China’s Rising Giants

China’s evolution into a global powerhouse, with the world’s second largest economy, is a familiar story. Less well known though is the tremendous growth of the nation’s state-sponsored aviation sector, which now has a global reach. Serving the world’s largest domestic market and a rapidly expanding worldwide one, China’s main airlines are now truly international players.

Communist days

Following the Communist Party’s victory in the civil war in 1949, aviation was centralized under the Civil Aviation Administration of China (CAAC). Employing a mix of aircraft, mostly Soviet types but with some western ones as well (mainly Boeing but with some others such as the McDonnell Douglas MD-80 series and the Hawker Siddeley Trident), CAAC had a poor safety record coupled with abysmal service.

With the restructuring of the Chinese economy in 1988, CAAC was split into a number of regional airlines. Thirty years later, three of those have evolved into large and very successful airlines, mirroring the transformation of the Chinese economy into the titan it is today.

Air China

Based in Beijing and starting life with 118 aircraft, Air China (IATA: CA) inherited the call sign and flag-carrier status of CAAC, including much of the latter’s international route network. Merging with two smaller airlines, CA was listed on the London and Hong Kong Stock Exchanges in 2006. The airline is also a member of the Star Alliance of major airlines.

Today, CA boasts a fleet of more than 400 aircraft operating over a globe-spanning network with flights to every inhabited continent, plus a huge domestic network within China. CA’s fleet is evenly split between Airbus and Boeing types. It includes 10 Boeing 747s (a 747-800 is pictured here) and in excess of 100 Boeing 737s. The airline already has 16 MAX variants of the 737, with 29 more in the delivery pipeline. The status of these aircraft is a matter of some conjecture given the current controversy surrounding the MAX.

Air China also has a number of Comac (Commercial Aircraft Corporation of China)-designed regional and single-aisle jets on order, a development that must be of some concern to Airbus and Boeing.

The airline has been consistently profitable since 2009, recording revenues exceeding USD 20 billion in fiscal year 2018 with an operating margin of over 10%: a very healthy performance.

China Eastern Airlines

Headquartered in Shanghai, China’s commercial capital and largest city, China Eastern (IATA: MU) is the second largest airline in the mainland. China Eastern boasts a fleet of more than 600 aircraft, predominantly Airbus types, of which 300-plus are of the A320 family (seen here at Pudong), in addition to 175 Boeing airliners. MU has several Comac aircraft in the order pipeline too.

Largely a domestic airline, MU has a significant international network encompassing destinations in Asia, Australia and North America, plus a few cities in Europe. A member of the SkyTeam airline alliance, China Eastern too has been steadily profitable since 2009. Latest results show a total revenue of USD 18 billion (with a net profit of over USD 400 million) and an operating margin approaching 8%.

China Southern Airlines

China’s southern commercial hub Guangzhou (formerly Canton) is the base for what has become the country’s largest airline by fleet size: China Southern Airlines (IATA: CZ). With a fleet number exceeding 600, CZ is slightly larger than China Eastern and has the distinction of operating five Airbus A380s, the only airline in the country to do so.

CZ too is primarily a domestic airline, operating from several secondary hubs other than Guangzhou, including Urumqi in the far west of China. Utilising more than 250 Airbus A320 family aircraft and 200-plus Boeing 737s, in addition to a large wide-body fleet, China Southern’s international network covers Australia, Asia, North America and Europe.

Another member of SkyTeam, CZ gave notice that it will leave the grouping in 2019. It is rumoured to be considering joining Oneworld, or else continuing without being a member of any alliance but securing tactical code-share agreements, a strategy used successfully by Emirates among others.

Consistently profitable and listed on the Shanghai and Hong Kong Stock Exchanges, CZ declared a net profit of over USD 500 million in FY 2018, with an operating margin (6.14%) slightly less than its two siblings.

Spring Airlines

An anomaly to the above list of state-owned giants, Spring Airlines (Chinese: 春秋航空股份有限公司; pinyin: Chūnqiū Hángkōng Gǔfèn Yŏuxiàn Gōngsī) means Spring Autumn Airlines in Mandarin. A very tightly focused Low Cost carrier, Spring is headquartered in Shanghai Hongqiao International Airport, as opposed to the   Spring Airlines started operations on 18 July 2005 and the first flight on that day was between Shanghai and Yantai.

Operating a fleet of A320 family aircraft that is rapidly approaching 100 hulls, Spring does not have any complementary cabin service (not even water) and only sells tickets through its website, completely bypassing travel agents. Due to a robust regional network Spring is now the largest international carrier in China, though this may be a temporary effect due t the sharp drop in traffic due to COVID-19 as the Corona-virus is now named.

China’s Command Economy

China’s mega-airlines are part of the world’s largest ‘Command Economy’.  Rather than allowing competition, the central government decides on many issues regarding the economy.  One of the most pernicious problems the airline industry must contend with is over-capacity, where competing airlines offer more seats than the market demands.

By carefully controlling international capacity on foreign carriers, China seems to have avoided this predicament. A huge domestic market driven by a powerhouse economy has helped ensure healthy balance sheets for the nation’s airlines.

However, the relative opacity of the Chinese system makes it difficult for outside observers to determine the true state of the airline industry in that country. The actual ownership of the huge fleets operated by the airlines is not totally clear, neither is the manner in which traffic rights are allocated. Yet yields, as measured in Revenue Passenger Kilometres (YRPK) both domestically and into China remain high, a sign that capacity controls are being successfully implemented.

How well the industry will cope with a downturn in the economy (always a possibility although unlikely in the short-term) is an open question. For the moment though, a record of over thirty years of growth and profit is a rare achievement in the airline business. The Chinese government must be given due credit for effectively managing a growing industry while successfully avoiding the pitfalls that have hampered other nations.

COVID-19 is going to be the biggest challenge that China’s gigantic airlines have every faced. Let us see how well they cope with the near lock-down of Chinese travelers in the coming weeks.

One response to “China’s giants”

  1. […] Airlines – the Big Three of China Airlines; China Eastern and China Southern (see FT article here) , plus large regional airlines based in Hainan, Shanghai, Shenzhen, Sichuan and Xiamen. Another […]

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