Chinese flag-carrier Air China is positioning itself to become the first of the country's airlines to join a global alliance, following its signing of a codeshare deal with Star Alliance co-founder Lufthansa on 9 October.
Air China chairman Wang Li An lists alliances with foreign airlines as a key element of the company's long-term strategy, but emphasises that a decision on which global grouping to join, if any, is some way off. For Lufthansa, the codeshare deal is a reward for the 10 years of management effort it has sunk into the Ameco aircraft maintenance joint venture between its Lufthansa Technik unit and Air China, providing a solid foundation for deeper co-operation between the airlines. The pair have also set up a cargo joint venture.
Lufthansa, however, is not prepared to rest on its laurels, mindful of the fact that Northwest Airlines has already been codesharing with Air China on trans-Pacific routes for two years. The German carrier has previously held partnership talks with both China Eastern and China Southern. It always maintained a keenness to bring a mainland Chinese carrier into the Star Alliance when the time became right.
Market forecasts from both China Aviation Industry Corp I (AVIC I) and Europe's Airbus Industrie suggest that air traffic will grow faster in China than in any other market in the world over the next two decades. Airbus' latest forecasts for the Asia-Pacific place domestic traffic growth in China at 8.1%, and the manufacturer promises to release a more detailed analysis of the market at the Zhuhai air show. A forecast released by the manufacturer last year estimated overall passenger traffic growth at 7.5% per annum up to 2018.
As such, many carriers outside China are jostling for an advantageous position as the country opens up. Qantas, a oneworld alliance partner, recently announced a codeshare with China Eastern on services between China and Australia, while China Eastern also codeshares with American Airlines and China Southern has a codeshare with Delta Air Lines, among other similar agreements.
Wang says Air China's codeshare with Lufthansa "will surely mark a new step in our co-operation" but emphasises that fundamental restructuring issues in China's airline industry have to be resolved first.
The big threeSuch restructuring is proceeding apace, with numerous Chinese airline mergers coming to light in recent months, following a July announcement by the Civil Aviation Administration of China (CAAC) that the 10 airlines under its control would merge into three groups, based around Air China, China Eastern Airlines and China Southern Airlines. There are now over 30 airlines operating in the country. The CAAC controls the aforementioned big three as well as China Northern Airlines, China Northwest Airlines, China Southwest Airlines, China Xinjiang Airlines, CNAC-Zhejiang Airlines, Great Wall Airlines and Yunnan Airlines.
Most recently, China Northwest and Shandong Airlines were named in the Chinese press as being close to a merger, which would make the combination into China's fourth largest carrier after Air China, China Eastern and China Southern. This news came a week after Shandong - a non-CAAC domestic airline - announced plans to buy another domestic carrier, Shanxi Airlines.
Shandong's moves have been interpreted as a campaign by the carrier to avoid losing control of its operations by being swept up in the overall consolidation process. In September, the Xian-based carrier completed an initial public offering of 140 million 'B' shares which raised 80.6 million yuan ($9.7 million) and placed it on the Shenzhen Stock Exchange.
Other merger plans revealed over the last few months include the acquisition of Zhongyuan Airlines by China Southern's parent Southern Air Group. China Southern says that within 30 days of the September merger announcement it has increased "cargo, luggage and mail transportation loads by more than 33%", and has boosted its overall market share from 60% to 65.6%, eliminating three duplicate routes, restructuring Zhongyuan's cargo operation and reconfiguring its Boeing 737s on routes to Beijing and Shanghai by adding first class.
Great wall buyAt the same time, China Eastern has announced the purchase of Great Wall Airlines, and Hainan Airlines has revealed its intention to absorb Changan Airlines. China Southern has also been reported in the official press as seeking government approval for a merger with an unnamed large carrier believed by industry observers to be China Northern - one of the country's biggest six airlines.
This last deal, if it goes through, will constitute the biggest takeover so far in the consolidation programme. It comes soon after the CAACformally blocked a proposed merger between Air China and China Southern, which conflicted with the administration's three-group plan.
The Chinese Government's main priority is to prepare all these airlines for the increased competition they are likely to face as a result of the country's pending accession to the World Trade Organisation (WTO). Membership of the WTO is expected to lead to the gradual liberalisation of bilateral air service agreements between China and other countries.
"China's reform and opening policy has greatly boosted Air China's development," says Wang, "The airline industry is an important basis for national economic development."
"The world economy is being globalised and competition in the airline industry is becoming increasingly tense," he adds. "There has been a surge in alliances in the world airline industry. Every airline is trying hard to survive and seek development under such circumstances.
"Besides, China's airlines are also facing the challenge of joining the WTO. Air China is sizing up these situations and is making co-operation with other airlines its long-term strategy of development," says Wang.
Industry observers see Lufthansa's decision to codeshare with Air China as potentially its most risky tie-up to date, due to preconceptions among the German flag-carrier's European passengers over the quality of service provided by Chinese airlines and their safety records.
Lufthansa officials say they have no concerns over their new partner's in-flight product or safety. Air China is the largest carrier in the People's Republic, and the only one permitted to carry the national flag on its tail. It was formerly the international division of the CAAC before the administration and its operational divisions were divided up in 1988. The airline claims it has not suffered a single accident in its 46-year history.
Air China is currently refitting the business class cabins on its long-haul aircraft to ensure that its premium product can compete with those of other major international carriers. Zhang Lan, deputy general manager for passenger transportation, says a key aim of the Lufthansa codeshare is to boost demand for premium-class tickets. "We are looking to have a big jump in business class sales," says Zhang.
The codeshare deal covers all direct flights between Germany and China flown by the two airlines, plus selected Lufthansa German domestic connections from Frankfurt. Some Chinese domestic flights are set to be covered within two years, after IT compatibility problems have been resolved.
Alliance membership will eventually come for Air China, Zhang believes, but not yet. "The time is not ripe here in China for participating in airline alliances," she says. "Codesharing is quite new in China - we need customers to understand this."
Further consolidationZhang declines to comment on what further role Air China might play in the government's consolidation plans. She says she is also unable to provide further details of plans by the state-owned airline to float some of its shares on a foreign stock exchange - China Eastern and China Southern are already listed in both Hong Kong and New York.
The airline welcomes China's impending entry into the WTO, despite the prospect of increased access to the Chinese market for foreign carriers. "It would be more competition but would also bring more opportunities," says Zhang. "We are certainly looking forward to a more liberal environment for China's airlines to operate in."
Air China continues to grow its aircraft fleet with delivery of three Boeing 777-200ERs planned next year, four additional 737-800s in 2002 and eight Airbus A318s in 2003. Its three A340-300s remain on lease to Cathay Pacific, leaving the carrier with an all-Boeing fleet.
Zhang says it remains unclear whether Air China will be profitable this year. "The fuel price rise is really making our costs go up a lot this year," she says.
Source: Flight International
