China Eastern Airlines (00670.HK, 600115.CN, CEA.US) has high ambitions in the country’s burgeoning e-commerce market. The challenges it faces are more down to earth.
The good news is that the carrier is already China’s second biggest airline with a fleet of more than 500 passenger and cargo aircraft and an extensive network covering 1,000 domestic and international destinations. It has a simplified customs clearance procedure that allows it to zip cargo from point A to point B.
But that’s as good as it gets.
China Eastern is essentially wading into territory in which airlines have been limited to A2A (airport-to-airport) services. Last-mile delivery has been the domain of logistics and courier companies which control the market with an iron grip.
For perspective, Hainan Airlines (HNA, 600221.CN, 900945.CN) plunged into the business-to-consumer (B2C) market with a website named yoye in 2011. One year later, the operation was a fiasco, the initial investment having drained yoye’s cash flow. A crippling price war launched by competing logistics companies dealt the final blow.
That has not stopped China Eastern from pursuing its own B2C strategy. It plans to take advantage of a captive market — its own passengers — to sell its products and services on its eaemall website. It’s packed with offerings ranging from imported fruit, milk, meat and fresh food directly sourced from their countries of origin — scallops from Alaska, oat cakes from Italy.
With the domestic food market still reeling from a recent wave of contamination scandals, imported foodstuff is looking increasingly appealing to Chinese consumers.
The airline is said to have poured millions into a ground logistics system to deliver goods to customers, primarily in Shanghai’s urban districts, where it will go head to head with more established rivals such as Shentong and SF Express.
That raises some serious questions about warehousing and the need for a nationwide distribution network. These boil down to one thing: there’s a world of difference between an airline and a courier.
Airlines are already a vital link in the e-commerce logistics chain but their role is limited to A2A delivery. Without solid grounding in storage, last-mile services and marketing, they are unlikely to compete in any meaningful way with incumbent players, analysts say.
Although there will be some fast learners, time is not on their side. The e-commerce market is growing faster than the companies can respond to it, forcing players to join forces to consolidate their market share and fend off newcomers.
China Eastern investors have more to worry about than whether its latest venture is going to fly. Closer to the ground, the company has turned out some dismal numbers — an 11.8 percent year on year fall in cargo and mail traffic revenue in the six months to June and shrinking cargo volume in September.
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