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China's 19 new passenger airlines will be mostly full service

12/17/2014| 10:35:00 AM| 中文

A year into China's framework to cultivate new airlines and specifically LCCs, we take a look at industry conditions.

One year ago in Nov-2013 China announced the start of a new framework to cultivate new airlines and specifically LCCs. The objectives were to re-stimulate market growth by introducing new types of airlines into the heavy state-owned, and until-now inefficient, airline secotor. A further objective was to bring the humming aviation scene on China's east to western areas that are centres of economic policy drives.

As part of this, a de facto moratorium on new airlines was formally lifted. This has led to a rush of start-up activity. The number of new passenger airlines that have recently launched, plan to or are in formation has reached 19, according to CAPA's compilation based on public statements. But only two airlines – 9 Air/Jiu Yuan and an unnamed carrier in Zhengzhou – are so far planning to operate as LCCs. This reflects hesitation to innovate but also a policy framework that is not yet entirely conducive to LCCs.

There is a better turnout of airlines forming in China's west as well as previously ignored northeast corridor. But there is still a heavy eastern bent to the start-ups, with some planning to launch passenger service in first tier cities like Guangzhou, Hangzhou, Shanghai and Shenzhen.

China's 19 new passenger airlines are mostly in the east

China's economic push is in the west, in now well-known places like Chengdu and Chongqing but also Xinjiang and Zhengzhou. The drivers are varied. The cost of manufacturing in the east has increased (and the east wants to move towards service-based industries) while costs are lower in the west, and manufacturers have followed.

For example, Zhengzhou is a hub for Apple's manufacturing. The other strategy underpinning is that growth will bring stability, such as in Xinjiang or Tibet.

There are a number of start-ups planned in western (and central) parts, although some like Chang'an in Xi'an are not yet very definitive. Urumqi Airlines in the far west has launched, but is largely taking over an existing branch of Hainan Airlines. Still, a separate airline (partially owned by the local government) should enable stronger growth than what Hainan could have achieved under its own name and ownership.

More quiet is the activity in China's northeast, where there are now three proposed start-ups. 

New airlines in China are launching in large and small cities

The start-ups are in cities big and small. China's second-largest airport, Guangzhou with 52.4m passengers in 2013, will be home to 9 Air, due to launch imminently. The smallest airport seeing a new airline is Nantong (home to Sutong Airlines), which had 600,000 passengers in 2013, making it China's 75th largest.

Overall, the average size of airports seeing a start-up is passenger throughput of 16.8m passengers with a 2013 growth rate of 16%.

Ranking of China's start-up airlines on size of base airport (announced or presumed): as of Nov-2014

Airline NameBaseRank of Base Airport in 2013Base Airport Passenger Throughput 2013Base Airport Passenger Growth 2013 v 2012
Jiu Yuan/9 AirGuangzhou252.4m8.6%
Yangtze River ExpressShanghai Pudong347.1m5.1%
Donghai AirlinesShenzhen632.2m9.1%
Ruili AirlinesKunming729.6m23.8%
Chang'an Airlines Xi'an826.0m11.2%
Loong AirlinesHangzhou 1022.1m15.7%
Urumqi AirlinesUrumqi 1415.3m15.1%
Qingdao AirlinesQingdao1614.5m15.2%
(Unspecified; affiliated with First Eastern)Zhengzhou1813.1m12.6%
Heilongjiang AirlinesHarbin2310.2m12.2%
(Unspecified; affiliated with Okay)Harbin2310.2m12.2%
Fuzhou AirlinesFuzhou258.9m13.7%
Beibu Gulf AirlinesNanning268.1m16.0%
Jiangxi AirlinesNanchang296.8m13.2%
Jilin AirlinesChangchun306.7m15.7%
Guilin AirlinesGuilin335.8m3.3%
Hefei Airlines Hefei355.6m8.4%
Qinghai AirlinesXining433.2m21.5%
Sutong AirlinesNantong 750.6m75.0%

 

Source: CAPA - Centre for Aviation and CAAC

19 airlines in China are in the launch phase, but not all are likely to launch

The table below is an update on the details of start-up passenger airlines in China. New airlines have made known their intent to launch, while none have been known to publicly withdraw. Six have so far launched in the past year while others will hope to launch before the end of 2014. Some will not launch at all and others will not survive, as is common with a rush of start-up activity.

HNA continues to have a defining role, having expressed interest in launching seven passenger airlines. Two of those (Fuzhou Airlines and Urumqi Airlines) have launched. One of HNA's planned passenger airlines, Yangtze River, is already flying as a cargo carrier.

A recent development has been the entry of Xiamen Airlines into the subsidiary environment. Xiamenwill be a stakeholder in proposed Jiangxi Airlines, and has become a stakeholder in existing carrier Hebei Airlines. Xiamen Airlines is majority owned by China Southern. Xiamen's involvement in Jiangxi marks China Southern's entry in the start-up scene.

Air China launched airlines (including Dalian Airlines and Tibet Airlines) prior to the formal lifting of the moratorium on new airlines. Air China is indirectly involved in start-ups again via Shandong Airlines' role in start-up Qingdao Airlines. China's fourth and last major airline group, China Eastern, is absent, although this comes as China Eastern seeks to bed down its operation, launch 777 long-haul growth, and launch the largest new LCC yet (China United Airlines) in Beijing, the fortress of rival Air China. 

Summary of proposed new Chinese airlines: Nov-2014 

Airline Name

Status

 

Model

 

Airline Share

holder

Share

holding

 

Base

 

Fleet

 

Beibu Gulf Airlines

 

Waiting. Preliminary approval received in Jun-2014. In Jul-2014, airline expected to launch by end-2014.

FSC (regional)

 

HNA (Tianjin Airlines)

 

70% Tianjin Airlines, 30% Guangxi Beibu Gulf Investment Group. Total registered capital: CNY3000 million (USD468.8 million)

Nanning

 

E190s

 

Notes

 

Another HNA-affiliated start-up, Guangxi Airlines plans to be based on Tianjin Airlines’ Nanning branch, which is also a subsidiary of Hainan Airlines. The carrier is set to further improve Tianjin Airlines’ regional network. International expansion to Hong Kong, Macau and Taiwan is mooted. There have not been recent mentions of previously mooted service to South Asia.

Chang'an Airlines

Waiting

 

FSC

HNA

 

TBA

 

Xi'an

 

TBA

Notes

 

HNA in May-2013 announced it would seek to launch Chang'an and four other proposed new airlines. Chang'an had been an airline integrated into the larger HNA Group but statements indicate HNA would seek to make the business independent again.

Donghai Airlines

Launched in Mar-2014

FSC

 

N/A

 

East Pacific Group, share

 unknown

Shenzhen

737-800

Notes

 

Donghai Airlines had been a cargo carrier based in Shenzhen and established in 2002. In Dec-2013 the carrier received approval to provide scheduled passenger services and commenced passenger services in Mar-2014. Donghai ordered 25 737-800s and plans to take six or seven aircraft a year until 2020, by which time it aims to have a fleet of 50 serving domestic and international routes.

Fuzhou Airlines

Launched on 30-Oct-2014

 

FSC

 

HNA

 

CNY1200 million (USD187.5) million from HNA (60% stake) CNY400 million (USD62.5 million) from Fuzhou State-owned Assets Investment Holdings Co (20% stake) CNY200 million (USD31.3 million) split between Century Golden Resources Group and Ningbo Ruitong Network Technology Co (each with 10%)

Fuzhou

737-800

Notes

 

Fuzhou Airlines was announced in mid-2012 and launched in Oct-2014. Fuzhou Airlines plans to operate services within Southern China and will compete with Xiamen Airlines, which has a 50%market share in Fuzhou and is a subsidiary of China Southern.

Guilin Airlines

Waiting

 

FSC

 

HNA

 

TBA

 

Guilin

TBA

 

Notes

 

Guilin Airlines planned to launch services in May-2014 but its new estimated launch is unknown. The carrier will be a JV between HNA Group and Guilin’s Municipal Government. The airlline was jointly established in order to boost the development of the tourism industry in Guilin. HNA vice chairman Chen Wenli said Guilin Airlines proposes to operate three aircraft initially with plans to expand its fleet to 30 aircraft in three years.

Hefei Airlines

Waiting

 

FSC (possibly regional)

Joy Air

 

TBA

 

Hefei

 

TBA

 

Notes

 

Hefei Airlines is a regional Chinese start-up, part of a joint venture between Joy Air Aviation Holding, the Aviation Industry Corporation of China (AVIC) and the Hefei Municipal Government. The start-up initially intended to commence operations on 30-Jun-2014 but this has been delayed by at least nine months reportedly because it failed to secure regulatory approval from the State-owned Assets Supervision and Administration Commission. Hefei Airlines plans to launch scheduled services with three aircraft. By 2020, the carrier plans to operate a fleet of 30 aircraft, serving 50 to 70 routes, including international services.  Hefei reportedly wanted to purchase Airbus narrow body aircraft to tackle thicker routes, but Joy Air part owner AVIC wanted Hefei to focus on regional routes and use AVIC's aircraft.

Heilongjiang Airlines

Waiting

 

FSC

 

HNA

 

TBA

Likely to be Harbin

 

TBA

Notes

 

Heilongjiang Airlines is a proposed Chinese start-up to be launched as a JV between HNA Group and China’s Heilongjiang Provincial Government after signing a strategic cooperation agreement in Mar-2013. The carrier will focus on expanding services in China’s northeast. Heilongjiang Airlines may be based on the operating model of Capital Airlines, focused on regional routes and charter travel as its main business.

Jiangxi Airlines

Waiting

 

FSC

 

Xiamen Airlines

 

40% Jiangxi Aviation Investment Co, 60% Xiamen Airlines. Registered capital: CNY2 billion (USD330 million).

Nanchang

 

737

 

Notes

 

he carrier will reportedly launch services in Jun-2015 initially servicing Tier I Chinese cities such as Beijing, Shanghai, Guangzhou, Shenzhen and Chengdu, with plans to operate to Singapore, Thailand, Malaysia, Japan and South Korea, as well as – quite boldly – Europe and the Americas in the medium/long term. Initial fleet size is five 737-800s, growing to eight in 2016 and 30 by 2020. Jiangxi Aviation (a JV between several state-owned companies in Jiangxi Province, including the Jiangxi Airport Group) looked at a number of airlines to co-launch Jiangxi Airlines, and selected Xiamen. Jiangxi is holding a public competition for its logo and livery design.

Jilin Airlines

Still Forming

TBA

TBA

TBA

Likely

Changchun

TBA

Notes

 

Jilin Province hopes to establish Jilin Airlines to promote local tourism and a potential aviation hub. Jilin Province borders Heilongjiang Province, which is establishing a local airline – perhaps pressuring or galvanising Jilin.

Jiu Yuan Airlines / 9 Air

Waiting

 

LCC

 

Juneyao Airlines

 

Juneyao Airlines (78.9%); Elion Resources Group Limited (15%); Juneyao Airlines EVP Ji Guangping (6%) and the Macrolink Group (0.1%). 9 Air will have total investment capital of CNY600 million (USD93.8 million).

Guangzhou

 

737-800s

 

Notes

 

                          

Shanghai-based private carrier Juneyao, which launched during last decade’s liberalisation wave, is waiting to launch Guangzhou-based LCC called Jiu Yuan Airlines. Its name derives from its lead-in fares of RMB9, made possible by the recent removal of minimum fare regulations. Rival Shanghai carrier Spring follows the LCC model (Juneyao is full-service) and had planed to have a base in nearby Shenzhen, but this appears to be a fading thought. Jiu Yuan had planned for an Aug-2014 launch on domestic routes (with later expansion to international routes) but this has been delayed. On 16-Nov-2014 the carrier told media it would launch on 02-Dec-2014 from Guangzhou to Zhanjiang. Jiu Yuan sourced its initial aircraft from Transportation Partners, the leasing company affiliated with Lion Air. Jiu Yuan has ordered 50 737 family aircraft

Loong Airlines

Launched 29-Dec-2013

 

FSC

 

N/A

 

Huixiang Investment & Commerce Co.,Ltd: 51%. Delux Wealth Group Ltd.: 24%. Asian Win Investment Ltd.: 15% Caulfield Investment Ltd.: 10%. Registered capital of CNY200 million (USD32.6 million)

Hangzhou

A320

Notes

Zhejiang Loong Airlines (operating with the abbreviated name Loong Airlines) signed an MoU for 20 A320 family aircraft, including 11 A320ceo and nine A320neo in Sep-2013. Loong launched on 29-Dec-2013 with service from Hangzhou to five domestic destinations. As of Nov-2014 it operates six A320s and one 737-300F. Regional (Hong Kong/Macau/Taiwan) and international operations are hoped to commence in three to five years time.

 

Qingdao Airlines

 

Launched 26-Apr-2014

 

FSC

 

Shandong Airlines

 

CNY250 million (USD39.1 million) QingdaoMunicipal Transport Development Group Co (25%)

CNY550 million (USD85.9 million) from Nanshan Group Co (55%)

CNY200 million (USD31.3 million) from Shandong Airlines (20%)

Qingdao

A320

 

Notes

The carrier received CAAC approval around May-2013/Jun-2013, a speedy timeframe as Qingdao government only publicly stated in Oct-2012 its desire to have a local airline. The first flight was on 26-Apr-2014. Qingdao Airlines is being sponsored by Shandong Airlines, which is partially owned by Air China. Air China’s indirect ownership likely helped the process along. Qingdao Airlines in Sep-2013 announced an order for a total of 23 A320 family aircraft, including five A320ceo and 18 A320neo with the first delivery expected in 2016.

Qinghai Airlines

Still Forming

TBA (possibly regional)

TBA

TBA

Likely Xining

TBA

Notes

Details are scarce except that the province wants to expedite the airline's launch, along with regional airport development. The airline may serve regional cities in this vast western province.

Ruili Airlines

Launched 18-May-2014

 

FSC

 

N/A

 

CNY600 million (USD93.8 million), 100% owned by Yunnan Jingcheng Group

Kunming and Mangshi

737s

 

Notes

It received CAAC approval in May-2013, the first of the new wave of carriers to do so. In Aug-2013 Ruili Airlines and Boeing signed a purchase agreement for 14 Boeing 737 aircraft including eight 737-700s and six 737-800s. The carrier also signed purchase agreement with Air Berlin for two 737-700s in 2013 and two 737-800s in 2014. By 2020, the carrier plans to expand its fleet to 24 aircraft, down from a previously stated 45 aircraft. Although privately owned, flight inspectors will come from China Eastern Airlines Yunnan while management staff will also be recruited from China Eastern Yunnan. Technicians will come from from Sichuan Airlines Group and Civil Aviation Flight University of China. Ruili expects to take its fourth aircraft in Nov-2014.

 

Sutong Airlines

Waiting

FSC (Regional)

N/A

         Nantong Tongzhou Bay Aviation Industry

Nantong

Q400s

Notes

The carrier signed a letter of intent (LOI) to acquire 30 Bombardier Q400s which will start operating in 2015.

Urumqi Airlines

Launched 29-Aug-2014

FSC

 

HNA

70% Hainan Airlines, 30% Urumqi Urban Construction Investment

Urumqi

737-800

 

Notes

Urumqi Airlines has taken over Hainan Airlines’ operation at Urumqi and is licensed for domestic (including Hong Kong, Macau and Taiwan) and international passenger and cargo services. Urumqi Airlines aims to also expand internationally from Urumqi to Central Asia,Europe and the Middle East. It aims to have 12 aircraft within three to five years. Urumqi operates two 737s in Nov-2014 and is licensed to have up to three 737s in 2014.

Yangtze River Express

Waiting for passenger flights

 

FSC

 

HNA

 

In Jul-2013 HNA reported its stake as 51%, but intended to wholly-own Yangtze River Express after other shareholders sold their stake.

Shanghai

 

TBA

 

Notes

Shanghai-based Yangtze River Express is a cargo airline owned by the sprawling HNA group. The carrier was established in 2003 and as of May-2014 operates 20 freighter aircraft: 17 737s and three 747s. Reports from Apr-2014 indicate the carrier has applied to the CAAC to have passenger flights, thereby increasing HNA’s exposure in the Shanghai market.

Unspecified

Waiting

 

FSC (regional)

Okay Airways

TBA

 

TBD (Harbin?)

TBD

 

Notes

Okay Airways is a privately owned carrier unaffiliated with others. It is based in Tianjin and follows the regional model, although its fleet of eight MA60s is complemented by 11 larger passenger 737-800s, with additional 737 variants on order. In mid-2012 Okay said it submitted an application to base a regional affiliate at Harbin in Heilongjiang province. In Aug-2013 Okay said it had filed an application to launch a regional carrier in 2014, but it was not made clear if this was new, a revised or the same application as 2012. The announcement that HNA and Heilongjiang provincial government agreed to form Heilongjiang Airlines appears to conflict with Okay's initial plan to have a carrier in the same province. Okay said new affiliates would have separate branding and be part of its effort for a country-wide regional carrier network. Okay has opened a branch (its first outside of its main Tianjin base) in Hunan Province. Okay has spoken of eventually operating over 100 MA60s.

Unspecified

Still Forming

 

LCC

 

TBA

 

First Eastern Investment: USD50 million for a 49% stake. Balance held by Zhengzhou City Manli Transportation Group

Zhengzhou

 

A320

 

Note

The start-up will operate a fleet of three leased A320 aircraft initially and expanding to six aircraft in its second year of operation. Commenting on possible routes for the start-up, Mr Chu said considerations include mainland China, Japan and Hong Kong markets. Hong Kong-based First Eastern is an investor in Japan's Peach Aviation. Peach has been invited to be a shareholder and/or provide assistance.

 

Source: CAPA - Centre for Aviation

Outlook: the large chasm between launch and survival

As in any other part of the world, most of the start-ups will face myriad challenges. Despite the new entry, the vast majority of Chinese seatcapacity falls under the umbrella of four airline groups. The independent start-ups, with no backing from HNA or anyone else, will be most challenged. They will generally have the favour of their local government, but will have a long way to make gains in other areas.

Regulators in turn can be expected to try to balance giving enough space to allow the airlines to grow, but without unduly undermining the incumbents. This is still not a deregulated market, either at national (CAAC) regulatory level or in terms of provincial government involvement in airlines.

A sombre outcome for independent airlines was the recent fate of Hebei Airlines, which suffered from a lack of scale - but also of expertise. Its local government owner effectively gave up on it in favour of supporting existing carrier Spring Airlines, which gave a better return on lower subsidies.

The government love affair with owning a local airline is an enduring one. But, as more efficient entrants become able to provide the desired services (eg to satisfy business, tourism and communication needs), the attraction of "owning" an airline will steadily be outweighed by the cost and risk.

Even the airlines that are part of another group – Fuzhou Airlines and Urumqi Airlines are part of HNA; Qingdao Airlines is part of Shandong Airlines – will see lost opportunity as systems are replicated.

Despite falling short of full deregulation, China's regulators have taken a healthy approach towards "market exit", at least for smaller airlines. Failures will be necessary along the way, as new experiments are tried; and the eventual potential before China's market becomes "mature" is so substantial that there is  room for plenty of mistakes, as the learning process unfolds.

Some airlines will fail entirely while others will be consolidated into other brands. The loss of face for a failed airline may be high-profile, but it is a sign of a healthy market.

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