Chinese Airlines Should Wait to Launch Low-Cost Long-Haul Routes
By Luo Zhiyu, Global Times | Feb. 13, 2017
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The niche market for low-cost long-haul flights continues to grow, but the timing isn't quite right for domestic airlines to join in.
During the upcoming peak travel season in the summer and autumn, there will be 72 airports around the world where at least one low-cost long-haul flight takes off each week.
A long-haul flight is defined as one longer than 4,500 kilometers.
Each week, 903 such flights, operated by 17 airlines, will depart from these airports.
However, domestic airlines are better off waiting.
First, low-cost long-haul requires a strong presence at a major flight hub. All low-cost carriers have major hubs at the starting points to offer their low-cost long-haul services.
AirAsia is based in Kuala Lumpur; Scoot Airlines is based in Singapore; Eurowings is based in Cologne, Germany; and WOW air is based in Reykjavik, Iceland. AirAsia takes up 37 percent of all flights in Kuala Lumpur, and Scoot with its parent Singapore Airlines take up 45 percent of total flights in Singapore.
These low-cost carriers that operate long-haul flights have a large market share at their hubs. The airlines have mid- and short-haul flights to bring passengers to their hubs. These are the prerequisites to develop a low-cost long-haul flight business.
Looking at China's low-cost carriers, there are five, including Spring Airlines and Lucky Air, based at major aviation hubs, but many, such as Beijing Capital Airlines and Chongqing Airlines, are not.
China's large airports, those that handle 25 million passengers or more a year, have opened up plenty of routes to cities abroad. These are the battlegrounds for larger airlines. Budget airline companies do not hold a significant market share in these cities, as they are dominated by airline alliances. There will be fierce competition if the low-cost carriers try to open long-range routes in them, and the low-cost carriers won't have reliable connections via their short-range services to bring in customers on connecting flights.
Second, the internationalization strategy of Chinese airlines hinges on continually growing the outbound travel market. In 2016, growth in the Chinese mainland's outbound travel market slowed to its lowest rate since 2009.
There was rapid growth in demand for flights to some long-haul destinations, such as North America and Oceania. For example, passengers bound for Australia and New Zealand grew by 20 percent in 2016. However, the big picture remains unchanged. Most of the demand for international flights in the Chinese mainland remains for cities in Asia.
Besides, the air resources of domestic airlines are limited, so if budget carriers want to add these destinations, there will be cutthroat competition.
Third, as more Chinese companies pour resources into international routes, the revenue from international routes declines. The reality of low profitability poses austere prospects for low-cost carriers trying to introduce wide-body aircraft to provide long-haul flights. And airlines that offer low-cost long-haul flights in Asia, such as AirAsia and Scoot Airlines, have unstable revenues.
All in all, the development of low-cost long-haul flights serves the purpose of diversification for their parent companies. This is the case for overseas airlines, and is also true for domestic carriers. For instance, China West Air and Lucky Air all serve the strategy of parent Hainan Airlines. To start a low-cost long-haul service from certain cities, they will have to avoid competition with other airlines owned by their parent.
However, the development of a new generation of narrow-body aircraft offers airlines a new option. Boeing's new narrow-body aircraft can fly routes of more than 6,600 kilometers and Airbus aircraft can fly more than 7,400 kilometers.
That means low-cost carriers can launch long-haul routes with aircraft that have fewer seats. China's low-cost carriers are likely to receive these new planes over the next few years, and that may well be an opportune time for them to venture into the low-cost long-haul business.