Low-cost airlines in China? - Orient Aviation

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Low-cost airlines in China?
It’s a possibility, but it will not be easy, writes HAN DAWEI
Since the low-cost U.S. airline
pioneer, Southwest Airlines,
was launched in 1971, the low
cost airline (LCA) concept has
been introduced into many
countries, with most of them modelled
on the success of Southwest. But to date
the concept has not been introduced
into China.
Would it be possible to introduce a
low-fare, no-frills airline in China?
Most LCAs have emerged from the
successful conversion of a full-service
airline. Every one of them was born in a
free market. Under certain rules, a lowcost
airline is able to bid for a flight route
and airport slot, as well as establishing
its airfare to meet its own margin.
To date Chinese carriers have been
unable to set their own fares. A breakthrough
was made last November when
the Civil Aviation Administration of
China (CAAC) halted “price alliances”,
forced upon domestic airlines in 2000 to
curb massive discount wars, that were
leaving major Chinese airlines awash
in red ink.
There is speculation that the CAAC
will completely deregulate fares within
12 months. The CAAC has been working
with the National Economic Planning
Committee on airfare reform.
This is very good news for the introduction
of an LCA in China – with ticket
prices to be based on market demand
and costs.
China’s airline industry has consolidated
the nine airlines, previously under
the umbrella of the CAAC, into three
airline groups to enhance the competitiveness
and efficiency of China’s major
airlines and to meet the challenge of
the world airline industry. In future the
CAAC will have no direct control over
airline management. Instead, it will
concentrate on its new role of industry
regulator.
The three airline groups, China
National Aviation Holding, China Eastern
Air Holding and China Southern
Air Holding, are operating full-service
flights on their domestic and international
routes, using multi-type aircraft
fleets. On average, around 30% of their
network are long-haul flights. It would
be impossible to persuade any of them
to convert to being a short-haul, no-frills
carrier.
It is the regional carriers which are
best suited to the Southwest Airlines
low-cost model. They could include
Sichuan Airlines, Shandong Airlines,
Shenzhen Airlines, Shanghai Airlines,
Xiamen Airlines, Hainan Airlines and
Xinhua Airlines.
In fact, some of China’s airlines
have been intentionally or unintentionally
conducting low-cost operations
on certain sectors or in some regions
for some considerable time. In 1995,
Hainan Airlines purchased regional
jets and deployed them on some high
frequency short-haul sectors. Recently,
‘A web-based
e-ticketing
system could
be introduced
in China on
a wide scale
and this would
significantly
reduce airline
marketing costs’
China Southern Airlines started shuttle
flights between Guangzhou and Sanya,
on Hainan Island; about a two-hour sector.
The flights offer maximum airfare
discounts and simple inflight service.
Benefit for Airline
Operating costs for a LCA are significantly
lower than for a full-service
competitor. This gives more room to
adjust airfares, build market share and
develop market opportunities.
Hainan, Shandong and Shanghai
Airlines are publicly listed companies in
China. Sichuan will be listed soon. Other
airlines are owned by local provincial
governments or by joint enterprises. But
in all cases a board of directors takes
responsibility for the company’s profitability
and acts as a decision-maker on
airline business strategy.
It is possible for one or more of these
airlines to launch a low-cost airline once
airfare barriers have been removed.
China’s emerging market economy
and air traffic deregulation means regional
airlines face intense competition.
Management has to develop an effective
and sustainable business strategy to
avoid being overrun by rivals. Could the
LCA model be the answer?
Fleet and route
On their short-haul domestic routes,
the major fleets of most of China’s regional
airlines are made up of one or two
aircraft types with a full service cabin
configuration.
Most LCAs primarily choose Boeing
737 aircraft and Airbus A320s for their
fleets, which have proved suitable on
short-haul routes, both economically
and operationally. To convert into an
LCA and schedule future development,
there would be no need to replace their
fleets, but certain renewal and adjustment
would be necessary.
Apart from fleets, routes at some
airlines would have to be extensively
analysed and optimised. Recently, certain
strict regulations have been issued
by CAAC to accompany airline consolidation.
For example, some high-volume
domestic sectors like Beijing-Shanghai
have been made unavailable to airlines,
like Sichuan Airlines, not based in these
cities. I believe this is a “sunshine” policy
favouring the three new groupings.
Hard work must be carried out to
determine how to best optimise those
routes. With further extensive air
traffic industry reform and marketisation,
these anomalies will hopefully be
remedied.
Flight operation
China’s regional airlines employ
all their own flight crew and some licensed
engineers. They operate their
own ground handling and minor engine
maintenance while major maintenance
repair and overhaul are out-sourced.
Minor changes to crew rosters and
maintenance schedules could convert
these aircraft from a full-service to a
low-cost operation. However, as efficiency
is crucial to low-cost operations,
an extensive tailor-made training plan
must be developed.
24 Orient Aviation, February 2003