The rise of China's penny-pinching budget airlines

Last updated 08:45 15/04/2014
Spring Airlines

BUDGET AIRLINE: A crew member of Spring Airlines talks with travellers.

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The chairman of Spring Airlines requires his employees to use both sides of a sheet of paper before throwing it away and even removed most of the bulbs lighting the corridor to his office - all part of his quest to save money.

China's first low-cost airline has been profitable since 2006, its first full year of operation, but the budget aviation market is about to get a lot more competitive as the government moves to promote low-cost travel to meet a surge in demand from an increasingly wealthier population.

Over the last 18 months, Spring has been joined by two new competitors. China's big state-backed carriers are also looking at launching budget carriers, a strategy industry executives say would be an additional boon to plane makers Airbus Group and Boeing.

The Civil Aviation Administration of China (CAAC) plans to add nearly 80 new airports by 2020, including a US$14.5 (NZ$16.73) billion second airport in the capital Beijing, and is urging other airports to build new terminals and convert existing facilities to handle budget airlines.

The initiative, industry observers say, would usher in a new era for low-cost carriers (LCCs) in a country where one in four people travelled by air in 2013. That number is set to rise to almost the whole population in the next two decades, according to Airbus executives, with China to replace the United States as the world's largest aviation market during the same period.

"There will be a number of new entrants," said Andrew Herdman, director general of the Association of Asia Pacific Airlines. "We know that model works well for short-haul flights elsewhere. There is no reason it shouldn't work well in China."

For Wang Zhenghua, founder and chairman of Spring Airlines, progress has been slow. The Shanghai-based carrier has been flying for nine years and still struggles to get prime landing slots at Beijing Capital International Airport, causing Spring to rack-up 80 million yuan (NZ$14.84 million) in total losses on a route that has been highly profitable for the wider industry.

"We only get to land in Beijing either early in the morning or late at night," Wang said. "Slots are pretty tight, but unfairness and discrimination are the main issues here."

Beijing, one of China's busiest airports, is home to Air China and a critical hub to other state-backed carriers. The CAAC recently pledged to assign slots to all airlines in a more fair way.

Unlike Europe, where budget carriers control 50 per cent of the short-haul market, Spring booked about 11 million passengers last year, or less than 5 per cent of the total China market.

Pilot shortages, limited airspace and regular delays have held back growth, industry executive say, while fast and affordable rail also poses a threat. China's State Council announced last week that it was speeding up construction of railway lines.

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The low fares and no-frills model now popular in China was pioneered by Southwest Airlines in the early 1970s and successfully emulated by Ryanair, AirAsia and easyJet.

"The growth potential for LCCs is huge because China has a big population and many people have never taken a plane," Spring Airlines' Wang said. "Our clients can be anyone who is price-sensitive, it's not just wage earners."

In November, CAAC deputy director general Xia Xinghua endorsed the development of budget travel when he appeared at a Beijing low-cost carrier forum.

That month, Wang Junjin, chairman of privately owned Juneyao Group, set up Jiuyuan Airlines, a budget carrier based in Guangzhou, southern China's most important aviation hub.

Juneyao also operates a namesake full-service Shanghai-based carrier, which services 60 domestic cities, and a handful of Asian destinations, with a fleet of 34 Airbus A320 aircraft.

HNA Group, parent of Hainan Airlines, converted its Chongqing-based subsidiary West Air into a budget airline at the end of 2012.

West Air, which mainly shuttles between small cities, flew 3.3 million passengers in 2013, its first full year of service. More importantly, it reported a load factor of about 90 percent, 10 percentage points higher than the industry average.

China's biggest government-backed carriers are also eyeing budget opportunities.

China Southern Airlines is considering setting up a low-cost subsidiary, its chairman Si Xianming said recently. Air China is also "studying" the low-cost market, Chief Financial Officer Fan Cheng told China's state radio this week.

China Eastern Airlines is turning Beijing-based subsidiary China United Airlines into a budget carrier, local media said.


More competition may mean more margin pressure. Spring Airlines now has a profit margin of 10 percent, higher than the industry average of 8 percent.

Wang attributes Spring's success in part to stringent cost cutting: all staff, Wang included, must fly with heavily discounted tickets or take trains for business trips. Employees are expected to stay in budget hotels, and no one leaves the office without turning off the lights.

When the company moved its headquarters into an ageing hotel near Shanghai's Hongqiao airport, Wang not only took away eight of the 10 bulbs that light his office corridor but also voted against refurbishing, a decision that makes think twice when he has trouble flushing the toilet.

"The pipes in the bathroom are too old. It's a pain to flush the toilet," he groaned.

- Reuters


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