The Bottom Line.
In this Insight, Hong Kong Poly University Professor and former Vice-President of Air France Henri Hié discusses recent developments pertaining to the aviation industry in Asia and China. From general trends to airline insights and Great Bay Area strategies, Henri Hié draws an interesting and precise big picture and sheds some expert lights on a usually unknown but highly competitive industry.
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Air transport as a lever of internationalization for China.
[By Henri Hié]
Asia’s share of the air transportation market is increasingly significant and a couple of numbers are sufficient to draw a preliminary big picture.
Asia currently represents 20% of world air transport and its share should rise, barring major incidents, to 30% in 2030. The annual growth rate of the transport industry has been around 10% in recent years and should remain high (minimum +7% per year). Asia will also account for 30% of future aircraft purchases, as will the scarce resources of new pilots, technicians and training.
Within Asia, China is the major actor, both domestically and regionally, whilst accounting for 20% of the 30% world share. While domestic passengers are in the majority, the number of Chinese tourists abroad currently exceeds 130 million and remains in strong growth, with Europe accounting for 10% and France, the most attractive destination, for 2.5 million per year.
A favorable environment.
The global air transportation industry is currently doing very well. According to the International Air Transport Association (IATA), its growth has been continuous since the 2008 financial crisis, constituting one of the longest cycles ever observed. It should be recalled that this industry, which is very sensitive to shocks of all kinds (oil, geopolitical, economic), has historically had positive cycles of around 5 to 6 years at most.
This growth continues to generate exceptional economic results (around USD 35 billion in 2017, and probably USD 39 billion in 2018). This is the fifth consecutive year of profits, which is a big turn after bad results in previous years.
These excellent results are due to a continuous increase in traffic (+6% per year), to stable revenues and a maintained aircraft load factor. The control of production costs – in particular a relatively low oil price – and the improvement in the quality of the service (around 50 to 60 USD per barrel on average over the period) are also to be considered.
These circumstances have helped to restore the airlines’ operating margins (which now reach 9% gross and 5% net per year), thus facilitating the industry’s financial development, and permitting the proper remuneration of shareholders as well as an increase in needed investments. This has rarely been the case before, as until now only the other players in the sector (aircraft manufacturers, distributors, airports) used to be in a correct financial shape.
Also worth noting is the fact that employment has held up well despite productivity gains. The industry is now reaching 2.7 million direct employees and contributing to 3.5% of the world economy whilst allowing 4.3 billion passengers to travel the world in 2018.
Asia at the helm.
While North America is still the lion’s share in terms of results, accounting for half of the world’s profits, Europe and Asia are on an equal footing by sharing the remaining 18 billion.
For the coming years, regional forecasts continue to be excellent. The anticipated demand growth in Asia reaches 7 to 8%, which is significantly higher than in the rest of the world and inexorably shifts the center of gravity of air transport to the East.
Competition continues to be intense between players in South-East Asia, however. This is mainly because of the development of “low cost” products in the region, but the main markets of China, Japan and India maintain “intelligent” regulation, inspired by the American model which proceeds from a well-understood liberalism.
China, an aerial eldorado?
Henri Hié: There are four major airlines in China: Air China (Beijing), China Eastern (Shanghai), China Southern (Canton) and Hainan Airlines (Beijing and Hainan) as well as Cathay Pacific (based in Hong Kong).
The first three are public companies managed at the national level by SASAC, which includes state shareholdings; the other two are private or semi-private since Air China owns a large part of Cathay Pacific. Their growth has been almost parallel over the past ten years, but each with its own characteristics:
- Air China (CA), mainly international, has developed on the domestic market, with numerous acquisitions of domestic companies allowing it to better position itself as in Shenzhen;
- China Eastern (MU), more balanced in terms of network, has developed in both sectors;
- China Southern (CZ), essentially domestic, has developed a lot internationally, particularly towards Australia and the west coast of the United States;
- As for Hainan Airlines (HNA), its development has been very (too?) important, multisector (hotels, catering, tourism) and international (secondary cities from China to Europe, especially Paris). It is currently facing major financial problems and must reconsider its recent acquisitions to pay off its debts. In Hong Kong, the low-cost subsidiaries (Hong Kong Airlines and Hong Kong Express) have developed considerably, but also face structuring problems due to too rapid growth.
- CX, the high-end and emblematic company from Hong Kong is essentially long haul-focused. It acquired Dragonair (now Cathay Dragon) from Air China in 2007 to serve the Chinese domestic market. It however faces certain financial difficulties, both on long haul (due to the competition from Gulf companies), and on short and medium haul with Chinese companies and low costs exercising competition. It has therefore recently decided to buy Hong Kong Express from the HNA group, thus equipping the group with a weapon in this segment (like Singapore Airlines).
The three Chinese “majors” (CA, MU and CZ) continue to develop at a high rate. In fact, considering that the various Chinese provinces develop at a faster pace than the three major cities (Beijing, Shanghai and Canton), the new highly productive aircraft (A350 and B787) will gain in attractiveness and allow more direct flights whilst reducing congestion at airport centers.
Indeed, the construction of provincial airports to international standards should increase their number from 30 to 120 by 2030, and would be accompanied by an equivalent increase in traffic. In addition, the three major airports of Beijing, Shanghai and Canton have been running behind their capacities, growing at a slower pace than airlines and passenger demand, leading to numerous delays.
The development of local airlines such as Sichuan, Xiamen or Shenzhen Airlines in their regional metropolitan areas will also contribute to this objective of traffic flow, better punctuality and support the political decentralization of these provinces.
The strong development of the well-managed High-Speed Train (HST) will undoubtedly create a balance. It is very complementary for short distances and will contribute, through its electric propulsion, to reducing China’s oil energy deficit.
Air-rail connections deserve to be better developed in China, the only example of an international airport connected to the HST being Xi’an to date, with other cities requiring tedious transfers and load breaks. The merger of the two ministries into a single Ministry of Transport, as in France, is beneficial in this respect.
This development of the High Speed Train is accompanied by a moderate growth of low-cost airlines in China (depending on the region, they currently represent 5 to 10% of traffic compared to 35% in Europe and more than 40% in Southeast Asia), and are most often subsidiaries of large companies such as Japan or Korea.
This strategy is now general, as in Europe with Lufthansa, Air France KLM or British Airways Iberia, which makes it possible to offer complementary products (so-called category management approach) and to better control low-cost competition.
Finally, in terms of aircraft construction, the development of the Chinese C919 aircraft (120 seats and more), after the small 70-seat ARJ21 model to replace the A320 and B737, will help – if it manages to obtain the appropriate operating costs – to support the growth in domestic traffic over the next five to ten years. Although the C929 project has already been launched, the construction of a long-haul aircraft is also planned for the future. Cooperation with Safran (CFM engines) is very important to this regard.
After experiencing a very strong growth in the years 2005-2015, the China-Europe routes now seem to be reaching a point of balance, in particular through the establishment of joint ventures between European and Chinese companies.
Air transport is now also expanding to North America (despite current isolationist tendencies that still have little impact), both on the west and east sides (new aircraft allowing more direct economic flights) and the Pacific (an area where China wants to play an increasingly important political role).
In terms of traffic, China still applies a negotiated bilateral rights regime (no Open Skies) and European countries are accordingly seeking to protect their equilibrium position; in the case of France, for example, traffic rights are 50 round trips per week and will gradually increase to 100 for the coming years.
The capital destination (Paris) is relatively protected from the three major Chinese cities, but openings will be possible from the Chinese province to Paris or from the major Chinese cities to the French province, which explains the interest of opening the capital of these airports. The case of Toulouse airport has nevertheless cooled some appetites.
In terms of alliances, the three Chinese majors are (or will be for China Southern) logically associated with the three European majors and the three American majors within Skyteam, Star Alliance and Oneworld. Originally purely commercial in the form of code-sharing, these alliances are gradually moving towards joint ventures and equity investments to be more secure over time (e. g. Air France with Delta Airlines and China Eastern). Only the case of Cathay Pacific remains uncertain, as it may remain close to Oneworld or switch to the Star Alliance camp with Air China given its shareholding in the capital
Hong Kong as a typical case study.
On the one hand, Singapore Airport is the main international competitor and is growing rapidly. ON the other hand, Hong Kong Airport has been saturated for several years and the third runway will only open at best in 2024.
This has a negative impact, obviously, because while Hong Kong remains the world leader in air freight, saturation not only generates a decline in quality, but it also affects the potential for immediate growth. On top of this, this also increases the risk of being overtaken by the other airports in the Greater Bay Area (Shenzhen, Canton, Zhuhai, Macao) which are growing at a rapid pace and are all the more interconnected. This is not to mention the High-Speed Train and by the recent opening of the Bay Bridge.
In terms of international competition, in comparison with the other “hubs regions” of Asia (Singapore, Beijing, Shanghai, Tokyo, Seoul), Hong Kong must take advantage of its proximity to China and coordinate better with the other airports in the Greater Bay Area in a global transport scheme. Also, Hong Kong’s role as a super connector is still predominant and should be maintained, particularly in terms of airport growth, in terms of air-rail intermodal links (to be improved), and in terms of traffic redistribution (between national and international infrastructures).
Getting out of China to become a stronger China.
In the long term, air transport remains a direct reflection of international relations policy. To this extent, the economic aspect – although necessary – remains secondary. This is especially the case in China where airlines, always supported by the State, support the country’s internal development and help it regain its place on the international scene.
Today, this creates concerns to both Europe and the Pacific, hence some American companies that are developing and forging alliances on this axis (Delta with China Eastern, American with China Southern recently).
The slower construction of Europe and its lack of political existence do not work in its favor. In fact, there is a risk that, in the absence of a political, economic and military alliance, China will consider Europe as the alliance of the strong and the weak. Said differently, China might only be interested in the European industry’s technical contributions and will invest in aeronautical subcontractors and airports in Europe, therefore forcing its partners to run ahead of a China that is catching up more and more quickly.
Since General de Gaulle’s recognition of China in 1964, France has always enjoyed a privileged position, and Air France in particular, with air transport reflecting international policy. With regard to the United States, China is testing its political balance of power and transposing it into the air sector. The logic of alliances still prevails and we can only hope that it will continue.
As for regional development, particularly in South-East Asia, the fear of local governments is – in the air as in other sectors – China’s economic hegemony, a risk exacerbated by an apparent American withdrawal. As such, the next ASEAN aviation agreement, if reached, could enable the area to relaunch itself in a coordinated manner with China on the international scene.
Very strongly positioned on their market and having gradually upgraded their technical skills, Chinese companies want to improve their openness and image and move away from the “purely Chinese type company” to alliances, thus supporting the country’s internationalization image, and to have their global political presence recognized.
As such, Europe and France, through balanced exchanges with China in the Belt and Road project, and particularly in the Greater Bay Area for Hong Kong and its region, have an important role to play, provided that they build Europe into a political and economic force to continue to prevail in the eyes of the Chinese.
The very clear-cut political position of the United States may be an opportunity for Europe to reposition itself in a multilateral game in which airlines will have a role to play. They make it possible to intensify trade and human exchanges, accompanying dialogue rather than confrontation.
For Chinese companies, the future lies in openness and international alliances. Despite the current political difficulties, Beijing will not be able to make the economy work, despite the current political difficulties, to continue to forge agreements on the various continents in order to acquire its international stature and not remain isolated. This is the Great Air Game: getting out of China to stay in China better.
This insight was originally published in French in « La Lettre de la Chine Hors Les Murs » N°27, January 2019, by the French External Trade Advisors (Comite National des Conseillers du Commerce Exterieur).
Henri Hié | Aviation Expert Contributor.
Henri Hié is an aviation expert. Currently a Professor in charge for Aviation Management at the Hong Kong Polytechnic University, he was previously Vice President of Strategy & Partnerships in China for Air France, in charge of development, from 2013 to 2016.
Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.
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