Thursday, December 04, 2014

Hainan Air Elbows Its Way Into China’s Skies: Feisty Carrier Gets Creative in Attempt to Chip Away at State-Owned Airlines’ Dominance

The Wall Street Journal
By Joanne Chiu

Dec. 4, 2014 4:46 p.m. ET

To gauge the state of competition in China’s airline industry, look at the antics of Hainan Airlines Co. , China’s largest private carrier.

The feisty southern China-based airline had for years unsuccessfully lobbied Chinese aviation authorities for permission to fly a major international route like Beijing to Paris.

So in 2012, Hainan Air got creative, getting its parent company to take a 48% stake in tiny French carrier Aigle Azur, which then applied for French approval for the Beijing-Paris route. The carriers unveiled a plan to start service in June, using a Hainan Air jet, complete with Hainan livery and flight staff.

The plan hit headwinds when Russia, whose relationship with France had soured over tensions in the Ukraine, wouldn’t let Aigle Azur fly over Siberia on the way to Beijing. Aigle Azur finally abandoned the route in October. “As long as French and Russian authorities haven’t reached an agreement on that matter, we will not be able to consider the launch of this service,” said Aigle Azur CEO Cédric Pastour.

So Hainan Air in September launched its own flight to Paris from the smaller southeastern city of Hangzhou, and said it would figure out other ways of snagging a prime route.

In an emailed comment, Hainan Air Chairman Xin Di said Aigle Azur’s decision won’t affect Hainan Air’s global ambitions or its cooperation with the French carrier. “We’ll continue our overseas expansion drive, targeting the U.S. and European markets as well as emerging countries in Russia and Africa,” he said.

Hainan Air’s Paris push illustrates the new forces of competition—as well as obstacles—in China’s aviation industry, long dominated by slow-moving state-owned carriers that got favored protection from the government.

A decade ago, China’s three main state airlines— Air China Ltd. , China Eastern Airlines Corp. and China Southern Airlines Co. —controlled almost all air travel inside as well as to and from China. They still have a 77% share of all traffic for Chinese carriers.

The government started to liberalize the domestic aviation market in the middle of the previous decade, allowing several new airlines to emerge. Last year, China opened the door further to domestic competition, again allowing the creation of new carriers and loosening restrictions on aircraft purchases.

But state carriers are still protected in international travel, helped by an implicit regulatory principle that only one carrier can operate in a handful of key long-haul routes. That effectively keeps Hainan Air—the only private Chinese airline that operates such routes—out of most prime international connections.

“China effectively operates under a one-airline, one-route policy in which its carriers are not permitted to compete on long-haul routes,” said Will Horton, senior analyst at consultancy CAPA-Centre for Aviation.

Each state airline group has a hub at one of China’s international gateways: flag carrier Air China is based in Beijing, China Eastern Airlines in Shanghai and China Southern Airlines in Guangzhou. That means those carriers get first dibs on the biggest, most-profitable global destinations from their hubs.

From Beijing, for instance, Air China monopolizes the most-coveted flights to places like New York, Paris, London and Tokyo. Hainan Air flies to cities like Chicago, Seattle, Boston, Toronto, Brussels, and Moscow—places considered less desirable.

Hainan Air was founded in 1993, in China’s southern resort city of Haikou. Two years later, it snagged a $25 million investment from hedge-fund billionaire George Soros , the first foreign stake in a Chinese airline. Since then, Hainan Air and its affiliates have grown into China’s fourth-largest airline group with 12.5% of passengers flown in 2013, according to China’s aviation regulator.

The airline’s parent, HNA Group, is known for making waves. HNA has actively sought investments overseas, in areas ranging from transportation and tourism to banking and insurance. HNA was one of the first to respond after the Chinese government allowed new airlines to be set up last year, saying it would change West Air, an existing regional carrier, into a budget airline. In September 2013, a dispute between one of HNA’s shipping units and a Chinese creditor got so bad that it resulted in the seizure of one of HNA’s cruise ships, passengers and all, in a South Korean port.

Hainan Air started offering international flights more than a decade ago, and now operates more than a dozen. But it has always wanted a flight between first-tier cities in China and the West, since they are more popular with travelers and make more money.

So far, its efforts haven’t borne fruit. Besides its attempt to fly Beijing-Paris with Aigle Azur, Hainan Air in late 2013 applied for a route between Beijing and Newark Liberty International Airport, which is part of the New York City metropolitan area. In an attempt to win regulators’ approval, it offered to fly three times a week between Beijing and Nairobi, Kenya—the kind of route China wants as part of its plan to boost trade with Africa. Although the carrier had initially said it hoped to start flying those routes in 2014, Chinese regulators still haven’t given the green light.

So for now, Hainan Air is concentrating on launching more flights from Beijing to second-tier cities abroad, as well as flights to prime destinations from secondary Chinese cities such as Hangzhou, a metropolis southwest of Shanghai that is home to e-commerce giant Alibaba Group Holding Ltd. and the nation’s largest beverage company, Hangzhou Wahaha Group Co.

Hainan Air’s Mr. Xin said the carrier is looking at opportunities in cities with sizable populations and robust economic growth. “There are 13 Chinese cities with a population of more than 10 million,” he said in a June interview. “Cities such as Tianjin, Chongqing, and Shenzhen are among our potential options for new services.”

Air China said it is unfazed. Referring to the growing clout of China’s smaller airlines, Air China Executive Director Fan Cheng said the flag carrier would focus on bolstering its core competence as a premium carrier and strengthening Beijing as the region’s major transit hub.

—Robert Wall in London contributed to this article.


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