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  • ANALYSIS: Air China and Air Canada embark on joint venture

ANALYSIS: Air China and Air Canada embark on joint venture

Air Canada and Air China have closed a long-anticipated joint venture, signing a deal on 6 June that enables them to coordinate transpacific and domestic flights and to market themselves as one airline.

The deal could help the carriers contend with lower yields resulting from a recent surge in competition on Canada-China routes, one analyst notes.

"The JV will clearly be positive for Air Canada," says National Bank of Canada analyst Cameron Doerksen.

The deal enables the airlines to "expand their existing codeshare agreement" and to begin "increasing commercial co-operation" on both Canada-China flights and domestic flights within both countries, the carriers say in a joint media release.

Air Canada and Air China will co-ordinate flight schedules, frequent-flyer programmes, and marketing and sales efforts, the release says. They will also provide customers with "seamless travel" between their respective networks.

Montreal-based Air Canada and Beijing-based Air China will implement the joint business in phases during the next six months, they say.

The carriers first announced plans to create the business in November 2014. They initially hoped to close the deal in 2015, but negotiations and the approval process for immunity from anti-trust laws lumbered on.

They finalised the deal on 6 June in Beijing at a ceremony attended by Air Canada chief executive Calin Rovinescu, Air China president Zhiyong Song and Air China chair Jianjiang Cai.

CLOSER TIES

The agreement builds on other recent efforts by the airlines to weave their networks together.

In December 2017 they opened their lounges to both airlines' customers, and in May they expanded to 564 the number of connecting flight opportunities available under their codeshare deal.

The release notes that capacity between Canada and China has expanded rapidly in recent years, jumping 18% year-over-year in 2017.

In 2018, the number of round-trip seats in the market will jump another 7% to 3.3 million – nearly four times as many as 10 years ago, according to FlightGlobal schedules data.

Air Canada will carry nearly 40% of those seats and Air China will carry 16%, data shows.

Both carriers recently added capacity on such routes, with Air Canada launching a Montreal-Shanghai service in 2017 and Air China beginning Beijing-Montreal flights in 2015.

Air Canada also flies from both Toronto and Vancouver to Beijing, Hong Kong and Shanghai, and Air China serves the Beijing-Vancouver route.

Canada-China routes served by Air Canada (in red) and Air China (in green)

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FlightGlobal schedules data

Other carriers like China Eastern Airlines, China Southern Airlines, Hainan Airlines, Sichuan Airlines and Xiamen Airlines have also made inroads to Canada in recent years. Most of those carriers will continue adding seats this year, FlightGlobal data shows.

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Also, in June 2017 rapidly-expanding Canadian discounter WestJet applied for rights to fly to China using Boeing 787s.

WestJet expects to receive the first of those aircraft in the first quarter of 2019, and has not released specific route plans.

COMPETITION AND YIELDS

A March research report from the National Bank of Canada notes that unit revenues on China-Canada flights have declined in the last year partly because carriers have added seats.

However, Air Canada's yields to China will likely improve thanks to strong demand and to a treaty limiting the capacity that airlines from each country can carry to the other, says the report.

Chinese carriers have about met their limit and cannot expand, while Canadian airlines have used only half their allotted capacity, National Bank of Canada says.

"Profitability on China routes will likely be further enhanced for Air Canada once talks around its proposed JV with Air China are concluded," the report adds.

Air Canada's president of passenger airlines Benjamin Smith has also called attention to transpacific yield pressure.

"As we look ahead to the first quarter, the Pacific continues to face competitive pressures, particularly for the China and Hong Kong market, resulting in a slight downward pressure in yields," he said in February.

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