ANALYSIS: Cross-straits opening up driving route growth

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Hong Kong
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Ascend's Joanna Lu examines how cross-strait flights between mainland China and Taiwan has been a key area of growth, particularly for Taiwanese carriers, since the opening up of direct scheduled services in 2009

Route development is, from a demand perspective, a key driver of how airlines use their aircraft. Dramatic capacity changes on routes may reflect market changes in demand and, in turn, lead to a shift in competitive status and aircraft demand.

The Asia-Pacific region possesses the greatest potential in aviation growth and in 2012, its regional routes grew more aggressively than intercontinental routes and domestic routes, both in terms of destinations, at 8.9%, and in total operations, at 7.5% more flights.

Last year, almost every Asia-Pacific country experienced an expansion of regional routes, albeit some from a low base. High-frequency routes in the region include flights linking Hong Kong with Shanghai, Singapore and Taipei; and connecting Singapore with Bangkok and Jakarta.

Capacity on some already busy routes more than doubled on the previous year as measured in total flights. Airbus A320s and A330-300s have been widely used on the lucrative and highest-growth regional routes such as Guangzhou-Singapore and Seoul-Osaka. The former route now has more than eight daily services, while Seoul-Osaka has almost 20 departures each day.

New traffic flows

Recent years have seen a growth in cross-strait flights between mainland China and Taiwan as a result of the liberalisation of traffic rights.

The introduction in 2009 of scheduled flights to and from the Chinese mainland, which had been blocked since 1949, has become an important source of new traffic flows and revenue for airlines in Taiwan. While facing a drop in domestic traffic in Taiwan, Taipei now sees flights to and from China as a new source of traffic that will help build its aviation hub links to the rest of the world.

The market for these services has risen from nothing to over 62,000 departure seats per week on more than 550 direct flights. This accounted for a fifth of Taiwan's total departure seats in November. Demand is set to grow as a result of further liberalisation on the cross-strait market.

While Taiwan has benefited from traffic to and from mainland China, these services have affected traffic volumes from Hong Kong and Macau. These islands had been the key transit points between China and Taiwan while direct services were prohibited.

The total number of seats provided between Hong Kong and Taiwan fell by 12% and 4% respectively in 2009 and 2010 after the start of direct scheduled cross-strait flights. They resumed growth of 6% in 2011.

The route now accounts for 16% of the total seat capacity out of Hong Kong, down from 20% a decade ago. The market share of mainland China flights out of total operations in Hong Kong has been volatile over the past 10 years, but was steady at 29% in 2011. Hong Kong-Taipei is still the largest route by capacity in the cross-strait market - with more than 4 million passengers in 2011. But this is nearly 20% lower than in 2007.

The overall cross-strait market has grown rapidly over the years, triggering incremental traffic in the regional market, and this situation is expected to be sustained with the further open skies developments. Taiwanese carriers have provided more aircraft seat capacity compared with their counterparts in mainland China, and these carriers will continue to benefit from serving this market.

Evaluating strategy

Reviewing traffic and flight pattern performance will help carriers evaluate their strategy and restructure their route development.

While the positive market environment has encouraged airports in Asia-Pacific to explore developing their route networks, some major hubs tend to be more cautious. Congestion problems in the air and on the ground have become a real issue for the daily operations of hubs. Airspace congestion in China is said by the industry to be the result of the strict control of airspace by the military, or air-traffic control capabilities. As air services develop, however, such demand would require action from the government.

It seems this breakthrough has come earlier than expected. Recently, the Shanghai Airport Authority and the East China Air Traffic Management Bureau of the Civil Aviation Administration of China signed an agreement to support Shanghai's status as a global air-transport hub. Under the strategic co-operation agreement, the two will work together to ensure that air- and ground-support capabilities in Shanghai meet its growth needs.

This is a big step for Chinese aviation regulators to move forward with its airports towards international standards. This has also given the market further confidence in the outlook for China in the next few years. Priority is expected to be given to the three major national hubs to relieve congestion, improve operational efficiency in the available airspace and co-ordinate with the military to increase the available airspace.

It also implies the co-operation between airlines and airports has been extended to the regulators, with all three working in partnership. It will be interesting to see how this partnership will work to provide a sustainable solution to support growth in the industry. Air service marketing and capacity management is sure to be a top priority for Chinese airport development in the coming decade.

Joanna Lu is managing consultant for Asia at Flightglobal Ascend. Based in Hong Kong, her main focus is on the global airline/airport advisory business