first-class seats is considered hedonism,” said an official of the China Air Transport Association, which represents the country’s major airlines. The government’s austerity measures are far-reaching because they include discouraging official travel unless absolutely necessary and a serious reduction in the travel budgets not only of government officials but executives of major corporations, including airlines themselves.

And Xi Jinping is taking the whole issue of austerity so seriously no-one want to be seen wallowing in any sort of luxury or over-spending.

Reflecting the pain being felt by airlines Chinese luxury hotel profits have also plunged. The country has 13,500 hotels, which include 850 five star hotels and their income has nosedived into the red. Some of them have even asked for their star rating to be downgraded in order to avoid unwanted

Now, the consumption of first-class seats is considered hedonism.

attention from a local media which has been going to town exposing those continuing to spend big in defiance of government wishes.

How long this campaign will last no-one knows but it is hurting airline bottom lines. While 90 per cent of flyers travel in economy it is up front that the real yields – and thus profitability – are manufactured. And the austerity measures aren’t the only issue hitting the balance sheet. The rapid expansion of China’s high-speed rail network is hitting air traffic between the big three gateways at Beijing, Shanghai and Guangzhou. Fast growing budget airlines, now being encouraged by Beijing, are also having an impact, as is concern about the country’s slowing economic growth.

Guangzhou-based China Southern Airlines last year saw its profits drop 10. 5 per cent to $292 million. In the first half of 2014 Shanghai-based China Eastern Airlines, now operating a fleet of close to 500 planes, saw a massive 98 per cent drop in profitability. It attributed the lackluster performance to “geopolitical instability, fewer high-end business travelers, and more convenient high-speed railway services”. Air China, based in Beijing and the country’s flagship carrier, did see income increase some 17 per cent last year but that was mainly the result of a decision not to use fuel hedges. It was able to take advantage of buying at spot prices as the price of fuel plunged dramatically through 2014. If the price of fuel remains low this year it should bring benefits to the bottom line of all carriers.

In the meantime China’s airlines continue to spend billions on new jets to serve the growing middle class taking to the skies in ever-increasing numbers. Boeing and Airbus forecasts Chinese carriers will need around 6,000 new planes valued at some US$780 billion over the next 20 years, accounting for around 16 per cent of world demand and nearly half of Asia’s.

China already takes 20 per cent of the worldwide production of Airbus. It’s just that Chinese airline executives may be wending their way to Toulouse and Seattle to change earlier configuration orders to reduce the front-end space and add “A Little Bit Better Economy” in greater numbers.