China’s skies are set to see more no-frills airlines take flight in the near future.
Earlier this year, China United Airlines (CUA), a wholly-owned subsidiary of China Eastern Airlines (00670.HK, 600115.CN, CEA.US), became the first budget airline to be established by one of the nation’s Big Three state-owned carriers. More recently, 9air, a subsidiary of Shanghai-based Juneyao Airlines, also took wing.
Including incumbents Spring Air and West Air (a subsidiary of Hainan Airlines), there are now four budget airlines in China. So, is the business ready to take off in the country?
If experience elsewhere is any guide, the answer is probably yes.
Latest figures from the International Air Transport Association show that budget airlines commanded a combined market share of 26.3 percent globally last year as compared to 8 percent in 2001, with major no-frills carriers like Ryanair and AirAsia striking gold in their respective regions.
Weighed down by soaring fuel prices, terrorism attacks and a lukewarm economic climate, the global aviation industry has been flying in and out of troubled skies in recent years. Annual passenger growth has been hovering around just 5 percent in the sector in recent years. However, budget carriers have outperformed, with their passenger numbers up 12.6 percent last year.
In China, IATA estimates that less than 7 percent of passengers used low-cost airlines last year, still way below the global figure, suggesting plenty of leg room for budget airlines to stretch their presence.
Just like in other countries, it is believed that budget carriers in China will see their growth outpace that of the traditional airlines.
The success formula for a budget carrier is typically a mix of simple and highly efficient operation modes, including the use of one single plane model for the entire fleet, with only economy class seats so as to keep repair, maintenance and crew training expenses low, Hong Kong Economic Journal reports, citing a note from Industrial Bank (601166.CN). The report points out that gross margin of low-cost carriers in Asia was 41 percent higher than that of traditional airlines last year.
As cheaper tickets usually lead to higher passenger load, the improved utilization helps a lot in covering fixed expenses for aspects like mechanical maintenance, ground services and staff-related expenditure, which on average account for half of total operation costs. Meanwhile, charging for inflight services like meals create extra income.
Hu Qinghua, deputy director at the China Academy of Civil Aviation Science and Technology, told the Economic Observer that the market share for budget airlines in China will surge to 20-30 percent in the next 15 years.
The upbeat outlook has prompted carriers to add more planes to their fleets. Spring aims to raise 2.53 billion yuan (US$408 million) to buy 12 Airbus A320s, while new entrant 9air made headlines in May with a US$6 billion shopping spree for 50 Boeing 737s.
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