ANALYSIS: What a second Beijing airport will mean for airlines

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China air transport specialist Jane Pan considers how a second airport in Beijing might alter the competitive landscape for airlines in China’s second largest city

Beijing has long enjoyed the title of the most lucrative air travel market in China. Apart from being a major domestic economic centre, the Chinese capital has attracted three-quarters of the world's 500 largest companies by revenue, according to its commission of commerce. With the city's population exceeding 20 million, Beijing Capital International airport has faced increasing pressure to meet growing demand. The airport has again reached its full capacity, only five years after adding a third terminal.

As air routes around the airport have become congested and flight delays top the list of passenger complaints, the Beijing government, after five years of deliberation, recently decided to build a second airport to serve China's second largest city by population.

The new airport will cost 70 billion yuan ($11.26 billion) and will be located in the southern suburbs of the city, 68km (42 miles) from the current airport. Construction will start in 2014 and upon completion in 2018, the new airport will have at least six runways and handle 45 million passengers a year, reaching 72 million by 2025.

In another 10 years, Beijing will be served by two similarly sized airports, with combined traffic figures of around 150 million passengers a year. There is little doubt that the multi-airport system will dramatically change the Beijing market, triggering a new round of airline competition.

For many years, the Beijing market has been under the firm control of Air China, the hub airline of Beijing Capital International, largely as a result of the slot shortage at the airport.

The dominant position has been further strengthened after Terminal 3 opened in 2008, at which Air China accounts for nearly 75% of operations. The airline now controls nearly 45% of flights at the airport, compared with 18% for China Southern, 14% for China Eastern, and 12% for Hainan Airlines.

The hub effect is not only profitable for Air China, but allows it to successfully block rivals, especially China Southern and China Eastern, from expanding.

But the second airport is about to break this long-established market equilibrium. Air China's rivals have wasted no time preparing themselves for the coming market opportunities in Beijing.

FREEDOM FLIGHTS

With a new airport, China Southern would be able to achieve a breakthrough in its Guangzhou-Beijing dual-hub development. Guangzhou has been a huge success, especially in using sixth freedom rights.

The largest player in the China-Australia market, the SkyTeam carrier has extended the Canton route to connect Australia and Europe and opened a Guangzhou-London route in June 2012.

Its growth in sixth freedom traffic was from 17,000 in 2009 to 346,000 in 2012, making the airline an active player in the international market. As shown in its newly released 2012 annual report, international ASK rose by 23% year on year, compared with 9% domestically, while international RPK increased by 24% year on year versus growth of 7% domestically.

China Southern's Beijing hub has had great difficulty in opening up the market since its establishment in 2007, because of the strong competition from Air China and limited slot availability. The 60 aircraft based there is less than the number at its Urumqi hub which only opened in 2010.

But China Southern has never moved away from its dual-hub strategy, consistently ­emphasising Beijing as its core market. It should not come as a surprise given that China Southern signed a co-operative agreement in 2011 with the Da Xing district government in Beijing, which oversees the area the second airport will be built in, even a year before the second airport proposal was approved.

Getting the support of the local government is the essential element of China Southern's Beijing strategy and it has been speculated that the airline will put over 200 aircraft in the second airport within the next 10 years.

If so, China Southern would be able to take full advantage of its extensive domestic network to connect Beijing with many of its 150 Chinese destinations with enhanced frequencies, becoming the strongest competitor against Air China in Beijing.

More importantly, it would give China Southern a balanced international route portfolio, with many long-haul flights, especially to North America, being able to start from Beijing.

China Eastern, unlike China Southern, does not have long-established operations in Beijing. The airline has made little progress in the capital for years, again because of the competition and slot constraint issues. In its home market, China Eastern acquired Shanghai Airlines in 2010, enhancing its hub position and preventing Air China from expanding in Shanghai.

But Air China has recently added capacity to its Shanghai branch and established the cargo joint venture in Shanghai with Cathay Pacific, re-emphasising its focus on Shanghai. The approval of the second airport in Beijing has come at an opportune moment, not only because China Eastern has felt an increasing need to accelerate development in Beijing, but also because it now owns China United Airlines, a subsidiary of the former Shanghai Airlines.

The small airline is the sole user of Beijing Nanyuan airport, a civil-military combined airport located in the area designated for building the second airport.

China Eastern's market strategy in Beijing is straightforward - merging its Hebei branch with China United Airlines to develop a stronger network covering the southern part of Beijing and Hebei province, to capture new travel demand stimulated by the second airport.

The merger was completed at the end of 2012, with 23 aircraft serving both Nanyuan in Beijing and Shijiazhuang in Hebei, and the aircraft number is set to double in two years.

The strategy is expected to deliver three benefits to China Eastern. Firstly, the airline can avoid face-to-face competition with Air China by focusing on a new market far away from Beijing Capital airport.

Secondly, the stronger China United would be more capable of capturing the travel demand generated by building the second airport, and the fact that the airport will not be ready until 2018 would also give the airline time to establish a strong market presence.

Nanyuan airport will also be closed when the second airport enters service, by which time all China United's operations will move there. As the sole user of Nanyuan, China United could face favourable conditions when moving into the new airport.

OPPORTUNITY

The country's fourth largest carrier, Hainan Airlines, has not yet revealed its plans but it would certainly not ignore an opportunity to further expand in Beijing. The airline has transformed itself over the past five years, doubling its fleet and growing its frequent flyer members tenfold. Noticeably, most of its growth, especially internationally, has been achieved in Beijing, although the primary base of the airline is on Hainan Island. The airline flew to only three international destinations before 2007, but has added nearly 20 since then, including Seattle, Toronto, Zurich, and Abu Dhabi.

Almost all of its international routes start from Beijing. The airline's interest in the Beijing market was clearly shown in 2010 when it established Capital Airlines based in the city's airport, focusing on business aviation. Lately, the carrier has started the nation's first all-business service between Shenzhen and Beijing to capture high-yield business traffic on this lucrative route. Its cultivation of the Beijing market has given Hainan a considerable competitive advantage and it will only grow stronger with the new airport.

Also eying the opportunities a new airport will provide are China's low-cost airlines which have long been excluded from the Beijing market, particularly Spring Airlines. It runs only one daily flight between Shanghai and Beijing, arriving in Beijing at 23:40 and departing to Shanghai at 06:00 the next day.

The low frequency and the poor time slot make it impossible for Spring to develop in Beijing. But the second airport could again bring exciting opportunities.

Air China has not yet revealed its own plans for the multi-airport system, but may choose to stay in Beijing Capital, using slots freed by other airlines moving to the second airport to continue expanding its operations there.

It is likely the Star Alliance carrier will not wish to replicate the experiences of China Eastern, which operates via a dual hub in Shanghai. There the multi-airport system in which Hongqiao airport provides domestic flights, while the more remote Pudong airport focuses primarily on international service, has added cost and complexity to China Eastern's operations.

Another reason for Air China to want to remain at Beijing Capital airport is its location on the east side of the city, a mature market covering most of the business and tourist attractions. High-yield business passengers in the area are likely to continue to use the airport because access to it is quicker and more convenient. The 72-hour visa-free stay policy, effective from January 2013 has also provided Air China with new opportunities.

The scheme, facilitated by the well-developed ground transportation system connecting the airport to the city, will help Air China attract more passengers to transit via the hub. The airline has shown great interest in the new market, recently releasing tourism products with domestic travel operators to boost transit passenger numbers.

But Air China will find it more and more difficult to maintain a dominant position in the Beijing market. The second airport will spur economic growth in the southern part of the city, generating new travel demand.

TRAVEL DEMAND

If the two airports are similar, it is reasonable to believe that passengers in the southern city would choose the new airport for travel. More importantly, the new airport will compete with Beijing International airport for existing passengers in the overlapping catchment areas.

Based on recent research, the new airport is likely to attract 41% of passengers from competing markets. This research takes into consideration the 37km railway that will be built to link it to downtown Beijing, allowing passengers to reach the city centre in 30 minutes.

More than 70 foreign airlines that fly to ­Beijing Capital will also benefit from the additional capacity. In 2010, the airport handled 1,500 daily flights on average, of which 22% were international services. But foreign airlines have found it increasingly difficult to add flights or launch services because of slot constraints.

American Airlines, for example, delayed the start of its service between Beijing and Chicago as a result of difficulties in securing an operating slot in Beijing. Congestion is also part of the reason that many foreign airlines have started to look at secondary Chinese cities.

British Airways, for example, plans to start a service between London and fast-growing Chengdu, in southwest China.

Apart from generating new slots, the second airport in Beijing will also allow the member airlines of SkyTeam and Star Alliance to deepen co-operation with their Chinese partners in Beijing. With Xiamen Airlines newly on board, SkyTeam now has three Chinese airlines covering Guangzhou, Shanghai, and Xiamen, while Star Alliance recently added Shenzhen Airlines and now covers Beijing and Shenzhen in China.

If Air China stays at Beijing Capital and China Southern and China Eastern move to the second airport, the two airline alliances would be able to use enhanced airport resources to integrate their operations with greater efficiency. That would leave Oneworld in a more difficult position in mainland China, as so far it has not recruited a Chinese airline.

Although the second airport in Beijing will become a reality in just a few years, how it would affect airline competition in Beijing remains unclear. Multi-airport systems are still relatively new in Asian countries and are mostly government-regulated. How government policy would influence the traffic and airline allocation between two airports in Beijing remains to be seen.

In addition, the balance between commercial and military airspace use remains an unsolved problem in Beijing and the new airport, which may have a runway dedicated to military use, will still face the challenges of civil and military airspace co-ordination.