By Nicholas Ionides in Shanghai
Under Zhou Chi, Shanghai Airlines has become China’s fifth largest airline group. He is planning plenty more growth, including a low-cost arm, but this must not come at the expense of profitability
Shanghai Airlines chairman and chief executive Zhou Chi has seen his airline expand its fleet more than fivefold in just a decade. Impressive growth to most, but not to him.
“That’s not that much for China,” Zhou says matter-of-factly at the airline’s headquarters in the booming Chinese commercial centre of Shanghai.
It may sound arrogant, but it is not – it is simply a fact. China’s air transport system is continuing to grow at a phenomenal rate well above the world average, and there is much to come.
Shanghai Airlines is a poster child of the Chinese growth machine, and an airline Zhou has overseen for 10 years since leaving Shanghai’s Public Security Bureau. Now in its 21st year of operation, the carrier has had a contributory role in sparking change in the overall Chinese airline sector. As the fifth largest airline group in China, it is preparing for a place in the bigger leagues by further expanding its operations.
It recently added dedicated freighter operations, aims to launch its first long-haul flights later in the year, is planning a major fleet expansion and has begun exploratory talks with the Star Alliance. Shanghai is at the same time not holding back on the domestic front, where it has acquired a base in Beijing through the purchase of another airline, which it will use for an entry into China’s fledgling low-cost market.
What is most important is that the airline’s expansion has for the most part come with profits, and this is something Zhou is particularly proud of. He says this makes Shanghai Airlines different from many other Chinese companies that typically grow for growth’s sake, rather than on the basis of focused expansion.
“In our airline the government doesn’t make the decisions, the board of directors makes the decisions. So all our ideas to operate our company are the ideas from the whole aviation industry’s perspective. We focus on our finances and our operations by focusing on our core business,” says the straight-talking 54-year-old.
“We are always focused on growing alongside the growth of the Chinese economy. The three main airline groups – Air China, China Eastern Airlines and China Southern Airlines – are very different from Shanghai Airlines because their behaviour is the way it is mainly because of the government’s behaviour. They are still operating as state-owned companies. All the state-owned companies have the same problem. They focus on their big size and they don’t focus on the stable development. We are different. That is why Shanghai Airlines can produce profits.”
The carrier was set up in 1985, when there was no real airline in China, but rather a single air transport operation run by the regulatory Civil Aviation Administration of China (CAAC). The average person could not fly on the CAAC airline as special permits were needed, and it was mainly used by government officials.
At the time Shanghai’s government wanted to open up the city’s economy and saw an opportunity to establish an airline of its own. Shanghai Airlines was thus born as the first passenger carrier independent of the CAAC, initially operating Boeing 707s. Not long after, the CAAC “airline” was split into regional arms – including a major one in Shanghai – while many other semi-independent airlines were established by provincial governments.
Ground-breaking
Shanghai Airlines was the first Chinese carrier to operate as a limited company, responsible for profits and losses and reporting to a proper board of directors. It still has the Shanghai municipal government as its biggest single shareholder, but now has other investors, in addition to having its shares publicly traded on the Shanghai stock exchange.
Zhou says what sets it apart from many other Chinese firms is that “decisions are made for the good of the company” rather than for – or by – individual shareholders with vested interests. This enabled it from day one to model itself on airlines in other parts of the world and focus on customer service, he says, which is something that is still lacking at many other Chinese carriers.
“When we were established in 1985 we had the opinion from the beginning that our customer had to come first. The customer is a god, so ‘smiling service’ is our focus,” he says.
“Our customer service girls were trained by Singapore Airlines, so our staff were trained on international principles. We combined this with developing our operations [at the speed of] the whole country’s development because we didn’t want to grow too fast. This has helped us to avoid the big waves where sometimes growth is too high.”
Shanghai Airlines’ passenger fleet comprises nearly 40 aircraft – Boeing 737-700/800s, 757-200s, 767-300/300ERs and Bombardier CRJ200 regional jets. Its freighter fleet comprises a 737-300F and an MD-11F. It also has one Hawker 800XP business jet.
The airline went through an initial public offering in 2002 and has been profitable most years – including during the Asian economic crisis of 1998 when it was the only Chinese carrier in the black, says Zhou.
It has been a success despite having competition that many others in China do not have to face. Its Shanghai base is home to the giant China Eastern. Shanghai, with regional hub ambitions, is also being steadily opened up to more competition – both by Chinese and foreign airlines. Unlike the two other key Chinese hubs of Beijing and Guangzhou, which are still protected in that there are more restrictions on airline operations, Shanghai is open to all domestic carriers. Many industry observers also expect an open skies regime to eventually be adopted for Shanghai that would give foreign carriers unlimited operating rights, probably first for cargo services.
Shanghai Airlines operates on more than 130 domestic routes and has international services to Japan, South Korea and points in South-East Asia. It also has traffic rights to Vladivostok in Russia, but is not currently operating there, while in recent years it has begun codesharing with foreign airlines as well as with Beijing-based flag carrier Air China.
Its growth will steadily pick up in the coming years if Zhou has his way. He says the airline is planning to add more than 30 new narrowbody and widebody passenger aircraft by 2010 as part of its moves to expand international operations and keep up with rapid domestic growth.
Shanghai Airlines has been seeking government approval to order additional 737-700/800s and 767-300ERs, and Zhou says at least 20 new aircraft are needed by 2008, followed by at least 10 more by 2010. These figures include some of the first of nine 787s that Shanghai already has on order for delivery over five years from 2008. The airline also has two 767s on order for delivery next year and five ARJ21 regional jets that are being developed locally by China Aviation Industry Corp I for delivery later this decade.
Zhou sees growth as not an option, but a necessity if Shanghai Airlines is to remain a strong independent airline in the fast-changing Chinese market. He sees China’s air transport sector continuing to grow at rapid rates in the years ahead and says that without additional capacity it will not be able to keep up with demand. “There is still rapid development in the domestic market. The growth rates will be more than 10% and I believe 14-16% [RPK] growth is reasonable,” he says. “That [shortage of capacity] will be a big problem. We plan to do something. We need to get more 737s and 767-300ERs, and we will need more than 30 new aircraft by 2010.”
Western push
Zhou says international expansion efforts will include the addition of Shanghai’s first long-haul services, to points in Europe and the USA. He expects to soon secure Chinese government approval to serve the USA and says the carrier is likely to start with freighter operations. It already has rights to serve Germany and expects to start exercising these shortly, with freighter flights to Frankfurt.
“For our company our international operation is just at the beginning stage, but we will expand it,” he says. “We think in 2008 we may open the new markets to America and to Europe for passenger services. But we may start with cargo first and then passengers. The cargo market to America may be earlier than 2008. We will also start Germany this year.”
Zhou says international passenger and cargo revenues currently account for “a little bit more than 10%” of total revenue, but this will change greatly in the years ahead. International and domestic cargo revenues will also grow rapidly, as they currently only account for around 10% of total revenue.
“In the future our cargo business will probably grow far more quickly than our passenger business,” says Zhou. The airline only introduced dedicated cargo services in the second half of 2003 using a wet-leased 747-200F to the former Portuguese enclave of Macau, west of Hong Kong. It no longer has this aircraft, but has the dry-leased 737-300F and MD-11F, while two 757 freighters will be added, followed possibly by a second MD-11F next year.
Shanghai has also opened discussions with the Star Alliance on the possibility of joining the multilateral passenger airline grouping. Star has long said Air China is its main target in the country, but it recently acknowledged that it is talking to Shanghai Airlines as it is open to having two Chinese members. Shanghai Airlines is already close to several Star members, and has codeshare deals with All Nippon Airways and Lufthansa.
Domestically, meanwhile, Shanghai Airlines is finalising plans for the relaunch of grounded Beijing-based subsidiary China United. Zhou says the carrier recently secured government approval to use Beijing’s Nanyuan airport, which is a military facility south of the city, rather than the main Beijing Capital airport, which should help keep operating costs down.
“We will start operating it very soon – next month maybe,” says Zhou of China United, which has not operated scheduled passenger services since 2003. “We have the approval documents from the government to use Nanyuan airport and this is very valuable.”
China United was controlled by the Chinese air force until last year when it was acquired by Shanghai Airlines for a reported CNY70 million ($8.5 million). The takeover was an important strategic move for Shanghai Airlines, which has had to fight to remain independent of the country’s three dominant airline groups. The “big three” have expanded significantly in recent years through government-supported takeovers of smaller carriers and Shanghai Airlines is today one of two main carriers not under the direct control of the central government, the other being Hainan Airlines. While there are a handful of others, these are much smaller than Shanghai or Hainan, such as Sichuan Airlines, in which Shanghai Airlines has a 10% stake.
Zhou says adding a Beijing base was key to the China United acquisition, but it also opens up the prospect of having a low-cost operation. China United will be positioned as a low-cost/low-fare operator, he says, in a country where the no-frills concept has yet to be properly tested, but where several new privately owned airlines are in the process of being established.
“We had two purposes for buying China United Airlines. The first is we got a base in Beijing and in China a base means a new market. Second, we will have a part in the low-cost market. We don’t know if the low-cost market will be possible in China, but we still want to have a try,” he says.
“If we put the low-cost base in Shanghai it would have a conflict with our strategy since our own base is in Shanghai. So we have to have it in Beijing.”
Beijing expansion
China United will resume operations soon with a single 737, operating to domestic destinations such as Dalian, Hohhot and Wushi. The first aircraft will be in a two-class configuration, but those to be added later may only be in single-class configuration. Around two or three 737s will be added annually to the China United fleet, adds Zhou, who expects 2008 to be a big year.
“The Beijing base is very valuable. I think the most valuable thing to us is that in 2008 Beijing will host the Olympic Games. At that time Beijing will need two airports so that is our best opportunity,” he says. “The service at the airport will be provided by us, by China United.”
Zhou sees a bright future for the growing Shanghai Airlines group, but he says it is important not to become complacent – for if there is one thing the Chinese market keeps demonstrating it is its tendency to change rapidly.
“There are many new airline companies that are being set up and they want to establish low-cost companies, but their structure, their cost, their routes are very complex. They cannot be low-cost,” he says.
“The challenge to the aviation industry is that they will use low fares to damage the market. They are changing the market, they are starting a price war. This is one of the big challenges to Chinese aviation.”
Zhou is confident the carrier will be able to cope with the change, however, just as it has done over the past 20 years. As he puts it: “Change is part of this business.”
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Source: Airline Business
