ANALYSIS: China's LCC market poised for great leap forward?

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The highly-regulated China airline market may only have one home grown low-cost carrier at present, but things look set to change.

At a symposium on low-cost carriers held in Beijing last week, the Civil Aviation Administration of China (CAAC) clearly signaled its intention to promote the development of Chinese low-cost carriers in response to the growing number of foreign LCCs flying into the country.

The regulator says it is looking to relax policies to encourage the establishment and development of LCCs in the country, including lowering the barriers to entry for new players, and making it easier for them to purchase aircraft and be allocated slots. It is also encouraging legacy carriers to set up low-cost subsidiaries.

For a start, the CAAC says it will scrap a rule requiring airlines to maintain a minimum domestic ticket fare. This will allow carriers to determine fares based on demand and supply, and low-cost operators can then also offer the desired fare advantage over legacy carriers. There are also plans for a new budget terminal at the upcoming second Beijing airport.

The CAAC's move clearly indicates a mindset shift which, if carried through, could fundamentally alter the competitive landscape in the Chinese aviation market, which for years has protected and prioritised the three state-owned carriers.

Shanghai-based Juneyao Airlines, for instance, has made an application to set up an LCC in Guangzhou, while Hainan Airlines' subsidiary West Air is working towards transforming into a true low-cost player based in Chongqing.

Flightglobal's FlightMaps Analytics show that seven foreign LCCs – AirAsia, AirAsia X, Scoot, Cebu Pacific, Tigerair, SpiceJet and Jeju Air – already operate services to and from China.

Though home-grown Shanghai-based Spring Airlines is the dominant player among the LCCs, offering 915,000 seats monthly, it accounts for only 2.4% of domestic capacity. This shows how underdeveloped the low-cost market is in China, as well as the massive opportunities in store.

Spring started operations in July 2005 with one A320 and has since grown to a fleet of 38 aircraft of the same type. Its journey as the sole LCC in China has not been without turbulence. It has faced various challenges including being allocated unfavourable slots. It has also not been able to grow as fast as it would like, with the regulator putting the brakes on how many aircraft it can import.

Analysts tell Flightglobal Pro that China is a highly-regulated market, and its LCC segment is constrained by several factors including limited access to commercially viable landing slots, getting approvals for new aircraft purchases, and also long turnaround times at the country's congested airports.

“Any new LCCs will likely target secondary markets underserved by existing players and secure landing slots at uncongested airports in tier 2 cities,” says Credit Suisse analyst Davin Wu.

He adds that the impending changes will represent new threats to the country's established full-service carrier-focused market structure, and that the big four carriers – Air China, China Southern Airlines, China Eastern Airlines and Hainan Airlines – are likely to lobby against them.

“The new policies roll-out is not expected to be rapid and will be highly managed. Rather than taking the landing slots from the state-owned giants and permitting aggressive competition, we expect new LCCs to compete in new markets underserved by existing carriers and operate in newer secondary airports with more landing slots available to LCCs such as Chongqing, Qingdao and Hangzhou,” says Wu.

China Eastern appears to have a headstart considering its partnership with Jetstar in Jetstar Hong Kong. Working with the experienced budget player will provide it with valuable knowhow that could give it a leg up against its full-service counterparts.

The big four Chinese airlines are highly likely to set up budget arms, or carve out part of their business to be managed as an LCC, something their peers in other countries in the region have done. This could, however, prove challenging given that running a successful low-cost operation requires a different mindset and strategy that management from legacy carriers often find hard to grasp.