ANALYSIS: United sees value in flights to 'fresh' Chengdu

Washington DC
Source:
This story is sourced from Pro
See more Pro news »

United Airlines is going west, to western China that is, more than a decade after the Chinese government began incentivising investment in the region.

The Chicago-based Star Alliance carrier will begin three-times weekly service between San Francisco and Chengdu - the capital of China's Sichuan province - on a 219-seat Boeing 787-8 from 9 June 2014. It will be United's first destination in the country beyond Beijing and Shanghai, and the first by a US carrier beyond China's heavily developed coastal front.

"We've been watching the market for a long time and finally got to the point where, with the demand growth and the corporate penetration into the market, we really started to feel that the time might be right to take a really serious look at it," says Andy Buchanan, managing director of international planning at United.

He cites the steady growth in air travel, investments by Fortune 500 companies in Chengdu and the surrounding region, and the growing local market as reasons for the new route.

"Not only is there economic development and strong demand, a lot of our core customers here in the USA do actually go to Chengdu," says Buchanan.

Chengdu mayor Ge Honglin told the American Chamber of Commerce in Shanghai (AmCham Shanghai) earlier this year that the city had attracted investment from 233 fortune 500 companies, including Intel and Cisco, largely as a result of the China's Western Region Development Plan - also known as the go west campaign - that began in 2001.

"Chengdu ranked first among these [15 sub-provincial] cities in key economic indicators including GDP [gross domestic product] growth, the growth of large scale industrial production and the growth of import-export volume," he said. "Chengdu has been the number one city in absorbing foreign direct investment and attracting fortune 500 companies."

Trade between Sichuan province and the USA totalled $5.36 billion during the first half, according to the Sichuan Customs District. The country was the province's second largest trading partner after the 10-country Association of Southeast Asian Nations (ASEAN) region.

"Expanded service to China's interior regions will not only allow US carriers to further enhance their presence in China, but also facilitate business travel and two-way trade flows," says Kenneth Jarrett, president of AmCham Shanghai.

Chengdu was one of many destinations in China that United could have selected for new service, for example Guangzhou or Shenzhen in the country's well-established Pearl River delta manufacturing region.

"One of the intricacies with Guangzhou is its proximity to Hong Kong," says Buchanan. "While there is clearly a distinct market there, there is also a lot of overlap with Hong Kong. We look at Chengdu and what we saw is a fresh market that really hasn't been touched by United."

He adds that Chengdu is a growing market while Guangzhou is more mature.

Guangzhou and Hong Kong are about 135km apart, with train trips between the cities taking about 2h.

United held the route authority for San Francisco-Guangzhou service from 2008 until 2010, when it returned the authority without launching service to the US Department of Transportation. It cited high fuel prices and slipping demand in Asia-Pacific for the move.

Delta Air Lines and pre-merger Northwest Airlines flew to Guangzhou from 2004 to 2009. The route was also dropped due to fuel prices and weak demand.

United currently only serves Chengdu via its codeshare partners, including fellow Star alliance members Air China - which operates a hub at Chengdu Shuangliu International airport - and All Nippon Airways (ANA).

Buchanan says that the extent of connectivity between the carrier's new Chengdu flight and Air China's hub "remains to be seen", when asked about feed on the China end of the flight.

"Chengdu is the kind of route that the 787 was really built for," says Buchanan. "It's a long thin route." It is the second new route that United will have launched with its Dreamliners, the first being Denver-Tokyo Narita this past June.

United 787 routes from June 2014, as of 4 September

asset image

Great Circle Mapper and United Airlines

United has mostly used the aircraft to replace larger ones - Boeing 747-400s and 777-200s - on existing routes across the Pacific. Buchanan says that it the aircraft has allowed it to "normalise" capacity in markets where it was slightly "overgauged" in the past.

Flights between Los Angeles and both Shanghai Pudong and Tokyo Narita have been downgauged the 787, and the carrier plans similar moves on its Seattle-Tokyo flights in November and San Francisco-Osaka Kansai flights in April 2014.

Chengdu is unlikely to be United's last new 787 destination. Buchanan calls it the "tip of the iceberg" in terms of using the aircraft to enter smaller markets in Asia with nonstop flights from the USA.

The airline continues to watch Guangzhou as well as a number of other second tier cities in China and elsewhere in Asia, he says.

"If Chengdu performs to our expectations, we really think this could be the tip of the iceberg," says Buchanan.