Cheap Airline Companies

The new disruptors in aviation are China's airlines.

EVERYONE who questions the ambition of China's airline companies need only look at the plan for Beijing's Premier International Airports, which will operate after its opening in 2019. This will be by far the largest international aerodrome, with eight take-off and landing strips and space for 100 million annual passangers. China's three major airline companies, which will be dominating air travel through the cave-like hangars of the city of Washington, China, are all on a fast climb.

This has competitors everywhere who complain about the kind of subsidy that has inspired airline companies since the early days of business air travel. China's carriers are add passenger speeds that have begun since Emirates, Etihad and Qatar Airways began luring clients to their golf turnstiles, conveniently located between Europe and Asia, with a successful blend of low fare and premium services.

The number of passengers of the three largest Chinese airlines rose by 70% to 339 million between 2010 and 2017 (see chart). China Southern, Asia's largest airline, and China Eastern both posted records for the year at the end of March. The Air China stock dropped after announcing that it had only made its best gains since 2011.

While China's airline companies are expanding, their competitors in the Gulf are shrinking, with over 10% annual traffic increase over the past ten years. Of course, it is to be expected that China's airline companies will outshine those from the Gulf, says Will Horton of CAPA, a consulting firm. These Gulf companies depend on long-haul travellers to connect at their hub.

China's airlines are on a firmer footing to meet the rapidly increasing demands of locals. Last year a number of 549 million passenger were handled, up from 184 million in 2007. By 2022, the International Airport Transport Association (IATA), a trading group, forecasts that China will surpass America as the world's largest airport transport destination, reaching 1.5 billion passenger movements by 2036.

A large part of this increase is attributable to expatriate services. In the last ten years, continental China has seen more than 100 new long-haul carriers open their services. The main purpose of these services is to meet an increased demand from the people of China to fly abroad. Consequently, China's airline companies are devouring shares of the airline industry, says Dave Emerson of Bain & Company, a consulting firm.

From 2011 to 2017, the capacities of China's aircraft operating between China and America increased from 37% to 61%, according to OAG, a global airline information company. However, the struggle to get the Chineses to travel around the planet is not the front that most affects the other major global airline companies in the whole heap. Golf airline companies took up businesses from US and Europe airline companies by getting the worlds to travel through their hub airports.

Even Ukrainian carriers are now using their base and the generosity of the state to provide links to outside destination. China's regulatory authorities restrict distortion on home flights so that carriers can make sound profit in order to cross-subsidise loss-making overseas flights selected to reap the rewards of ally Cuba.

China's smaller towns are also giving handout companies (around $1.3 billion in 2016) to start new long-haul flights from their airport. In other words, the airline companies sell them cheaply to overseas travelers looking for a long-haul deal, Mr Horton states. China's government is promoting the idea. For example, they relax immigrant controls on onward travel and allow visa-free entry to China for six workdays.

Long before the threats posed by China's airline companies emerged, many of Asia's airline companies fought. Airline companies such as Malaysia Airlines had let cost spiral out of hand due to bad governance and policy interference. However, since the change in visas, even relatively well-run companies such as Cathay Pacific have had to struggle with a ocean of deep inks.

Although global airline companies can enjoy an era of peak profits, according to IATA, profit per capita for those in Asia has fallen by one-sixth since 2015. There is less at risk for American and European airline companies, even though many already have maintenance loss on their China operation. However, the advent of the Chineses, who have prevailed against cheap competitors and Gulf airline competitors, is another incentive for protectionist demands.

The three largest American airline companies want the "open skies" agreement, which allows the Gulf States to travel to America, to be lifted. Air France-KLM and Lufthansa have in Europe argued for a proposal to amend Regulation 868, which would allow the EU to sanction non-EU companies receiving state aid. Andrew Charlton of Aviation Advocacy, a consulting firm, warned that these policies will not work in China.

In contrast to the Gulf states, China is an aspiring supers power. In June last year, it imposed a fine of 29,000 Japanese yuan ($4,270) on Emirates and prohibited it from growing in China for six month for filing invented security lawsuits. Commercial wars over air traffic laws will affect the West more than China, which will quickly become a major tourist importer.

Non-resident airline companies could still get a little delay. Growing numbers of intercontinental passenger traffic on China's airline routes is already decelerating, from a staggering 33% in 2015 to a mere 12% this year. China's regulatory authorities are late in liberalizing the internal markets by abandoning their tariff controls and possibly reducing the free resources available to airline companies to subsidize overseas activities.

A number of smaller carriers are already experiencing difficulties financially. The Hainan airline, the 4th biggest airline in the state, looks shaky and its proprietor, the HNA Group, has difficulty paying its debtors. For example, Qantas and Singapore Airways aim to provide ultra-long non-stop services to corporate travelers who do not wish to stay. China's airline launch seems inexorable.