Law Kian Yan
In adapting the low-cost model to China, Spring Airlines successfully managed to infiltrate a market dominated by three state-owned giants. Now chairman Wang Zhenghua looks to capitalise on the country’s pent-up demand for cheap travel
Meeting a senior executive from one of China’s state-owned airlines? You will probably make your way to a gleaming new office tower in downtown Beijing, Shanghai or Guangzhou, where immaculately coiffured receptionists escort you to a swank room with modern European furniture.
Compared with them, the Spring Airlines offices next to Shanghai’s Hongqiao airport are spartan.
You walk into a set of nondescript buildings built at least 20 years ago, distinguished by a large neon sign on the roof that would not have looked out of place in the early 1990s.
Slow-moving lifts bring you to a modest second storey conference room with a wooden table and simple but comfortable chairs, and the cacophony of car horns from the nearby busy road drifts into the room via a window that is opened for ventilation.
Substance, more than style, defines the low-cost carrier and this largely stems from founder and chairman Wang Zhenghua’s personality.
When one Chinese state-owned carrier’s chairman went to Singapore in 2010, a year after getting a $1 billion government bailout, his suite in a five-star hotel had a billiards table and personal butler. The self-made Wang went to London for a conference in 2012 and stayed in the £40 a night Heathrow Lodge where his room had a shared bathroom – and he had to be convinced that it was a fair deal.
“We don’t need to gloss things up and make them unnecessarily expensive,” says Wang through a translator. “My counterparts in other companies have offices that are seven, eight or 10 times larger and more attractive than mine. But that is for show and it is not important to what I am doing, or to doing my business effectively. This philosophy is part of the Spring Airlines DNA,” he says.
Waking up at 6am every morning for the last 38 years to practice tai chi has helped this 69-year-old look far younger than his age, and provided him with a discipline and focus that has made him one of China’s most successful businessmen. His flagship Spring Travel had humble beginnings in 1981, but it overtook the larger lumbering state-owned competitors within 16 years. And he has similar plans in store for the Chinese airline industry.
Aviation was barely “an interest” for Wang when he spent three years in the mid-1990s studying the next step for the Spring Group. He got into the business only after researching the viability of the charter and full-service markets, before becoming intrigued by Southwest’s low-cost revolution in the USA.
“I saw an opportunity in an industry where the dominant global players are smart privately-owned companies. Southwest opened the market up to a whole new class of traveller, levelling the playing field on who might fly, and we thought that we could adapt this model to China,” says Wang.
Despite the success with the travel business, it took guts to enter an industry where, even today, the regulator owns all of the dominant players. The big three – Air China, China Eastern Airlines and China Southern Airlines – are also closely connected to the political elites in their home bases, and therefore to the different factions within the Communist Party of China.
The government’s “dilemma”, says Wang, was that it needed to allow “a corridor” for the likes of Spring to start up and achieve a “larger macro-economic goal” of increasing air connectivity within the country. At the same time, it needed to protect the state-owned carriers.
So when Spring began operations in July 2005 with one Airbus A320, it was given only the early morning or late night slots that nobody else wanted. But Wang and his team took them, knowing that even a toehold would give the airline a base from which it could build itself up.
Early attempts at promotional CNY1 fares led to complaints from the competition, which the regulators upheld, and the airline had to find different ways of marketing itself. It also took time to educate the Chinese traveller about the concept of flying without frills. Instead of moaning, the airline’s management knuckled down and challenged itself to overcome the problems.
“Regardless of who you are, the challenges that you predominantly face are internal. You have to understand your market, your consumer and their changing habits. Only you can control your destiny, and you are responsible for your own success,” says Wang.
That was tested during the 2008 global financial crisis, when the big three state-owned carriers collectively chalked up losses of more than CNY13 billion and remained in the red over the next few years. Beijing then bailed them out with billions of yuan. Other privately-owned carriers went bust, but Spring survived without any help by digging in, cutting costs and attracting passengers who started to pay attention to its cheap fares as they tightened belts.
“When you look at what happened to the other privately-owned airlines, you can see that there is a great inequity in the way the market operates,” Wang concedes. “Obviously, this is out of my control. I prefer to focus on what we can control.”
Slowly, the regulators gave Spring more slots as the airline proved that its presence brought benefits to the airports and the country. Its network now covers most of the lucrative domestic city pairings, it has opened up services to secondary cities and began international services in 2009.
There have been hiccups. In 2012, Spring made headlines by blacklisting some passengers who took it to a consumer court – and won compensation – after their flight was delayed by more than eight hours.
Wang blames these “unrealistic expectations”, ironically, on travel agents who fail to properly explain the airline’s business model to their customers.
“Around 80% of our passengers buy our tickets online, and they understand the product. The problem exists with those who go through agents. If we reduce the percentage of tickets sold by agents, there won’t be these problems,” says Wang.
Spring’s success is largely due to the internet. China may be more famous for the government’s restrictions on online political content and discussion, but it is also home to the world’s fastest growing e-commerce market. Last year, 220 million people made online purchases in China, a figure that is expected to reach 432 million by 2016. Many young Chinese are also addicted to online games in which they have to pay more to access additional benefits – similar to how airlines earn ancillary revenues.
“The average passenger spends CNY20 ($3.3) on ancillary products in China, but it is around 10 times more in the mature markets. We have a lot of room for growth,” he adds. “Our online presence gives us a clear advantage as our sales costs are up to 70% lower than our competition, who must spend a lot more to get the same number of passengers.”
Keeping operational costs down is also key to success in China’s low-fare environment. Spring breaks it down on a daily basis for each of the 43 aircraft in its fleet, and this is compiled into a monthly report that allows the management to be more knowledgeable and nimble.
“If we open a new route, we have to give it breathing space to stimulate demand. But in a mature market, we can respond very fast to anything that could be loss making. Of course, we also look at the market conditions and the potential for future growth. But we are very flexible,” says Wang.
That is crucial amid growing competition in the budget segment. Southeast Asia’s LCCs fly to many points in China, three started operations in Japan in the last year, and China Eastern and Qantas subsidiary Jetstar plans to start up a Hong Kong-based subsidiary by the end of the year.
The China Eastern-Jetstar venture is the most intriguing, given that it is the first step by one of China’s majors into the low-cost segment. Wang believes that China Eastern will “inevitably” set up an LCC in the mainland, and that the country will eventually have four or five budget airlines.
“This will happen. We can’t be worried or afraid of the competition. We just have to be aware of the potential changes in the market and be ready for them when they happen. It is up to us to be better and smarter than the competition,” he says.
ON THE OFFENSIVE
Taking the fight to the competition is an option, with Wang revealing that Spring could apply to set up a joint venture in Hong Kong too if it “finds the right partner”. Doing that in Japan, however, has been a “struggle”, with Spring’s attempts to set up a joint venture stalled for the last two years. Tokyo has dithered on the airline’s application, which some say is partly due to the souring of bilateral relations between China and Japan because of a diplomatic row over disputed islands.
“One of the fundamental issues was the differences in cultural attitudes, and the ability to communicate what we wanted clearly. It was clearly a struggle. But we are in the final stages and we could get the approval by October,” says Wang, who then adds with a laugh and a shrug of his shoulders: “Hopefully.”
Spring faced another setback earlier this year when the Chinese government put the brakes on its fleet plans. Chinese airlines must get state approval to import aircraft, and Beijing has asked Spring to slow down. That means the airline will have only 70 aircraft by 2015, down from its earlier plans for 100 A320s. Wang, though, takes this in his stride.
“Yes, it slows down our growth plans. But stable growth is at the core of any airline operation. This forces us to grow sustainably and safely, and that is not a bad idea,” he says.
Referring to the Lion Air Boeing 737-800 that came down in the sea short of the runway at Bali in April, he adds that there are “risks” to rapid expansion.
“Look at the LCC market in Southeast Asia. Jetstar, AirAsia and Lion Air have a growth trajectory that is double ours. Of course Spring will also like to grow fast, gain scale and become a larger operation. But that brings risks too. We still have a lot of control over our growth and can become more efficient as a result of this. Taking the larger picture into consideration, the government wants to ensure that the industry can be sustainable and grow safely. We are not opposed to that premise.”
By steadily chugging along, the airline has remained profitable despite a tough 2012. Wang declines to give the exact figures, citing regulatory restrictions as a result of its pending application for a listing on the Shanghai Stock Exchange. But he says that the airline improved on its 2011 revenue, operating profit and net profit numbers.
Since 2005, many other privately-owned airlines have gone bust in China. Wang, revealing his faith in the strength of a capitalist system in a politically communist country, says that Spring has been resilient because the market “decides everything”.
“The airline market is liberalised. There is room for us and the future looks really good for a company like Spring. The most important thing is to continuously differentiate ourselves and not replicate what is already there. We have to be creative and find a product that the market wants,” says Wang.
“The nature of the industry is such that there are always niches and there is room for each and every player. It is about getting your space and maximising your space to become the dominant player. We want to be one of the big boys in this market.”