Domestic Disturbance: Chinese airlines are going abroad, because things at home are not what they used to be

Dec 2 2013Currency, cargo, and capacity woes are hammering Asia’s airlines. And slowing economies and incursions by both Gulf carriers and LCCs alike don’t help. But China, on the other hand, is different. Or is it?

The mainland Chinese market is indeed its own animal, its airlines indeed protected in many ways from the storms blitzing other parts of Asia. For starters, airlines have long earned most of their profits on domestic routes, which account for a large majority of the sector’s revenue. helpfully, these domestic routes are still subject to rules that force carriers to offer domestic economy fares within certain government-established ranges, thereby limiting expensive fare wars. First- and business-class fares, by contrast, following recent reforms, are mostly deregulated and subject to market forces, meaning freedom to chase high yields from lavishly spending bureaucrats.

Better yet, the Chinese domestic market is largely LCC-free. The only notable exception is Shanghai’s Spring Airlines, accounting for just 2% of domestic seats this month (according to an Airline Weekly analysis using Diio Mi). The economy, although growing at about half the pace it was a half-decade ago, is still one of the fastest growing in the world. The Chinese currency is loosely fixed to the U.S. dollar, implying more revenue and cost certainty. Airport congestion can be as much of a blessing as a curse: at least it limits the ability of airlines to start new service, leading to higher fares. Several years ago, in fact, the government imposed a moratorium on new startup airlines to enable infrastructure to catch up with demand growth. An already rather concentrated domestic industry has consolidated further in recent years, with Air China now controlling Shenzhen Airlines and Shandong Airlines, China Eastern controlling Shanghai Airlines and China Southern more or less controlling Xiamen Airlines. And even competition among Chinese legacy airlines isn’t entirely competition in the sense that, say, a western antitrust regulator might recognize. The three largest airlines—Air China, China Eastern and China Southern—have a common majority shareholder in the central government and are widely understood to… well… “cooperate” would be the charitable word, not only among themselves but to…

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