In China Southern Airlines chairman Si Xian Min’s view, being a state-owned carrier in China is akin to being one of three brothers. They share the same parentage, but each has a distinct character, strengths and weaknesses.
Based in Beijing, Air China has the honour of bearing the country’s flag on its tail. It also gets the premium market, since Chinese leaders mostly fly on the airline when they travel overseas. China Eastern Airlines has benefits from being headquartered in the financial hub of Shanghai, where business and international traffic abounds.
China Southern’s base is Guangzhou, which is not the financial, cultural or political hub of China – still, it has the largest fleet among the three brothers. As a group, which also includes Xiamen Airlines and Chongqing Airlines, its fleet of more than 600 aircraft offers the most extensive domestic network, covering 133 points across the country.
Major changes are afoot at this giant, as the carrier extends its focus from relying heavily on the profitability of its domestic business to expanding its international network and capturing the rising Chinese demand to travel out of the country.
When China Southern launched a four-times-weekly Guangzhou-New York JFK service on 6 August, Si made it a point to be on the inaugural flight of the carrier’s longest-ever direct route. He also met with reporters in New York to drum up publicity. This was also a highly unusual move, because the carrier tends to shun the limelight.
“As a large company with over 600 planes, we can no longer just be a regional or domestic airline. For China Southern’s brand standing, we need to build our international and long-haul routes… which is why in recent years we have moved from a total emphasis on domestic routes to growing our international market,” he says in a rare interview at his office in the Baiyun district of Guangzhou.
Most noticeably, the SkyTeam carrier has been expanding its reach in Australia and New Zealand. It now operates over 50 weekly services to five points Down Under: Auckland, Brisbane, Melbourne, Perth and Sydney. Flightglobal’s CapStats data shows that China Southern’s available seat-kilometres from China to Australasia have exploded in recent years, growing from 1.4 billion in 2010 to 4.3 billion in 2013.
This is nothing short of a declaration of war against major-league players, which have for years dominated the Kangaroo route through hubs in Singapore, Hong Kong and more recently the Middle East. China Southern terms its strategy the “Canton route”, flying passengers to Europe via its main hub in Guangzhou. Its other hubs are Beijing, Chongqing and Urumqi.
In addition to competitive fares, China Southern has been deploying its newest assets, the Airbus A380 and Boeing 787, on Australian and New Zealand routes. It also signed an agreement with Qantas to codeshare on a number of domestic routes, with a promise to explore other potential areas of co-operation, such as pilot training.
The bespectacled chairman points out that besides Guangzhou being geographically more direct to Europe, cutting down on distance flown, the city also has much to offer transiting passengers with its rich culture and renowned cuisine. Last year, a 72h visa-free period for transiting passengers was also introduced in Guangzhou, helping to drive up the number of transit passengers in line with Baiyun International airport’s strategy of becoming a transit hub.
“People are used to Singapore Airlines and Cathay Pacific going the same route through Singapore or Hong Kong. They should give Guangzhou a try. There’s nothing much to see in Hong Kong and Singapore. In fact, you can drive through the whole of Singapore within half an hour,” Si quips, breaking into a laugh.
What China Southern needs to work on, he admits, is improving the service levels on its flights, and also the transit experience for passengers at Baiyun airport. “We’re the latecomer, so we have to learn from airlines that have done well,” he adds. “Learn from their operational experiences, and try to avoid taking unnecessary steps.”
Beyond the Canton route, the carrier has also been busy building its presence in Europe and North America. In addition to New York, it launched services to Frankfurt and London, and upgauged services on the Guangzhou-Los Angeles route to A380s. Sources say it could also launch a direct Guangzhou-San Francisco service in October.
China Southern also has connections to Amsterdam, Moscow, Paris and Vancouver. Nearer home, it has paid close attention to the Japanese and Korean markets.
Its hard work seems to have paid off, and the carrier is close to its target for international operations to account for 30% of total ASKs. The next step is to “stabilise the routes” and work to improve yields.
“Our load factors for North America and Europe are not bad,” says Si. “I’ll say it’s about 70-80%. The problem is our fares are still a bit low, especially for those newly launched routes, so we need time to grow the revenues.” He adds that the carrier has longer-term plans to enter the South American and African markets.
The 57-year-old is also quick to point out that although the carrier is putting more effort into growing its international arm, the domestic market remains at the core of its business.
Last year, China Southern’s operating profit plunged 70% to CNY1.51 billion ($246 million), while its net profit dropped 24% to CNY1.98 billion. Both net profit and operating profit have fallen steadily over the last three years. This is consistent with the pattern at its peers, as Chinese economic growth slows and intensifying competition dampens yields. The country’s growing high-speed rail network has also hurt the domestic business.
Nonetheless, China Southern has steadily grown passenger traffic from 80.7 million in 2011 to 91.8 million in 2013.
Si explains that China, with a population of 1.3 billion, remains a bright spot with plenty of room for growth. Civil Aviation Administration of China statistics show that in 2013, Chinese carriers together carried 360 million passengers. This translates into each Chinese person travelling 0.27 times a year – a figure that will no doubt grow as the propensity to travel rises with the standard of living.
“China’s aviation industry has grown very rapidly over the last 20 years,” says Si. “As economic growth slows, the aviation industry will also enter into a more stable growth stage. GDP growth will maintain at about 7-8%, and we predict the Chinese aviation growth to be higher than that, but it will not be like before. It’s like a person, if he keeps running 100 metres in 10 seconds, he can’t always keep up.”
As the carrier begins early preparations for its 13th five-year plan, one thing is clear: its focus will no longer be to “blindly seek” scale and growth, but rather to raise service standards and improve yields.
Si has confidence in China Southern’s “hardware”, because it has been the frontrunner in introducing new jets to China, namely the A380 and 787. The new aircraft are fitted with reasonably modern Panasonic eX2 and Thales AVANT in-flight entertainment systems. The “software”, however, is what the carrier knows it lacks.
“We admit we still have a distance to go in terms of service, as compared to some Asia-Pacific carriers like SIA, Cathay and China Airlines. We have so much to learn from them. [This includes] flight attendant quality, improving their language training and also our meal services, how to better meet international passengers’ demands.”
This is precisely why China Southern became the first Chinese carrier to join an international alliance in 2007.
“Joining SkyTeam, the important thing is not just how it raised revenues, but rather how it helped China Southern go international in its operations, services, sales, management, how to work towards international standards… learn from the big boys. This is not something you can just pay money for.”
Si says there is no shortage of investment opportunities for Chinese carriers, especially in Europe, where the economic recession has led several players to seek foreign investors. His view, however, is that the traditionally cautious carrier is not ready to take that step.
“Our scale is not small now. We want to do our own business well before looking at what we can do with others,” he says frankly. “Buying a stake is not difficult, but it’s not just about the funds, rather what’s important is the culture. Can the corporate cultures merge and walk together? I think this is difficult. There are successes and failures. We do not feel we have the capability to do this now.”
At home, the highly regulated airline market is also shifting, with the low-cost sector set to take off, while sales of front-cabin seats are being hammered by Beijing’s austerity drive.
China Southern is studying new cabin configurations. It may cut the number of first-class seats and put in more premium-economy ones, as president Xi Jinping cracks down on extravagance and corruption.
On the low-cost front, the government is actively promoting the development of homegrown carriers, in response to a growing number of foreign operators flying into the country. Many Chinese carriers have taken the hint and since set up new units, or are converting existing subsidiaries into low-cost operations.
China Southern, however, is not keen to jump on the bandwagon just yet. In Si’s view, of all the airlines that have popped up and called themselves low-cost, only pioneer Spring Airlines has a truly low-cost operation.
“It’s not difficult if we want to have an LCC,” he says. “We have so many subsidiaries we can just combine two and make some changes. But the fixed costs in aviation, such as fuel and airport charges, are so high. If you don’t have a good low-cost management model, my worry is that it will become a high-cost operation offering low fares.”
Being the largest player in China is no guarantee that the carrier always gets its way. One of the most embarrassing setbacks for China Southern is its failure to use the Airbus A380 on long-haul routes out of Beijing since taking delivery of the type in 2011. This is due to regulatory resistance that prevents Chinese carriers from competing directly on international routes.
China Southern’s attempts to jointly operate the A380 with Air China on key routes out of Beijing also failed when Air China insisted that it wanted only to wet-lease the aircraft – a display of increasing rivalry.
The reality is that brewing inside China – beneath the polite nods, gentle applause and friendly smiles – is a fierce battle to become the country’s pre-eminent carrier.
China Southern has been forced to ply its five A380s – the only superjumbos operating in China – on domestic routes from Beijing to Guangzhou and Shenzhen, with only one long-haul service to Los Angeles. Si pledges that China Southern remains determined to one day operate the type effectively.
“My biggest wish is to use the A380s from Beijing to USA and Europe. We have not given up… We’re still fighting hard for it,” he says. “Looking at it from another perspective, whether it’s in the domestic or international market, it raises the brand and influence of China Southern.”
China is a unique operating environment, with many decisions still being tightly regulated. But Si is positive that with deepening reforms, things are set to change.
Source: Airline Business
