The China boom

Yet look at the other side of the coin, the growth of capacity into Australia by Chinese carriers. As a report released in January by CAPA (Centre for Asia Pacific Aviation) put it: “Naming 12 Chinese cities would be a challenge for most people outside China. Yet that is how many mainland Chinese cities will so far enjoy non-stop service to Australia in 2016.” Until 2011, it pointed out, only three Chinese cities had flights to Australia. “This doubled to six in 2014, and will double again to 12 – maybe more – during 2016. A rising middle class coupled with Australia’s liberal air service regime and low fuel prices have meant a growing prominence of Chinese aviation, and the visitors it brings.” Indeed, the growth in Chinese airports with service to Australia coincides with growing Australia-China non-stop city pairs: from nine in 2013 to 21 in 2016. These 21 city pairs are just below the 22 between Australia and its near neighbour and partner, New Zealand. “New Zealand is Australia’s largest source of foreign visitors, but China will soon surpass New Zealand,” says CAPA.

Its report says this year will bring rapid growth in China-Australia air routes. “The China-Australia market is dominated in non-stop seat capacity by (Guangzhou-based) China Southern, which holds over 40 per cent of the market in January 2016. China Eastern (Shanghai-based) and then Air China (Beijing-based) each hold about 20 per cent. The recent entry of smaller carriers, as well as secondary routes from other carriers, has meant rapid growth in links, even if capacity expansion is more moderate and capacity is concentrated on core routes (China Southern sends the A380 to Sydney in the southern summer).”

The pace of growth has picked up in recent times. Late last year Xiamen Airlines opened Sydney services from Fuzhou and Xiamen, and Hainan Airlines from Xian. The latest addition was a new China Southern service from Shenzhen to Sydney, launched in January. Beijing Capital Airlines, part of the HNA group which owns Hainan Airlines, has also applied to open a Qingdao-Melbourne service this year.

“This could give Australia service from all of China’s long haul airlines except for Tianjin Airlines. Tianjin, also part of the HNA stable, plans to commence long haul flying in 2016. CAPA says it has not named Australia as an initial point, but will likely serve the country in due course. Hong Kong Airlines, flying to Cairns and the Gold Coast, while not from Mainland China, expects to carry large numbers of transfer passengers, similar to Cathay Pacific’s Australian presence.

For Qantas and Virgin, it is a tale of two strategies. Despite its re-focus on Europe through Dubai with Emirates Airline, Qantas still feeds traffic into Singapore and chief executive Alan Joyce has always maintained the importance of a strong Asian presence. A joint venture sealed last year with China Eastern, along with a code-share agreement with China Southern in Guangzhou, does give it impressive entry into China’s vast domestic market. One of its major aims is to build Shanghai as a North Asia hub, a move observers say has the potential to be equally as important as its alliances with Emirates and American Airlines.

On the other hand, Virgin chief executive John Borghetti has eschewed an Asian strategy in favour of focus on its core domestic network. “We can feed the China traffic over Singapore with Singapore Airlines and that’s as good as it gets,” he once said. “There is no better partner than Singapore Airlines”.

Once asked about pursuing an “Asian strategy” to take part in China growth, Borghetti’s response was: “My reply is always ‘Why? Why would we do that? What is it that would do for our core business?’… That to me would be a distraction. I don’t see the value in it. You’re not going to see us doing that in the foreseeable future.”

Virgin still doesn’t have a Chinese partner and the fact is that, right now, it is in no position to launch into Asia with its own aircraft. Its A330s are utilized on domestic routes and five Boeing B777-300ERs are busy serving Abu Dhabi, home of its stakeholder Etihad Airways, and the U.S. West Coast. In recent times its only fleet decision has been to convert orders it holds for 17 B737-800 single-aisles into B737 MAX 8 orders, for delivery from 2018. It has no wide-bodies on order, although Borghetti did say in late 2014 he would consider placing a shared order for either the Airbus A350 or Boeing B787 with partners Etihad Airways, Singapore Airlines and Air New Zealand. It could, of course, also opt to lease wide-bodies at some stage but, so far, nothing has come of any of this.

In addition, he has stated that, if ordered, he doesn’t expect to see the A350 or B787 join Virgin’s fleet until sometime after 2020, three years beyond an earlier 2017 timeframe. Besides, over the past few years, like Qantas, Virgin has been losing money and is only now getting back into profitability.

Sources suggest, however, that Asia isn’t completely off Virgin’s radar but has been looking at the possibility of services to Singapore and Hong Kong “at some stage”. Virgin’s view is that Australia’s “bread and butter” markets – the U.S. and New Zealand – shouldn’t be forgotten and that when it comes to China, the traffic flows are mainly from China to Australia and not the other way around.

The reality is that Australia’s airlines can’t compete on an equal footing with Chinese operators. Their only option is to work with them. China’s major carriers are no longer just big in terms of Chinese aviation itself. They are now massive players globally with huge, growing fleets. International expansion has been their major focus over the past few years and Australia, with its large Chinese population is an attractive target covering several travel segments: Australian Chinese visiting friends and relatives in China and vice-versa, the rapidly growing number of Chinese tourists and the increase in business travel demand as Australia’s Free Trade Agreement (FTA) with China kicks in.

The country’s carriers are also in a boom period, looking for more and more places to fly internationally. China Southern, Asia’s largest carrier by fleet number, says its net profit in 2015 rose between 110 per cent and 130 per cent to around A$378.4 million on the back of strict cost-control measures, lower fuel prices, and stringent efforts to cut its dollar-denominated debt to reduce the adverse effects of a weakened renminbi.

Air China, the country’s flag carrier, announced that by optimizing its debt structure and adding direct sales, net profit in 2015 will be between 60 per cent and 80 percent higher.

One big reason why they are awash with money has been the cost of fuel. Chinese airlines don’t hedge and have benefitted massively from buying at low spot prices. All of this means they are looking for new destinations and there are plenty of opportunities between the myriad of Chinese cities with huge populations and overseas destinations, particularly Australia.

Nevertheless, all this growth and the statistics which accompany it have to be seen in perspective. Analysis of OAG Schedules data reveals that capacity on all international routes from China grew by almost 14 per cent in 2015, the highest rate of growth since 2007 (which was only just over 14 per cent. Capacity growth has been between 10 per cent and 14 per cent for each of the last six years.

“All this growth and the statistics which accompany it have to be seen in perspective.”

In a report released early this year OAG says Australia is a good example of China’s drive to grow its airline capacity in foreign markets.

“In November (2015) there were 40% more seats in the China-to-Australia market than a year previously. Between them seven airlines have 237,000 airline seats in the market spread over 13 routes; the latest market entrant is Xiamen Airlines which started operations between Fuzhou and Sydney in November 2015. In November 2015 there were 438 frequencies, up 109 on the previous year. However, all but two of the airlines are Chinese. Qantas has made no change to its daily Shanghai service from Sydney, while Jetstar Airways is operating eight flights a week between Gold Coast and Wuhan, a service which wasn’t in place last year. This means that over 90 per cent of direct frequencies are on Chinese airlines.”

Even before the rush of additional capacity from China that largely commenced in December, November had been a record-breaking month for Chinese visitors to Australia, a 26 per cent increase on a year earlier. But despite all this, no Chinese airline yet appears among the top ten international carriers operating through Australia. These are (for year ended October 2015) Qantas with 15.8 per cent market share, Emirates with 9.7 per cent, Jetstar with 9.1 per cent, Singapore Airlines with 8.7 per cent, Virgin Australia with 7.5 per cent, Air New Zealand with 7.3 per cent, Cathay Pacific Airways with 5.2 per cent, Malaysia Airlines with 3.9 per cent, AirAsia X with 3.1per cent and Etihad Airways with 2.8 per cent. Chinese carriers merely appear amongst the “others” category. Put in terms of numbers, the latest statistics from the Bureau of Infrastructure, Transport and Regional Economics, for October last year, show the largest Chinese operator, China Southern, carried 39,000 passengers into Australia and 36,140 out during that month. Emirates during the same period carried 158,00 passengers in and 110,000 out. Despite the hype and although it may be inevitable in the long term, it will certainly be some time before China’s airlines reach these heights.

“Australia’s airlines can’t compete on an equal footing with Chinese operators.”

There is also, not surprisingly, an imbalance in where Chinese traffic is heading. The Australia side of the China market is concentrated, and more so than the country’s average, says CAPA. Sydney accounts for 55 per cent of Australia-mainland China seats, with Melbourne 32 per cent. Four other Australian airports make up the remaining 13 per cent. “While the number of Chinese airlines serving Australia and the number of routes has swelled, the market remains concentrated… 88 per cent of non-stop seat capacity between Australia and China departs from three Chinese airports: Beijing, Guangzhou and Shanghai. Guangzhou alone accounts for 43 per cent. This reflects China Southern’s prominent position in the market. All six Mainland Chinese airlines fly to Sydney (with only a seventh, Hong Kong Airlines from China’s Sepcial Administrative Region (SAR) of Hong Kong going to the Gold Coast. China Eastern and Sichuan also fly to Melbourne, while China Southern also operates to Melbourne, Perth, Cairns and Brisbane. The latest two additions for Sydney were Xiamen Airlines in November and Hainan Airlines in January. China’s fourth-largest airline, Xiamen began flights to Australia on November 30 with three weekly services from the coastal city of Fuzhou to Sydney and twice weekly services to Xiamen, further south along the coast, using B787-8 Dreamliners. Hainan became the sixth Mainland Chinese airline to fly into Sydney, starting on December 24 with twice weekly services to Xian, the home of the terracotta warriors.

“We now have six mainland Chinese airlines flying into Sydney – Air China, China Eastern, China Southern, Sichuan Airlines, Xiamen Airlines and Hainan Airlines – servicing eight mainland Chinese cities. We have 70 flights a week from mainland China, which is double the number we had five years ago,” said Sydney Airport chief executive Kerrie Mather. “If you include Greater China, we have Cathay Pacific and China Airlines, which flies to Taipei, with a total of 117 flights a week to the Greater China region.”

She said Sydney welcomes nearly half of all the Chinese passengers into Australia.

“They are our fastest-growing inbound visitor market – up by 17 per cent in the last year alone.” Interestingly, Mather says Sydney isn’t competing with other Australian cities to attract Chinese airlines but with competitors in the market place such as Vancouver, New York or Paris.

“They are our fastest-growing inbound market – up by 17 per cent.”
Kerrie Mather

The CAPA report points out that three Chinese airports – Beijing, Guangzhou and Shanghai – are the only Chinese airports with at least daily service to Australia. All others have no more than three weekly flights.

“Additional routes planned so far for 2016 are unlikely to change this. By the end of 2016, five of the (so far) 12 Chinese airports expected to have service to Australia will have flights to more than one Australian city: Guangzhou and Shanghai with four each, followed by two each at Beijing, Chengdu and Xiamen.

“There is potential, and an expectation, that airlines would increase frequency on existing routes or add service to other Australian points from existing Chinese points. This theoretically would give a stronger proposition than two or three weekly flights, while also giving scale, more flights from the same departing airport, rather than establishing long haul operations at (and rotating aircraft to) another city. But the nuances of the Chinese market dictate otherwise. Local subsidies back many routes and are seldom enough for a high frequency operation.”

CAPA says Chinese airlines are willing to spread themselves thinly on long haul markets and that once they serve a route, another local carrier is seldom allowed to compete.

“While opening a route now might not be profitable, there is the risk that another carrier will move on it. Sichuan Airlines, for example, has only two Australian routes: Chengdu-Melbourne and Chongqing-Sydney. Sichuan Airlines does not serve Chengdu-Sydney, and Air China has applied to do so.

Sichuan Airlines’ Australian network alludes to another nuance: government ownership of airlines influencing or dictating network links. Sichuan Airlines serves Sydney from Chongqing but serves Melbourne from Chengdu, despite Chengdu and Chongqing almost being neighbours.

This appeases the governments, even if it fragments Sichuan’s network.” Another example. “Xiamen Airlines will open service to Melbourne from Xiamen, which it links from Sydney, but Xiamen Airlines also links Sydney service with Fuzhou, which is almost a neighbour to Xiamen. It could be strongly posited that Xiamen Airlines prefers Fuzhou passengers to connect at Xiamen, but it appears that the local government does not.”

As is always the case in the airline business, there is also the possibility of future threats. While China’s economic slowdown isn’t being reflected in the growth of its aviation industry, it isn’t outside the bounds of possibility the rapid growth in air links with China could slow.

“With China, Australia takes one of its most liberal market access approaches, if not the most liberal approach, to expanding non-open skies air services agreements,” said CAPA.

“Australia does, however, want to ensure continuity and sustainability. Many of the new Australia-China routes, while small in capacity, have taken up large amounts of resources from the Australian planning end. Australia wants the routes to last and grow. Any increase in fuel price would threaten to undermine the viability of many of the new routes and markets, which almost entirely consist of leisure travellers. Secondary city routes would taper off faster than Beijing, Guangzhou and Shanghai should a downturn emerge.”

On the other hand, China’s government has been encouraging the emergence of new airlines in the low cost sector. Some have heady ambitions, including flying low-cost, long -haul and Australia will be among their priority targets.

The growth will continue. Australia’s revised air services agreement with China, signed in January last year, raised the cap on seats from Beijing, Shanghai and Guangzhou to the major gateway cities of Sydney, Melbourne, Brisbane and Perth by an immediate 18 per cent, with more to follow in stages over the following two years, with no restrictions on flights to secondary Chinese destinations.

It has already had an impact. China Southern, for example, had targeted having 55 weekly flights to Australia and New Zealand by the end of 2015. It actually reached 65.

There is certainly no doubt the Chinese roller coaster is picking up pace but it will be several years before it comes near dominating Australia’s international skies. The big question is: to what extent will Australia’s two major carriers be able to cash in on the action?