Alliances offer airlines plane sailing
By Winny Wang |
April 22, 2010, Thursday
|
Print Edition
Print Edition
COMPETITION in China's aviation market has intensified after China Eastern Airlines, the nation's second-largest carrier, announced plans to join the SkyTeam Alliance, linking it to overseas heavyweights such as Air France-KLM and Delta Air Lines.
China Eastern signed a memorandum of understanding with members of SkyTeam on April 16. Its official participation is expected to begin in the first half of next year. China Eastern will gain access to 856 destinations in 169 countries by joining the alliance.
Analysts said the Shanghai-based carrier's strategy is to boost its footprint globally and forge closer ties with China Southern Airlines, another member of SkyTeam. That will position China Eastern to compete more effectively with Air China, the country's international carrier and member of the rival Star Alliance.
"China's three largest carriers have all joined airline alliances, expanding competition in services and products," said Wu Yunying, an analyst of Changjiang Securities Co.
China's commercial aviation industry suffered setbacks following the drop in travel triggered by the global financial crisis in 2008. The industry returned to black last year with net profit of 12.2 billion yuan (US$1.78 billion), mostly contributed by government aid and fuel hedging gains.
The chase to restore profits and the need to consolidate a fragmented industry have ushered in a new era of mergers and acquisitions.
SkyTeam is the world's second-largest coalition after Star Alliance. It has nine members and two associate airlines, serving an estimated 384 million passengers a year on more than 13,133 daily flights. The other major grouping is Oneworld, whose only toehold in China is via Hong Kong-based Cathay Pacific.
Airline alliances seek to reduce costs by sharing such services as offices, maintenance facilities, catering, computer systems and check-in counters. They ostensibly provide travelers with more convenience and connectivity, though detractors would argue they can also result in higher ticket prices.
Beijing-based Air China, the nation's biggest carrier, announced last month that it will spend 682 million yuan to take control of Shenzhen Airlines as part of a strategy to dominate the aviation market in southern China.
That deal threatens China Southern, which was also said to be eying Shenzhen Air as a possible takeover target. The Guangzhou-based China Southern is the nation's largest airline by fleet size.
"China Eastern's participation in SkyTeam will deepen its ties with China Southern, so other carriers, such as Air China, must better position themselves and upgrade services to keep their market share," Wu said.
Officials at China Southern applauded China Eastern's move.
"We have good cooperation with China Eastern, and its participation in the alliance will widen our cooperation and generate more profits for us," said China Southern Chairman Si Xianmin.
Earlier this year, China Eastern acquired smaller rival Shanghai Airlines, which is a member of the Star Alliance. Shanghai Air is expected to drop its membership in that alliance, but China Eastern didn't disclose when that might occur.
The merger of Shanghai's two biggest airlines is expected to further weaken Air China's grip on the domestic market.
"Joining an international airline alliance is part of China Eastern's strategy to strengthen core profitability and boost market competitiveness," said Liu Shaoyong, chairman of the carrier. "It will help us improve our business, especially business and first-class seats on international routes, and will support our efforts to break even this year and return to profitability of our main business next year."
The carrier returned to profit last year by earning 540 million yuan after a record 14 billion yuan loss in 2008. But its main business revenue still declined 4.58 percent to 37.94 billion yuan.
Luo Zhuping, the carrier's board secretary, said on Tuesday that the carrier expects to increase flight capacity on international routes this year to 40 percent from 30 percent.
China Eastern now operates more than 330 aircraft to 151 destinations. Its participation in SkyTeam will add 25 new destinations, increasing the alliance's daily flights by 10 percent.
"China Eastern will have great chance to enhance its presence in Japan after Japan Airlines said it would sharply reduce its international flights," said Tao Wei, an analyst at China International Capital Co Ltd.
Liu said China Eastern remains interested in strategic investment from other airlines, and they don't necessarily have to be members of SkyTeam.
Singapore Airlines, which had intended to buy a stake in China Eastern but was blocked by Air China in 2008, is back in the picture amid speculation that it will re-launch cooperative links with China Eastern. Singapore Airlines is a member of the Star Alliance.
"We expect China Eastern will secure strategic investors and also a bigger cash injection from the central government to restart its talks with Singapore Airlines," said Ma Xiaoli, an analyst at Citic Securities Co.
The carrier said on Tuesday that it is seeking fresh government investment among other avenues for capital-raising.
But it isn't currently involved in any talks with potential foreign partners.
China Eastern signed a memorandum of understanding with members of SkyTeam on April 16. Its official participation is expected to begin in the first half of next year. China Eastern will gain access to 856 destinations in 169 countries by joining the alliance.
Analysts said the Shanghai-based carrier's strategy is to boost its footprint globally and forge closer ties with China Southern Airlines, another member of SkyTeam. That will position China Eastern to compete more effectively with Air China, the country's international carrier and member of the rival Star Alliance.
"China's three largest carriers have all joined airline alliances, expanding competition in services and products," said Wu Yunying, an analyst of Changjiang Securities Co.
China's commercial aviation industry suffered setbacks following the drop in travel triggered by the global financial crisis in 2008. The industry returned to black last year with net profit of 12.2 billion yuan (US$1.78 billion), mostly contributed by government aid and fuel hedging gains.
The chase to restore profits and the need to consolidate a fragmented industry have ushered in a new era of mergers and acquisitions.
SkyTeam is the world's second-largest coalition after Star Alliance. It has nine members and two associate airlines, serving an estimated 384 million passengers a year on more than 13,133 daily flights. The other major grouping is Oneworld, whose only toehold in China is via Hong Kong-based Cathay Pacific.
Airline alliances seek to reduce costs by sharing such services as offices, maintenance facilities, catering, computer systems and check-in counters. They ostensibly provide travelers with more convenience and connectivity, though detractors would argue they can also result in higher ticket prices.
Beijing-based Air China, the nation's biggest carrier, announced last month that it will spend 682 million yuan to take control of Shenzhen Airlines as part of a strategy to dominate the aviation market in southern China.
That deal threatens China Southern, which was also said to be eying Shenzhen Air as a possible takeover target. The Guangzhou-based China Southern is the nation's largest airline by fleet size.
"China Eastern's participation in SkyTeam will deepen its ties with China Southern, so other carriers, such as Air China, must better position themselves and upgrade services to keep their market share," Wu said.
Officials at China Southern applauded China Eastern's move.
"We have good cooperation with China Eastern, and its participation in the alliance will widen our cooperation and generate more profits for us," said China Southern Chairman Si Xianmin.
Earlier this year, China Eastern acquired smaller rival Shanghai Airlines, which is a member of the Star Alliance. Shanghai Air is expected to drop its membership in that alliance, but China Eastern didn't disclose when that might occur.
The merger of Shanghai's two biggest airlines is expected to further weaken Air China's grip on the domestic market.
"Joining an international airline alliance is part of China Eastern's strategy to strengthen core profitability and boost market competitiveness," said Liu Shaoyong, chairman of the carrier. "It will help us improve our business, especially business and first-class seats on international routes, and will support our efforts to break even this year and return to profitability of our main business next year."
The carrier returned to profit last year by earning 540 million yuan after a record 14 billion yuan loss in 2008. But its main business revenue still declined 4.58 percent to 37.94 billion yuan.
Luo Zhuping, the carrier's board secretary, said on Tuesday that the carrier expects to increase flight capacity on international routes this year to 40 percent from 30 percent.
China Eastern now operates more than 330 aircraft to 151 destinations. Its participation in SkyTeam will add 25 new destinations, increasing the alliance's daily flights by 10 percent.
"China Eastern will have great chance to enhance its presence in Japan after Japan Airlines said it would sharply reduce its international flights," said Tao Wei, an analyst at China International Capital Co Ltd.
Liu said China Eastern remains interested in strategic investment from other airlines, and they don't necessarily have to be members of SkyTeam.
Singapore Airlines, which had intended to buy a stake in China Eastern but was blocked by Air China in 2008, is back in the picture amid speculation that it will re-launch cooperative links with China Eastern. Singapore Airlines is a member of the Star Alliance.
"We expect China Eastern will secure strategic investors and also a bigger cash injection from the central government to restart its talks with Singapore Airlines," said Ma Xiaoli, an analyst at Citic Securities Co.
The carrier said on Tuesday that it is seeking fresh government investment among other avenues for capital-raising.
But it isn't currently involved in any talks with potential foreign partners.
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