While US legacy carriers focused their strategies on developing sophisticated hubs during the 1980s, Chinese airlines only began embracing this idea 20 years later. But despite a late start, air hubs have quickly formed in China, changing the competitive landscape of the domestic industry.
The origination of China's air hub development was closely associated with the major domestic reform in 2002. This saw consolidation in the sector around the country's principle three airlines, Air China, China Eastern Airlines and China Southern Airlines. Their hub development began after the reform and was initially largely based on the combined resources of different airlines. However, as it developed, the big three carriers have further rationalised their domestic hub structures.
Air China became the first Chinese airline to establish a hub, facilitated by the rapid expansion of Beijing International airport. Taking advantage of hosting the 2008 Olympic Games in the city, Beijing airport added a third runway and a third terminal. This allowed Air China to greatly improve services and boost flight frequencies. Beijing airport handled 73.9 million passengers in 2010, becoming the world's second busiest airport. Air China carried nearly half of these passengers, and has increased aircraft based at the airport from 119 in 2007 to 168 in 2010.
The airline also expanded in the domestic market by developing its regional presence outside Beijing. It launched a regional hub at Chengdu in 2007 through its Southwest operation. This had grown to cover 47 aircraft in 2010 and, under an agreement with the local government, will reach 100 by 2015. Air China now flies from Chengdu to 62 cities within China.
The airline has also grown in Shenzhen, a special economic zone and key air travel market in southern China, after winning the race in 2010 to buy Shenzhen Airlines. This lifted its market share from 10% to 43% at Shenzhen, overtaking China Southern as the largest operator at the airport. Shenzhen has given Air China the strong presence it lacked in the southern region, and the carrier is connecting it to its Chengdu and Beijing hubs, with 14 and 30 daily shuttle flights respectively. It also launched 16 daily shuttle flights between Chengdu and Guangzhou, where China Southern is based, 150km (93 miles) from Shenzhen.
China Southern operates the largest domestic network of the big three carriers, with a fleet of 422 aircraft providing service to nearly 200 destinations. This includes more than 130 aircraft at its main Guangzhou base, where it holds a 50% market share.
In 2007, China Southern embarked on a double-hub strategy, which aimed to take advantage of its exclusive use of Beijing's Terminal 1 to create a second hub. The aim has been to connect Beijing with its rich market resources in southern China, and compete with Air China for international market share. But while China Southern has been successful in growing domestic traffic at Beijing, its attempt to enlarge its international presence from Beijing has proved more challenging. In particular, Air China has benefited from the completion of the new T3, leaving China Southern's T1 building in an unfavourable position. China Southern has since moved back into Terminal 2.
ONWARDS AND OUTWARDS
It was, however, Air China's move into the carrier's backyard through the Shenzhen Airlines acquisition that prompted China Southern to look at new opportunities. Within a month of the purchase, China Southern struck a deal with Xinjiang's government to establish Urumqi airport, northwest China, as its third hub. China Southern already enjoyed a market-leading position at the airport after acquiring Urumqi-based Xinjiang Airlines in the 2002 reform. Now it hopes to nearly double to 80 aircraft its fleet and treble passenger numbers to 12 million at the airport by 2015.
Eyeing the potential in the southwest market, China Southern is now planning a fourth hub in Chongqing through its wholly-owned subsidiary, Chongqing Airlines. China Southern's five-year plan in Chongqing includes increasing the aircraft to 70 and targets 40% market share. The decision will further intensify the competition in the region. Chongqing and Chengdu are the two most important cities in southwest China and are only 300km apart.
Shanghai-based China Eastern was the last to embark on its hub development strategy. Despite its location in the country's financial headquarters, China Eastern spent the years after the 2002 consolidation co-ordinating relationships with the different airlines under its brand. It was only the 2010 merger with Shanghai Airlines that brought substantial changes.
Although led again by the government, the merger has more market elements. It allowed the then two loss-making carriers in the same city to consolidate resources, save costs, and achieve more efficient operations. Within a year of the merger, the new China Eastern posted a record profit in 2010. It now flies to more than 180 destinations with 362 aircraft.
The merger created a strong carrier at Shanghai, with a market share of nearly 50%. The city's Pudong airport, 30km from the city centre, serves as China Eastern's primary hub airport. This is supported by Hongqiao airport, 13km from the city centre. This dual airport in the same city strategy structure, though, adds complexity to the joint arrangements of the two merged airlines in route structure and human resources. China Eastern is also constrained by limited slot resources to increase capacity to its hub airports.
Despite the drawbacks, China Eastern's Shanghai hubs have made progress. In 2010, it flew 2,500 and 2,250 weekly flights at Pudong and Hongqiao respectively, up 59.5% and 67.7% from 2009. And Pudong airport handled 1.1 million transit passengers.
China can be split into six major regions, with more than half its passengers coming from the Eastern and central-south regions (see chart). Hub competition has become vital for the big three carriers to achieve greater market shares on this big map.
Air China controls the northern region. It has gained substantial market shares in the southwest and central-south regions through its Chengdu and Shenzhen hubs, but lacks substantial influence on the northeast and northwest regions.
China Southern is a major player in the central-south market. It has penetrated the northwest and southwest regions through its Urumqi and Chongqing hubs, but is relatively weak in the eastern region. China Eastern is dominant in the eastern region, but lacks a strong presence in other regions.
In the coming years, their hub decisions will be influenced by the competitive dynamics in the developed markets and a new focus on untapped markets - notably the northwest and northeast regions, which transported only 13% of total passengers in 2010.
Air China has hoped to establish a hub in Shanghai so it can play a bigger role in the eastern region. It has increased capacity to Shanghai and boosted flight frequencies between Shanghai and its Chengdu and Shenzhen hubs. But China Eastern's strong market position in Shanghai makes this a challenging task.
Air China has recently established Dalian Airlines in the neighbouring northeast region. Based at Dalian airport, the region's only airport with more than 10 million annual passengers, the new airline will connect Dalian with Air China's hubs before covering other major domestic cities. Dalian is a likely candidate to become Air China's hub in this new market.
China Southern is also looking into the northeast region, and has an advantage, as its acquisition of Northern Airlines in 2002 makes it the biggest airline at Dalian airport. It aims to increase passenger volumes in Dalian by 15% annually over the next five years, competing head-to-head with Air China.
In the northwest region, China Southern's Urumqi hub will continue to facilitate its long-term growth. The airline has increased capacity, including seven Embraer 190 regional jets, to the Xinjiang market, to develop out-province and in-province networks. Its leading position in Dalian and Urumqi, enabled by the 2002 acquisitions, position it to outpace its counterparts in the underdeveloped markets of northeast and northwest China.
The new China Eastern is now extending its reach to the southwest and northwest regions. Its acquisitions of the Kunming-based Yunnan Airlines and Xi'an-based Northwest Airlines in 2002 position it to build Kunming and Xi'an airports, the seventh- and eighth-largest in the country, into regional hubs.
China Eastern has also spotted opportunities in the northeast region, and selected Shenyang as an entry point. It plans to fly Shenyang-Shanghai nine times daily, and link Shenyang with Kunming and Xi'an, with up to five daily flights within two years.
The hub development, especially in Beijing, Shanghai and Guangzhou, has greatly extended the market reach of the big three carriers, triggering their international expansion.
Air China, again taking the lead, formed a strategic alliance with Cathay Pacific Airways in 2006 through a share exchange. Through interlining and combining sales resources, Air China's Beijing hub and Cathay Pacific's Hong Kong hub are able to support each other. In 2009, Air China raised its stake in Cathay Pacific to just under 30%, becoming the airline's second-largest shareholder.
It was, however, Air China's entry into the Star Alliance in 2007 that moved it onto the international stage. While domestically Air China has enhanced connectivity in the Beijing hub to support its international flights, it is restricted by its weak international route network. Air China's international traffic by revenue passenger kilometre, the strongest among the big three Chinese carriers, ranked only 26th worldwide in 2009. Air China subsequently added new routes to Manila, Melbourne and Milan, and codeshares with Star partners Egyptair and Ethiopian Airlines, to grow its international traffic by a fifth.
China Southern's international development has in part been driven by the prospect of high-speed rail competition. Having the most extensive domestic route network, the airline will be hardest hit when the country's 16,000km of high-speed rail becomes fully operational by 2020. This has seen rail journey times slashed on Wuhan-Guangzhou, a high-yield business route for China Southern, from 10 to three hours. This route forms part of the JingGuang high-speed rail link, which will open in a few years and connect Beijing and Guangzhou with a journey time of 10 hours - half the time it now takes to connect the airline's two most important hubs.
China Southern has wasted no time in turning its attention to the international market, dubbing 2010 its strategic transformation year. It signed a strategic partnership agreement with Tourism Australia, looking to build on Guangzhou's favourable location offering the shortest flight time from mainland China to Australia. China Southern has become the largest Chinese mainland carrier in the China-Australia market. Its weekly flights to Australia increased from 10 in 2009 to 35 in 2011, and are expected to reach 110 in 2015.
The carrier is also exploring the potential of its newly opened Urumqi hub in Xinxiang province, which shares borders with eight countries, to provide a gateway to new international markets in west, south, and central Asia. New routes from Urumqi to Istanbul, Kiev and a dozen other Asian and European cities will be opened within the next few years. China Southern is also benefiting from deepening co-operation with its partners in SkyTeam - which it joined in 2007 - notably Air France-KLM.
China Eastern's international expansion, enabled by its much-enhanced hubs after the merger with Shanghai Airlines, was greatly promoted by the Shanghai 2010 Expo. The event ran from May to October 2010, attracting 73 million visitors, and helped China Eastern to transport 35.2 million domestic and international passengers through its Shanghai hubs during that time. It also helped to showcase the new China Eastern on an international stage.
China Eastern and its Shanghai Airlines subsidiary followed China Southern into SkyTeam during summer 2011. That decision is likely to reshape the competitive position not only of the alliances in the region, but also of the big three carriers in the domestic market. China Eastern and China Southern share complementary market strengths. Under the same alliance, co-operation between the two is expected deepen, covering their Shanghai, Guangzhou and Beijing hubs. It remains to be seen how Air China will respond.
In joining SkyTeam, Shanghai Airlines jumped ship from the Star Alliance - which it originally joined in 2007. Although Air China saw Shanghai as an important market, it added only 2% capacity at Shanghai in 2009. In contrast it added more than a fifth to capacity at its Chengdu hub over the same period. Air China subsequently lifted capacity in Shanghai by 14% in 2010, after officially establishing its Shanghai branch. But its market share in Shanghai remained flat in 2010, largely due to the strong competition from the new China Eastern. The merger has turned China Eastern into a leader in the Shanghai market, which would not have been likely had Air China merged with Shanghai Airlines and taken hold of the Shanghai market.
Air hub development in China effectively began with a government design, as the state-led industry reform in 2002 regrouped players and combined resources. But airlines have since taken the initiative, expanding their hub networks to meet market needs. During this process, the big three carriers have moved away from point-to-point players towards hub-based operators with enhanced ability to consolidate traffic in hub airports, especially Beijing, Guangzhou and Shanghai. This has paved the way for international expansion.
And they certainly see a bright future. IATA forecasts that a quarter of the 800 million extra passengers flying between 2009 and 2014 will be associated with China and 33 million of the new Chinese passengers will travel on international routes. Obviously, China's hub development will benefit enormously from huge air travel demand, which in turn will continue to drive the dynamic growth of the big three carriers in domestic and international markets.