Date
22 October 2017

China Eastern’s low-cost venture may fly high

China Eastern Airlines (00670.HK, CEA.US, 600115.CN) has been flying in and out of troubled skies. The state-owned firm’s alliance with Qantas Airways and Shun Tak Holdings to build up the Jetstar Hong Kong budget airline franchise remains up in the air. Media reports, meanwhile, said recently that Beijing’s austerity campaign has dealt a crippling blow to the mainland carrier, with the airline carrying one million fewer passengers last year in its first and business classes compared to a year ago, leading to a revenue loss of nearly 1.1 billion yuan (US$182 million).

To cope with industry headwinds, peers Air China (00753.HK, 601111.CN) and China Southern Airlines (01055.HK, ZNH.US, 600029.CN) have responded with high-end economy classes featuring extra-legroom seats and in-flight services that are almost on par with that in higher classes. While the rivals have lost no time in bringing upgraded offerings, China Eastern has gone in an opposite direction by gearing up for a dogfight on the low-cost front.

Although a long-time laggard among the big-three state-owned airlines in terms of network and passenger volume, China Eastern is betting on a market segment that others have largely overlooked. As regulators unveil some incentives for budget carriers, the bet may indeed pay off and provide the company with much-awaited lift.

At a recent work meeting, the Civil Aviation Administration of China (CAAC) has for the first time given a clear policy blessing for budget airlines. Detailed initiatives, ranging from lower threshold for no-frills carriers to enter key hubs to simplified approval procedures to build budget terminals, have been laid out by the aviation regulator.

As the only state carrier that has embraced the budget segment wholeheartedly, China Eastern clearly won’t let its Jetstar Hong Kong stalemate hold back its ambitions.

High hopes are pinned on China United Airlines (CUA) {中國聯合航空公司}, China Eastern’s wholly-owned subsidiary that had been hovering on the fringes of the market for years.

Just ahead of last month’s CAAC conference, China Eastern announced that CUA would be overhauled into a regional budget carrier to compete with entities such as Spring Airlines and AirAsia and make full use of the group’s Boeing 737 fleet — short- to medium-range narrow-body aircraft that are known for cost efficiency.

The news has drawn little attention from the market, but industry experts say CUA has a unique asset that may ultimately help China Eastern carve a niche.

The secret weapon is a lesser-known airport that sits right in Beijing’s urban area: Nanyuan {南苑}. The airport serves as a military base most of the time but CUA secured exclusive right to use it for civilian flights a few years ago thanks to its military background — CUA was founded by the People’s Liberation Army’s (PLA) Air Force before the ownership was transferred to Shanghai Airlines during an official clampdown on PLA’s excessive business activities in 2004; in 2009 CUA came under the China Eastern umbrella following the latter’s merger with Shanghai Airlines in June that year.

Beijing is China’s predominant aviation gateway, with the city’s Capital International Airport (BCIA, 00694.HK) now the world’s second busiest airport by passenger traffic. The airport handled 83.65 million passengers in 2013, according to official news agency Xinhua.

China Business News, citing a CAAC expert, has reported that passenger throughput has already exceeded the maximum capacity of BCIA’s three existing terminals last year, resulting in worsening flight delays. The expert told the newspaper that by 2015 up to 8-10 million passengers will have to be diverted to other airports to alleviate BCIA’s burden.

That trend fits perfectly in China Eastern’s strategy. With lower prices and discount offers, Nanyuan’s convenient location (3 kilometers in the south to Beijing’s fourth express ring road and 13 kilometers from Tiananmen Square), as well as service guarantees such as faster boarding and no flight delays, CUA can definitely woo many patrons who seek Nanyuan as a cheaper and more convenient substitute for the BCIA.

What is even more heartening is that at a time when rivals like Spring Airlines are scrambling for time slots at BCIA and limited capacity is forcing the carriers to turn the flight scheduling to the red-eye model, China Eastern can sit back and count on its exclusive rights to operate at Nanyuan.

In terms of network, CUA now operates more than 40 routes from Nanyuan to places such as Guangzhou, Shenzhen and some other regional urban centers, putting it in a good position to align the flights with China Eastern’s extensive services. CUA has invested 350 million yuan for the Nanyuan phase one expansion to add an extra capacity of 5 million passengers per year.

– Contact the writer at [email protected]

RC

EJ Insight writer

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