West Air and China United Airlines officially announced on 29th March 2015 their transformation into low cost carriers (LCC). This results in a total of six LCCs in China, since direction was given by CAAC (Civil Aviation Administration of China) in December 2013 to encourage the growth of LCCs in the country. These include Spring Airlines, China United Airlines, West Air, Juneyao Airlines, Lucky Air and Chengdu Airlines. Tianjin Airlines and Hebei Airlines are planning to change in 2015 also. However, it has been over 18 months since the directive by CAAC was given. So given the market potential, why are there only six LCCs so far? Will the LCC market expand rapidly in the coming few years?
Some reasons leading to the slow growth of LCCs in China are typical of LCC development in the rest of the world, but some are typical of the China market.
1.Low Cost Carriers not operating at low cost
LCCs in China are either subsidiaries of the big four (the three state owned SOE- airlines and Hainan Airlines) or privately owned. Maintaining low cost but not sacrificing service quality is always a far-fetched task for Chinese Airlines facing huge passenger volumes, where maintaining low cost for LCCs is far more difficult. In China, subsidiaries of the big four normally get the very minimum subsidy from their parent company. In the past, privately owned LCCs got subsidies from the local airport authority or government for supporting growth of their local travel industry. However these subsidies were cut due to an anti-corruption campaign by the China government. Without significant subsidies during their start–up phase or before they mature, LCCs will likely struggle through the growth path.
2.Lack of LCC airports means high costs
Airports at big cities in China do not normally provide suitable facilities for LCC operations. They have to fight for slots at existing airports and pay at a rate similar to traditional airlines. Even some provinces have started to build smaller airports for LCCs, however they are far from major transportation links. Tourists do not normally want to take more time and pay more for connecting transportation, even if the LCC flight cost is less.
3.Low Cost Carrier does not mean low fare
Travelers in China have not traditionally bought ancillary products or paid to get a better seat. Carriers therefore have to focus on a low price for air products. However, even traditional airlines will compete with LCCs on lower prices via promotions and price cuts. This is a loss-loss situation and LCCs are struggling to get through. Airlines’ profit margins are decreasing. China Southern’s 2015 first quarter financials expected a USD50m loss. A price war will further reduce their net profit potential.
4.Too early to go international
According to a report issued by the China Tourism Research Academy, the outbound traveler population grew by approximately 17.5% in 2014, up to 115 million. Their favorite destinations are neighboring countries such as Thailand, Korea, Japan, Vietnam and even Australia. The big 4 airlines are planning to increase their international services to deal with the increasing demand. Facing the fierce competition of domestic routes, LCCs also plan to expand their international coverage. However, expanding nationally or internationally means bigger aircraft, better services, and better management and planning. This further drives low cost to ’higher cost’.
5.Competition from LCCs outside China
Air Asia added 17 routes within China in the past three years, amounting to up to 33 in total. Other LCCs from Asia are cutting their share of the China market including Tiger Air, Jetstar and Cebu Pacific. These are mature, well managed LCCs with steady growth. The China market now contributes 40% to their total revenue. Local LCCs starting up are finding it difficult to compete with them in the international market.
6.High reliance on IT
Facing the high cost as stated, it seems impossible for LCCs in China to rely on the travel agency channel for distribution, owing to their high commissions and kick-backs. They have to rely on online distribution from their own web sites or via OTAs with lower commission. Some have the perception that their current high operating costs cannot justify the building of sophisticated e-commerce retailing platforms or the adoption of solutions from reputable solution providers. In addition, it is not easy for them to expand into partnerships, alliances or interline agreements for broad coverage if they are not using the TravelSky PSS or have a powerful PSS in-house. TravelSky is not currently focused on its LCCs offering and does not offer lower rates for PSS use by LCCs. Therefore their current IT investment does not support LCCS for future growth.
What does the future hold for LCCs in China?
There are signs that LCCs in China are getting more support:
- CAAC has issued the ’Directives from CAAC on the development of CAAC in China’ in 2014;
- local governments are encouraging the construction of LCC airports;
- initiatives are in place to learn and to model LCC development from Air Asia;
- public funding to increase operating capital and other costs.
Generally the effects are slow and so far, not significant. Factors that hinder progress include local constraints such as lack of centralized control, lack of expertise, cultural indifference, the structure of the Chinese aviation industry, and customers’ expectations.
China is a rapidly evolving digital marketplace for travel with growing passenger numbers. IATA forecasts that China will overtake the United States as the world’s largest passenger market by 2030. The Datalex Commerce Platform is leveraged by prestigious airline brands such as Air China and the Hainan Group Airline West Air to accelerate low cost and high value retail across all online channels (web, WeChat, Qunar, Ctrip and Tmall). We are committed to the success of all Chinese airline customers where the common goal is to enhance the customer experience for increased profitability. Our local office in Beijing is led by senior travel commerce experts with global experience.
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Regional Director Business Development Asia Pacific, Datalex