Shenzhen Airlines has come a long way since its humble beginnings in 1993. It now counts itself among China's top five carriers and has ambitious growth plans

For proof of just how much China has grown in such a short time, one need only look at Shenzhen. The southern city was a fishing village of a few hundred thousand people 25 years ago but today is one of the largest cities in the world, with a population exceeding that of the metropolis of Hong Kong, which it borders. Much of that development has come in more recent years, and on the back of this economic boom the Special Economic Zone's little-known namesake ­airline has been quietly establishing itself as a major player in China's air transport sector.

Li Kun - Shenzen Airlines
 © All photographs Ben McMillan

Launched 15 years ago by the local government, Shenzhen Airlines in 2007 overtook Shanghai Airlines as the fifth-largest airline group in China by fleet size and traffic. It now has operational bases across the country, expanding domestic and international ­passenger operations, a cargo joint venture with Lufthansa of Germany, a regional airline venture with Mesa of the USA and a business jet venture with investors from Hong Kong. On the horizon is even more ambitious fleet and network growth as well as a possible ­initial public offering.

Most of the airline's development has come only recently, under the watch of president and vice-chairman Li Kun. Li joined late in 2005 following an ownership change that resulted in Shenzhen Airlines becoming the largest private carrier in the country. Since then Shenzen's growth has been phenomenal, and both its revenues and profits have soared.

Li took the industry by surprise when he joined Shenzhen Airlines as the then 45-year-old was a 27-year veteran of state-owned China Southern Airlines, one of the country's "big three" carriers. Such moves were until then unheard of in China, but Li took the job as the new owners' expansion plans presented him with a once-in-a-career opportunity.

"The reason I changed from China Southern Airlines to Shenzhen Airlines was Shenzhen Airlines at that time changed shareholders, and the biggest shareholder invited me to come over," he said through an interpreter in a rare interview at the carrier's campus-style headquarters at Shenzhen Airport. "We had the same ideas and the same thoughts and dreams: to create an airline with a worldwide brand. I had lots of experience in Chinese aviation but I wanted to do something different."

Li's ambitious expansion plan is called the "369 Development Strategy Program", with targets for the three-year period through the end of this year, the three-year period through 2011 and the three-year period through 2014.

It envisions a more than doubling of the carrier's fleet in the first phase from 33 aircraft when the expansion plan began at the start of 2006. It also calls for revenues to be among the top five airline groups in China, with annual passenger numbers exceeding 10 million. In the second phase, the plan calls for a fleet of 100 aircraft, and in the third phase 160 aircraft.

The targets are ambitious by any measure, but Li shrugs them off as fully justified and realistic, and points out that the growth has in fact been much quicker than originally intended. "By the end of this year we will have 100 aircraft, which means that the six-year plan will be finished three years in advance. It means that in these three years we could have built two Shenzhen Airlines," says Li. "We have been speeding things up by 40% or 50%. Our profitability is above the target and our revenue is higher than we expected. In this year we are now in the top five airlines in China. We are bigger than Sichuan Airlines, Xiamen Airlines and Shanghai Airlines, by fleet, revenue and traffic."

Shenzhen Airlines now has a group fleet of 78 passenger and freighter aircraft, profits are well up and passenger numbers have been increasing rapidly, says Li. This year the carrier expects revenues of more than 15 billion yuan ($2.2 billion) and it should carry about 15 million passengers, up from 10 billion yuan and 9.5 million passengers last year. This will put it firmly in China's top five, after Air China, China Eastern, China Southern and Hainan Airlines.

Just how has the seemingly unknown ­airline been able to pull this off? Shenzhen Airlines undoubtedly has strong central and local government support, and Li has clearly brought connections with him that were developed during his many years at Guangzhou-based China Southern.

Li Kun interview

Take aircraft orders, for example. China typically buys in bulk from manufacturers and then allocates aircraft to airlines, resulting in a fight among carriers for the jets. In a 150-aircraft A320-family order placed with Airbus in 2006, Shenzhen Airlines got by far the biggest single allocation - 28 narrowbodies. But it is not just political connections that have helped it. Civil Aviation Administration of China officials have held Shenzhen Airlines up as one of the success stories in the country's still-developing airline sector, one that is profitable - its net earnings rose 78% last year to a record 640 million yuan - and one that has shown it is forward thinking and willing to find new ways to do things.

One such example is in the issue of qualified personnel, which has become a serious problem in China for all airlines. In addition to setting up its own flying school, Shenzhen Airlines has taken a lead in hiring foreign cockpit crew and today has around 80 non-Chinese pilots from countries such as Brazil and the USA. It admits there were teething troubles in the early days in terms of the new pilots fitting in, but instead of allowing problems to fester the carrier set up a special department to deal with their different requirements. This, says the airline, has been a great help and allowed it to have fewer personnel problems than some of its rivals, which have been experiencing bigger troubles finding and retaining pilots.

Shenzhen Airlines has also been particularly forward thinking with joint ventures, recognising that having foreign partners can help it bring in international best practice. It now has two main airline joint ventures that are growing rapidly, namely Jade Cargo International and Kunpeng Airlines, and Li says he is always on the lookout for more ventures if they can help profitably grow the business.

In the case of Jade Cargo, which launched in August 2006 with Boeing 747-400ER freighters, Shenzhen Airlines was having difficulty breaking into the international freight market on its own. Lufthansa Cargo was coincidentally trying to find a way into the Chinese market and the two sides came together at the right time. Li says the same applies with Kunpeng: Shenzhen Airlines wanted to set up a new regional jet feeder airline and Mesa was hunting for a local partner to break into the Chinese market. "It was the right moment" for both ventures, says Li. "They were looking for partners and we were able to reach the same goals. It was very good timing."

Both ventures had troubles in the early stages, mainly as a result of the pilot shortage, but Li says operations are now going strong. "Compared with Jade Cargo's competitors, the operation is very good now, especially this year," he says of the Shenzhen-based freight carrier. It now has six aircraft, one of which is wet-leased to freight carrier Jett8, and Li says it will look at expanding further "depending on the next two years' business development". He adds: "We do have a plan to expand Jade Cargo in the long-term." Li says the same applies to Xian-based Kunpeng. It has five Bombardier CRJ200s in service and more will come before the end of this year as it expands its domestic network. It has also committed to adding at least five Embraer E-190s and at least 50 ARJ21 regional jets.

Despite the hugely ambitious growth plans for the group, Li says Shenzhen Airlines is genuinely focused on growing profitably rather than growing for the sake of it, and is in no hurry to move into long-haul international operations like some of its closest competitors. Hainan Airlines, for example, is already operating long-haul passenger services and Shanghai Airlines is planning to do the same. Both have Boeing 787s on order for more aggressive long-haul moves, but Li says this does not interest him in the near-term.

"Now we want to build and strengthen our national network. This is our main target in these few years," he says. "But we are also developing more international flight routes in Northeast and Southeast Asia. We now have [flights] to Seoul, Kuala Lumpur, Vietnam, Singapore, Osaka and the Philippines. There will be more. For the international flights we need to request approval from the CAAC but there will be more. The international operations now are focused on Southeast Asia and this is quite profitable. For the moment we will continue to focus on Southeast Asia."

Li also reveals that Shenzhen Airlines is interested in serving Taiwan, a market that is only now opening up. Regular non-stop flights between China and Taiwan had been barred since 1949, when the two sides split following a civil war, but a recent groundbreaking agreement allows for 18 flights per week by airlines from each side. Flights are allowed between Fridays and Mondays, and six Chinese airlines along with five Taiwanese airlines are now operating services (see page 20).

Shenzhen Airlines did not secure operating rights from the initial allocation by the CAAC, but Li says that "we hope our name will be in the second group", when more flights are allowed, possibly from later this year. "Our flights will obviously be from Shenzhen because it is a good location. Nearby in the Pearl River Delta area, there are a lot of Taiwanese businesses' factories."

One of the airlines that is now operating to Taiwan is Chinese flag carrier Air China, which is based in Beijing and which is a 25% shareholder of Shenzhen Airlines. In 2005, when the Guangdong Development Bank put its 65% stake in Shenzhen Airlines up for auction, Air China made it to the final round of bidding but narrowly lost out to a group of private investment companies. The main shareholder today is Shenzhen-based investment company Huirun Investment with a 71.25% stake. The Shenzhen Government retains a small 3.75% stake in the airline. Despite losing in the bid, Air China has continued to support the carrier's expansion plans, says Li, and has indicated it will remain a key minority shareholder.

"Air China is a shareholder of Shenzhen Airlines and is very supportive of us. They haven't sent any management here but in our operations and business development they 100% support us and with the board decisions they support us," says Li. He is having intensive talks with Air China over greater ­co-operation, possibly including codesharing.

Li also says he is open to acquisitions of smaller airlines within the Chinese market if any opportunity proves beneficial. Many privately owned airlines have launched in China in recent years and some have been seeking partners as they have run into financial difficulty. "In the Chinese market there are several small airlines now, and if there is good timing and also development needs, then we won't refuse this kind of opportunity."

Most of the new carriers initially tried to model themselves on foreign low-cost carriers, but things proved difficult for them as a result of restrictions on ticket discounting and high user charges at airports. Li believes true low-cost carriers will eventually make an impact in China, but not in the near-term. "Here, fuel costs can be 45% or 48% of airline costs. Also in China the aircraft prices are different from in other countries, because the government oversees the purchases. All the airports also have service fees and they are almost the same prices in the different facilities," he says. "So there are really only two places airlines can save money. The first is the human resource, the labour cost, and the other one is the catering. In airlines the labour cost is only about 10%, and for each passenger the cost of catering is only around 10 yuan, so the space for the low-cost airlines to be different is just in these two areas and this is just a very small space for them. Low-cost airlines will be a good direction for China's airline industry but the timing is not good now."

Timing is something Shenzhen Airlines is watching closely as it has said it wants to proceed with an IPO at some point. Li says: "We are discussing the IPO now on the board, and when we have the proper time we will do this." But he adds that if market conditions are not favourable in the near future, Shenzhen Airlines' owners will not rush into a flotation. In spite of the enormous capital requirements from its ambitious expansion plans, he claims the carrier has had no trouble securing financing. "Shenzhen Airlines' operations are very good right now. In 2006 and 2007, these two years' profits were the total sum of the previous 12 years. So when the investment banks have gone through our financial reports they have been very happy to loan money to us."

Things have changed radically for the airline that started with two aircraft in 1993 and which 10 years ago still only had eight aircraft. But Li says today, as its fleet approaches 100 aircraft, it still has plenty of work to do. "Shenzhen Airlines has gone from a regional airline to a national airline, with eight to 10 bases across China and with international flights," he says. "We want to keep building an airline with a famous brand, to keep changing from a small airline to a big airline. We are chasing this dream and we have done a lot so far, but we still have a long way to go."


Li Kun

Power Shower

Summer or winter, Shenzhen Airlines president and vice-chairman Li Kun starts the day with a cold shower, which he says invigorates him for his busy work day ahead.

Born in Kunming, his aviation career began in 1978 with the air force, which at the time ran China's limited air service. He was initially based in the Guangzhou management branch, which would eventually become China Southern Airlines, now one of China's big three airline groups. Li spent 27 years with China Southern, in Guangzhou, Beijing and Bangkok in Thailand, eventually rising up to the level of executive vice-president. He moved to Shenzhen Airlines in late 2005 following a change in ownership that left it as the largest privately owned airline in China.

Li enjoys hiking and studying. He secured a doctorate after becoming president at Shenzhen and is working on a post-doctorate in business management from Nanjing University. He is married with one son.


Airport Growth

Shenzhen Airlines is not the only aviation enterprise in the southern Chinese Special Economic Zone that has seen huge growth. Shenzhen Airport has seen traffic growth rates skyrocket as well.

The airport only opened in October 1991 but last year it handled more than 20 million passengers and 620,000 tonnes of cargo. This put it only behind Beijing, Shanghai and Guangzhou airports in terms of throughput.

Passenger numbers at Shenzhen Airport have grown at an average annual rate of 18.3% since the airport's opening, while freight throughput has increased 30.8% annually and aircraft movements at an average rate of 17.5% per year. Over the past five years alone throughput has doubled.

A major expansion of air cargo handling facilities is now underway, as is the construction of a second runway. A third passenger terminal will also be built.

The expansion is necessary if forecasts are to be believed. By 2010 the airport expects to handle 24 million passengers annually, rising to 36 million by 2015, 45 million by 2020 and 60 million by 2035. Cargo is expected to rise to 1 million tonnes annually by 2010, 1.8 million by 2015, 2.4 million by 2020 and 4 million by 2035.

Meanwhile, discussions are taking place over a partnership with Hong Kong International Airport, which is just across the border from Shenzhen. The two have been in talks for some time about a wide-ranging tie-up and some observers believe Hong Kong's Airport Authority may eventually buy into Shenzhen Airport.

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Source: Airline Business