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Air China may face an ominous fall ahead

12/25/2018| 10:11:17 AM|

Air China is its country’s clear profit champion. But as a new airport soon opens in its home city, its challenges are many.

Air China, more so than its champion counterparts abroad, has a lot to be nervous about. Problems, threats, and misfortunes are surfacing. Many are beyond its control. Some could prove highly damaging.

China Eastern and China Southern do have large operations in the capital. So does Hainan Airlines. But all have flight schedules and even terminal amenities far inferior to what Air China offers, particularly to business and government travelers.

Air China led the way on international alliances, developing joint ventures with Lufthansa, Air New Zealand and Air Canada, a close partnership with United and cross-ownership stakes with Cathay Pacific. Air China today has more than 50 million members in its Phoenix Miles loyalty plan—Lufthansa’s plan, by contrast, has something like 30 million. 

Ominously, Air China’s operating margin tumbled more than six percentage points in 2017, a significantly steeper decline that what its two major rivals experienced. All carriers felt a sharp rise in fuel costs, unprotected by hedges. But Air China was more exposed to international routes, where yield pressures were greatest. Air China’s yields on flights abroad dropped 5% year-over-year, while domestic yields rose 2%. That’s a reversal of the predominant trend in prior years, when domestic routes were more troubled, losing traffic to high-speed rail. The threat from trains has since stabilized, replaced by overcapacity strains on long-haul routes, most importantly to North America, where Air China has more capacity than any other airline.

That’s still not what worries Air China most. Even if trade tensions ease and the Chinese economy flourishes, there’s another looming threat. A big threat. Beijing next fall will open a giant new airport, radically altering the competitive dynamics of the market. China Eastern, teaming with international pals like Delta and Air France/KLM, has every intention of becoming a Beijing powerhouse—maybe not No. 1 in the city, but challenging Air China just as Air China challenges China Eastern in Shanghai. China Southern, currently the No. 2 airline at the current Beijing airport, holds ambitions no less grand for the new airport. 

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TAGS: Air China | China Eastern | China Southern
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