With SkyTeam signing China Southern as a future member, the prospect of China's big three carriers joining global alliances seems to have come closer
SkyTeam has become the first global alliance to sign a Chinese airline as a future member through a memorandum of understanding with China Southern Airlines. Insiders say the memorandum, signed late in August at a ceremony in Guangzhou, is expected to lead to China Southern, the country's second largest airline by traffic, joining formally some- time in 2006.
The announcement was billed as a coup of sorts for SkyTeam, given that all three major alliance groupings have for years been seeking a partner from among the Chinese "big three" of Air China, China Eastern and China Southern. But will it really mean much in the grand scheme of things? Probably not much for SkyTeam beyond marketing gains, say airline officials, at least in the immediate stages. However, China's airline market is growing faster than any other and with the number of Chinese outbound passengers rising at double-digit percentages each year, major international carriers would be foolish not to have an eye on expanding Chinese operations.
"All the alliances want a Chinese member but it really is very early as the market still needs to mature and the airlines need to improve their game," says one Asia-based executive with a major US airline. "Immediate benefits will be limited, if there even are any. But what everyone is looking at is the future."
If China Southern does ally with SkyTeam, it is widely assumed Air China will link with Star. Star itself does not specifically identify Air China as its preferred partner, but the Beijing-based carrier has strong codeshare ties to major Star members such as All Nippon Airways, Lufthansa and United Airlines. China is one of Star's main "white spots" when it comes to global coverage alongside India and Russia.
"At present, many of our member carriers already enjoy bilateral relationships with Chinese airlines," says Star chief executive Jaan Albrecht. "The initial impulse on a deeper alliance discussion will come from the Chinese airlines and the relevant authorities. Hence we view the recent announcement by China Southern as the first sign that alliance considerations now receive more attention in the Chinese aviation market."
That leaves Shanghai-based China Eastern with a possible future place in oneworld. However, its ties with oneworld are limited to deals with American Airlines and Qantas, while it also has codeshares with Air France, Asiana and Korean Air (KAL). It may be that oneworld will prefer to tackle the country via its other "Chinese" member, Cathay Pacific.
China Southern's entry into SkyTeam should be relatively uncomplicated on the relationship front because it already has codeshare deals with members Air France, Delta Air Lines and KAL, as well as with latest member KLM.
Korean lead
Alliance insiders say SkyTeam's efforts to bring in China Southern were driven largely by KAL, which has a particularly strong relationship with the airline and which has been steadily increasing its China services in recent years. Delta, which is struggling financially, took more of a "back-seat" role. It currently codeshares only on the Chinese carrier's flights between its Guangzhou base and Los Angeles but ties may grow in future since Delta is eventually expected to seek to operate its own aircraft to China following the recent signing of a far more liberal air services agreement between China and the USA.
If Star and Air China do align, they will lead the way by some distance in terms of their share of international services to and from mainland China. (see tables) Even today, Star has a considerable range of international service into China, whereas oneworld's presence is limited even including Cathay Pacific's recent tenure back to Beijing.
SkyTeam member airlines themselves say that bringing China Southern in as a member puts the grouping on a positive path for the future. KAL chairman Cho Yang-ho says: "SkyTeam has long expressed interest in working with a Chinese partner, given the vast growth potential of the Chinese market."
Speaking at a briefing in New York to mark the entry of new SkyTeam members Continental , Northwest and KLM, Air France chairman Jean-Cyril Spinetta said: "We are working toward the goal that China Southern and its gateway airport at Guangzhou should become the main gateway for tourism from China to Europe and the USA."
China Southern acknowledges that it is still working to lift service standards to those of respected international airlines. IT systems will also need to be linked to those of its future partners and this may take some time.
The Chinese carrier says it will now begin to adjust its network "to complement our new alliance members as well as enhance operations and service levels as we look forward to official membership in SkyTeam in an appropriate time".
Chairman Yan Zhiqing adds: "This agreement signing event is an important step forward into the future for China Southern Airlines to adapt itself to the need of further reforms and opening to the international community, as it will strengthen the airline's international co-operation and global competitiveness."
Yan's statement effectively sums up the motives of the Chinese side. While the immediate benefits for foreign airlines and their passengers are limited, the memorandum has clearly won the support of the regulatory Civil Aviation Administration of China (CAAC), which has said it wants the country's airlines to bring their service standards and competitiveness on to a par with foreign operators. This was highlighted by the fact that top officials of the regulatory body were in attendance at the signing ceremony, including CAAC minister Yang Yuanyuan. Also present was the chairman of the state-owned Assets Supervision and Administration Commission, Zhao Xizi, in a further sign that the government supports the move.
The CAAC had until now been pushing the airlines towards consolidation, and in recent years the big three have taken over seven other CAAC-controlled airlines that now operate their services under the larger airlines' flight codes. Now that the integration work has largely been completed, say observers, the airlines are readying themselves to expand further into the international arena by joining global alliances.
They also hope to support their respective home bases, where new airports are fighting for hub status. Guangzhou opened its new airport in August. Shanghai opened a new airport several years ago, while Beijing's airport has been upgraded and an all-new facility is planned for the capital for some time in the future.
Natural hubs
Taking international services, a combination of the big three with the alliances reinforces their dominance of their natural hubs. In particular, Star in Beijing and SkyTeam in Guangzhou would account for around 60% of the international service flown from these hubs. A teaming of China Eastern and oneworld would not dominate Shanghai in the same way that its rivals would at their hubs, while it would have no presence at Guangzhou at all and relatively little presence in Beijing.
Clearly the picture will change before alliance strategies in China are finalised, but China Southern's step towards SkyTeam is the first concrete sign of where they will end up.
NICHOLAS IONIDES SINGAPORE DATA ANALYSIS BY FABRICE TACOUN LONDON
| Alliance market share of international services to mainland China – OAG July 2004 | ||||||||
| Measure | Units | oneworld | +China Eastern | SkyTeam | +China Southern | Star | +Air China | Total market |
| Int'l network | city pairs | 4 | 87 | 28 | 108 | 63 | 119 | 320 |
|
| countries | 3 | 19 | 5 | 20 | 9 | 23 | 45 |
| Frequencies | monthly | 87 | 2,468 | 648 | 2,260 | 1,759 | 3,642 | 11,966 |
|
| share | 0.7% | 20.6% | 5.4% | 18.9% | 14.7% | 30.4% | 100.0% |
| Capacity | ASK million | 160 | 1,312 | 665 | 1,567 | 2,017 | 3,928 | 8,370 |
|
| share | 1.9% | 15.7% | 7.9% | 18.7% | 24.1% | 46.9% | 100.0% |
| NOTE: All data sourced from OAG schedules for July 2004. Analysis is of all international flights, including those from the Hong Kong and Macau SARs, into and from mainland China. Domestic services are excluded. ASK=available seat km 1 mile=1.609km | ||||||||
| Alliance share of capacity to mainland China by routes – July 2004 | ||||||
| Alliance | China-Asia | China-Europe | China-North America | |||
| + Chinese partners | ASK million | share | ASK million | share | ASK million | share |
| oneworld | 8 | 0.2% | 152 | 6.1% |
|
|
| +China Eastern | 637 | 18.0% | 348 | 13.9% | 221 | 13.5% |
| SkyTeam | 129 | 3.6% | 304 | 12.1% | 233 | 14.3% |
| +China Southern | 499 | 14.1% | 594 | 23.7% | 330 | 20.2% |
| Star | 714 | 20.1% | 604 | 24.1% | 699 | 42.8% |
| +Air China | 1,263 | 35.6% | 1,276 | 50.9% | 1,082 | 66.3% |
| Total alliances | 2,400 | 67.7% | 2,218 | 88.5% | 1,632 | 100.0% |
| Total market | 3,546 | 100.0% | 2,507 | 100.0% | 1,632 | 100.0% |
| Alliance share of international seat capacity from major hubs – OAG July 2004 | |||||||||
| Airport | oneworld | China Eastern | Total | SkyTeam | China Southern | Total | Star | Air China | Total |
| Beijing Capital | 3.60% | 4.00% | 7.60% | 8.90% | 4.90% | 13.80% | 26.00% | 37.40% | 63.40% |
| Guangzhou | - | - | - | 7.10% | 50.70% | 57.80% | 20.50% | 5.60% | 26.10% |
| Shanghai Pudong | 1.40% | 25.80% | 27.20% | 8.20% | 4.00% | 12.20% | 26.40% | 13.60% | 40.00% |
Source: Airline Business
