China's Big Airlines Spread Their Wings

Source: Wall Street Journal By Doug Cameron and Andrew Galbraith China's big airlines are starting to throw their weight around on the global stage, targeting international passengers and freight in a move that could redraw the industry's balance of power. The Chinese market has until now been viewed as an opportunity for international airlines considering the potential of millions of new passengers, while Airbus and Boeing Co. racked up billions of dollars in aircraft orders. Now, China's three largest airlines—which report full-year earnings this week—are starting to expand by offering bargain-basement fares from Asia to Europe and North America via their own domestic hubs. Targeting transfer traffic has been successfully employed before, notably by KLM in the Netherlands, Singapore Airlines Ltd. and, more recently, Dubai's Emirates Airline, where as many as 70% of the passengers connect through Persian Gulf hubs on their way to somewhere else. The rapid expansion of the Gulf carriers, in particular, has enraged rivals such as Deutsche Lufthansa AG and Delta Air Lines Inc., which claim these companies are unfairly subsidized, a charge Emirates and others deny. But aviation experts say this could be dwarfed by developments in China. "The great advantage of the Chinese carriers is they have enormous [passenger] flows into and out of their own country," said Peter Harbison, executive chairman of the CAPA Centre for Aviation, a Sydney-based consultancy. Chinese airlines are able to fill up most of their planes with higher-priced local passengers and then sell any extra space at cheap prices, and can also exploit a geographical position well-suited for the fastest flights from many parts of Asia to the U.S. and Europe. In contrast to the criticism leveled at Emirates and its Gulf rivals, international carriers are also wary of upsetting Chinese partners, as well as ruffling any diplomatic feathers in what remains an important market. Hong Kong-listed Air China Ltd. is already the world's largest airline by market value—at $11.8 billion, close to twice that of United Continental Holdings Inc. and like China Southern Airlines Co. ZNH -2.28%and China Eastern Airlines Corp. already ranks among the top 10 global carriers by capacity. Guangzhou-based China Southern has been the most aggressive in marketing itself as the cheapest way to travel between Asia and Europe, in part because it is the most exposed to the expansion of China's high-speed rail network. The airline started touting its Guangzhou hub as the "Canton Route" between Asia and Europe, a riff on the "Kangaroo Route" run for decades by airlines such as British Airways and Qantas Airways Ltd. China Southern offered fares of as little as 1,100 Australian dollars, or US$1,150, round-trip between Sydney and Paris, which Mr. Harbison said was half that charged by Australia's Qantas. These fares are also starting to appear for the first time on popular Internet travel sites such as those run by Expedia Inc., and the Chinese carriers are also working hard to improve their service reputation. China Eastern kicked off the reporting season, delivering a 7.7% drop in full-year profit to 4.58 billion yuan (US$722.2 million), and announced a planned joint venture to launch a Hong Kong-based low-cost carrier in partnership with the Jetstar unit of Australia's Qantas Airways Ltd.. JetStar Hong Kong venture is due to start flying next year, targeting leisure travelers on shorter hops around the region, rather than the longer flights in China Southern's sights. Analysts expect Air China to earn profit of about 9.2 billion yuan (US$1.46 billion) for 2011 when it reports on Wednesday, down sharply from 12 billion yuan last year because of a charge against retiring older planes. Second-ranked China Southern is seen earning 6.3 billion Hong Kong dollars ($811 million) when it reports on Thursday. from China Travel & Tourism News http://www.chinatraveltourismnews.com/

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