The global airline industry has never had an easy ride. Regulatory changes, security procedures, rising fuel prices, overcapacity, and low-cost competitors have forced the major players to adapt and evolve over time. The prolonged financial downturn has added to the industry’s challenges, reducing the passenger volume and profits of many legacy carriers.
Recent years have also seen the rise of Middle Eastern megacarriers such as Emirates, which is on track to be at least twice the size of every other long-haul carrier in the world by 2015. Now, China’s rapidly emerging airlines are poised to further shake up the industry, as China becomes a viable and cost-effective midpoint stop for Europe-to-Asia traffic flows. Already among the top performers in terms of growth and profitability, as shown in Exhibit 1, carriers in China and the Middle East are poised to reshape the Europe-to-Asia routes, squeezing the business of legacy endpoint and hub carriers. (See Exhibit 2.) To offset this risk, forward-looking carriers must develop strategies to strengthen their market position and capitalize on China’s growing travel and tourism industry.
Whereas Middle Eastern carriers built their strength around hub traffic—providing a convenient stopover for travelers going to Europe, Africa, and the Southwest Pacific—the catalyst for Chinese carriers’ growth has been burgeoning domestic demand. The carriers position themselves differently too. For instance, while Emirates promotes itself as a high-end brand with top-quality product and services, China’s airlines focus on meeting the specific needs of their domestic passengers: local cuisine, Chinese-speaking crew, and tailored in-flight entertainment. What the Middle Eastern and Chinese carriers share, however, is a low cost base—10 to 20 percent lower than other Asian airlines, and as much as 30 to 40 percent lower than those of international legacy carriers.
China’s major carriers—Air China, China Eastern Airlines, China Southern Airlines, and Hainan Airlines—have a ten-year record of solid growth in capacity, traffic, and passengers, largely due to surging domestic demand. Still, the carriers’ low labor rates, modern fleet, and low fares make them formidable international competitors. Given their cost advantage, if they were to upgrade their product and services to better meet the needs of China’s rising middle class and international travelers from elsewhere in the world, the Chinese carriers would pose a significant threat, particularly to endpoint carriers in Europe and the Southwest Pacific and to legacy hub carriers. And with their low fares, Chinese airlines need only upgrade their offerings marginally to attract new segments of travelers—and materially impact the yields of competing carriers.
At the root of China’s airline growth is a travel boom fueled by rising incomes, which are driving unprecedented growth in tourism—both within and beyond the country’s borders. According to a recent study by The Boston Consulting Group, Chinese travelers will take 2.5 billion trips and spend the equivalent of about $850 billion by 2020, a dramatic increase from the 1.1 billion trips and $230 billion spent in 2010.
According to the World Travel & Tourism Council, the Chinese will overtake the Japanese as major spenders on travel and tourism by 2020, second only to travelers from the U.S. Excluding Hong Kong and Macau, the top destination of Chinese travelers is Europe, which can expect about 8.4 million Chinese visitors per year by 2020. Ranking second among international destinations, the U.S. will see about 4 million visitors, and several Asian countries complete the list of top destinations.
This surge in travel activity is driving passenger demand in and out of China, and the country’s airlines are gearing up by planning major investments in wide-body aircraft. If current growth projections hold, the country’s largest airline—Air China—will have wide-body capacity about equal to Delta, Qatar, and other midsize international players by 2015, and Chinese carriers as a group will account for about 6 percent of global wide-body aircraft capacity, compared with 15 percent for Middle Eastern carriers.
Chinese travelers have behaviors and preferences that distinguish them from their Western counterparts. They tend to take longer trips and travel in larger groups, for instance. BCG’s survey reveals that 41 percent of Chinese travelers go with friends or colleagues, compared with only 12 percent of U.S. travelers. Chinese travelers are also more spontaneous, and their planning timelines are generally shorter, mainly owing to their love of bargains. Shopping is very important to Chinese travelers. Although they spend less overall than most travelers from developed markets, the Chinese spend 40 percent of their travel budgets on shopping once they reach their destinations, compared with 19 percent for U.S. travelers and 14 percent for the French.
Although Chinese consumers are avid Internet users who like to do travel research online, package tours and travel agencies are still widely used because many travelers are anxious about overseas trips. They may lack overseas experience, worry about language barriers and cultural differences, or have concerns about government regulations and visa eligibility. Many survey respondents said that they wanted to simplify the trip-planning process: China’s travel and tourism industry is still fragmented, and researching a trip can involve multiple website visits just to gather information.
With their increased capacity, lower fares, and willingness to improve the quality of their offerings, Chinese carriers will be well positioned to win a significant share of passenger travel from Europe to Asia and from Asia to North America. China’s airlines are already focused on attracting inbound and transfer passengers, often with discount fares in economy and business class. Moreover, given tight regulation by the Civil Aviation Administration of China, the Chinese carriers’ control of the domestic market will likely continue, allowing them to fund their ambitious international-growth plans.
Given their disadvantaged cost position and often stretched balance sheets, what can airlines outside of China do to protect their turf and capitalize on the growing outflow of Chinese visitors? On the basis of our knowledge of the Chinese traveler and the evolving industry landscape, we offer the following guidelines:
Join forces to strengthen the network offer and minimize costs. Further consolidation and deeper alliances will likely characterize the industry going forward. To compete effectively, legacy endpoint and hub carriers should explore partnership options that will extend their offerings in Asia, Europe, and the Americas. By allowing airlines to pool their operating requirements in heavy engineering and throughout the supply chain, such alliances can also deliver cost synergies. In some cases, these partnerships might involve lower-cost airlines, combing “best of both” elements of the full-service and budget models.
Rethink your business model to protect the corporate- and premium-customer franchises. To achieve future growth, established Asian hubs and airlines will need to refocus their business from providing long-haul services that rely on aggregating intercontinental traffic at hubs to offering intraregional and point-to-point services. To achieve this, Asia-based hubs must ensure that they are relevant destinations in their own right. European and Southwest Pacific endpoint carriers may need to target the corporate- and premium-travel markets even more, using smaller next-generation aircraft to increase frequency while offering cabin and lounge services that appeal to first-class and business travelers.
Continue to reduce costs. All carriers should look for ways to keep costs under control by adopting the cost-saving practices of their Chinese and Middle Eastern competitors—leveraging overseas crew bases and scale-efficient maintenance operations.
Build your brands. Trusted brands are important to Chinese consumers, who associate Western brands with high quality. Because China’s travel market is still emerging and evolving, there is little brand loyalty yet—and, therefore, many opportunities exist for airlines to rethink and strengthen their brand portfolios. Forward-looking carriers are seeking ways to build a strategic toehold in specific markets, for instance, by entering into joint ventures with local Chinese airlines or travel companies.
Meet the needs of Chinese consumers. Chinese travelers have specific needs and preferences. Airlines that understand and cater to these preferences can differentiate themselves. Our research shows that Chinese travelers value certain services more than Western travelers do and will pay extra for them. These services include greater flexibility in changing flights, baggage delivery to hotels, a higher weight allowance for checked bags, lounge access, and priority security and passport control. Other potentially appealing offers: products and promotions that target group travelers, easier and more convenient trip planning, and offerings that target underserved travelers in smaller cities.
Explore new partnerships with Chinese carriers. To access Chinese traffic flows and achieve economies of scale, international airlines should seek opportunities to partner with key Chinese carriers—for instance, by trading brand, product, and commercial expertise for a share of the growing Chinese travel market. Other partnership opportunities may exist at the travel destinations themselves. Explore ways to share in the profits from all elements of the travel value chain—meals, accommodations, guided tours, local transport, shopping areas, and airport retail outlets—that would benefit from Chinese visitors.
The airline industry’s landscape is quickly evolving. Europe-to-Asia travel is expected to double from about 60 million passengers today to 130 million by 2020. Chinese and Middle Eastern carriers are making significant investments in fleet and airport infrastructure to help service this growth. Clearly, the legacy endpoint and hub carriers will be squeezed by these changing dynamics. But they can survive and even thrive by rethinking their strategies and business models to defend their markets and capitalize on China’s growing travel industry.
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