China's Privately-Owned Airlines Still Face Uphill Battle
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China’s air travel industry has a bright future. The number of fliers in East Asia is projected to increase substantially in the coming decade. Even with China’s current economic troubles, the industry’s major carriers are expecting huge profits in the coming years.
An unfair advantage?
Like many other major businesses in China, the biggest stakeholder in the largest airlines in the PRC is the government. Up-and-coming private airlines have struggled because industry rules favor these “connected” carriers. One of the biggest problems is that the best slots at major airports are almost always given to state-owned airlines. Since most government companies now have a dual-brand strategy (legacy carrier and budget subsidiary), they are competing directly with privately-owned carriers.
In an attempt to level the playing field for non-government carriers, one of the largest of which is Spring Airlines, China’s aviation authority announced that it would begin auctioning off new slots at major airports in the future. The first such auction took place last week. Nine slots for domestic routes at Guangzhou Baiyun International Airport were on offer.
Giving privately owned airlines a chance?
34 airlines were invited to take part, but when the bidding was over, airlines affiliated with the four largest government carriers in the country - China Eastern Airlines, Hainan Airlines, Air China and China Southern Airlines - had outbid the others for each of the nine slots.
Spring has been vocal about what it considers unfair slot allotment practices. The privately-owned airline has survived by operating on a shoe-string budget. A recent Reuters report said that the airline’s CEO and all staff eat at the same modest cafeteria, flight attendants share hotel rooms on trips and most light bulbs have been removed from the headquarter’s hallways to save power costs.
No real change on the horizon
The concern is that the budget subsidiaries of government-owned carriers will use their preferential treatment to gain the upper hand on competitive routes and overcome Spring despite its super-frugal business model. Things have gotten so bad at Beijing Airport that Spring has offered free high-speed rail tickets to Shijiazhuang Airport, which is about 200 miles away, where it has a larger presence.
If the results of the recent Guangzhou auction are any type of indication, it is likely that Spring and its privately-held peers will have to continue their frugal model and creative business practices if they are to continue being profitable. Though the Civil Aviation Administration of China called the Guangzhou auction a success and said the 550 million yuan ($84 million) profit would be used to improve airport infrastructure and safety, private airlines have said that the prices were simply too expensive for them to bid. From their viewpoint, the CAAC knew they would be priced out of the bidding, but held the auction anyway so that it could say “we gave you a fair chance to buy the slots. What more do you want?”
Looking abroad and to underserved routes
After clearing regulatory hurdles, Spring Airlines has moved into Japan, where it has found the marketplace to be fairer. Its other strategy is to find niche routes, such as its new service between Shanghai and the oil town of Dongyin. Unfortunately, government-owned carriers have already been using this strategy. China Eastern’s low cost wing, China United, has, for example, expanded its offerings to include a number of destinations in previously underserved Inner Mongolia.
Despite the recent auction, it seems likely that China’s privately-owned airlines will still face an uphill battle when competing with government-owned carriers.
More by Josh Lew
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