The Strategy for the Future
The Strategy for the Future
RISING CHINESE POWER IN GLOBAL AVIATION INDUSTRY
MIXED FEELINGS TOWARD FUTURE GLOBAL MARKET
RE-INTEGRATE IN COMPLIANCE WITH MARKET TRENDS
SEEK A WIN-WIN SITUATION THROUGH COMPETITION AND COOPERATION
BE COMMITTED TO BECOMING AN INTERNATIONAL SUPER CARRIER
IDENTIFY THE DIRECTION AND OCCUPY THE COMMANDING POINT
RISING CHINESE POWER IN GLOBAL AVIATION INDUSTRY
Corporate development is dependent on vision. Without a vision about tomorrow, there will be no future. Without a global perspective, there will be no global competitiveness.
In today’s world, the liberalization of global aviation transportation is the prevailing norm. As union and integration between international airlines has become increasingly popular, future competition in global aviation will revolve around alliances and super carrier networks. The “powerful becoming perpetually powerful” trend has shown that we have to create a leader for the Chinese aviation industry, one super carrier that can compete with global aviation giants. Only in this way can Chinese power really rise in this industry. If not, the Chinese aviation industry will find it hard to make its presence felt on the global stage, and even face the danger of becoming marginalized.
Challenges, difficulties, and opportunities always come together. The liberalization of global aviation transportation has brought about bothserious, unprecedented challenges, and concomitant opportunities to China’s national aviation industry.
Today’s Air China is ready for an all-out start in this race. In recent years, along with the vigorous growth of the Chinese economy, the Chinese aviation transportation industry witnessed a sustained development at an average annual growth of more than 12.1 percent. The Chinese aviation transportation market promises greater potential than any other market in the world in the 21st century. The 2008 Beijing Olympic Games and the 2010 Shanghai World Expo will trigger off another round of speedy growth for Chinese civil aviation in the next five years. By 2020, China will have become the second largest aviation and tourism market in the world. While the industry faces these historic developmental opportunities, the global aviation industry is also going through a period of active strategic adjustment, exhibiting a mega trend toward the super aviation group, a higher level of professionalization, and a more market-oriented structure.
The Chinese economy is gradually integrating itself into the global economic community. The building of an aviation transportation network platform that enables an equal dialogue between China and the world has a close bearing on China’s economic position as a large nation, and consequences for its national economic security, as well as its social harmony. China is destined to become a large and strong power in civil aviation: this is the dream in the minds of all Chinese civil aviation players.
MIXED FEELINGS TOWARD FUTURE GLOBAL MARKET
A popular concept today is the “open skies,” toward which all those in Chinese aviation have a mixed feeling. We have been watching the trade conflicts between China and the Untied States very closely. In May 2007, the two countries held a strategic dialogue in Washington, with the Chinese delegation headed by Vice Premier Wu Yi. The two parties reached agreement on future measures to be taken in fields such as financial services, energy and the environment, and civil aviation. This dialogue has already born fruit.
According to the new Sino–U.S. aviation agreement, the two countries’ aviation cargo transportation markets will move gradually toward full opening by 2011. From 2007–2012, the passenger transportation capacity from the United States to the eastern Chinese region will realize an annual increase of 70 flights per week, as per an agreement reached in 2004. The market for non-stop aviation transportation from China’s central region (Anhui, Hunan, Hubei, Jiangxi, Henan, and Shanxi) to the United States will be fully opened. With this, the Sino–U.S. aviation market embraces a new round of opportunities.
In accordance with the 2004 agreement, which states that each party should provide 193 passenger flights per week, aviation companies in the Untied States have used up their quota. In contrast, Chinese airlines have only realized 70 flights per week. The reason behind this is that Chinese airlines are not as powerful as their American counterparts. The “Open Skies” between China and the United States is a direct result of the liberalization of global aviation transportation. From the 1940s to 1970s, many countries adopted a highly restrictive policy toward the aviation transportation industry. To protect domestic aviation rights and the interests of domestic airlines, applications from foreign airlines to operate domestic aviation transportation rights were usually rejected, and all countries imposed strict controls on the entry of foreign airlines, in compliance with bilateral and multilateral agreements. However, at the end of the 1970s, the United States took the lead to relax its control and open the skies, moving gradually from localization toward globalization. Relaxing control principally involved the government relaxing or even canceling its control of domestic aviation transportation, and making the industry market-oriented. When this policy was applied to the international aviation transportation industry, the concept of “open skies” was proposed, which required countries to grant one another the right to freely enter other parties’ aviation transportation markets, on the basis of respecting one another’s sovereignty. This meant that all countries should open their aviation transportation markets to one other.
Over the last 20 years, thanks to the forceful promotion of the U.S. government, the policies of “relaxing control” and “open skies” have had a profound impact on the whole world. Until now, with the regionalization of the world economy, many regions in the world have realized the regional liberalization of their aviation transportation. Examples include the European Union and South Asia, which have both unified their aviation transportation markets; the integrated North American aviation transportation market, composed of the United States and Canada; the South American Andean aviation group made up of Bolivia, Columbia, Ecuador, Peru and Venezuela; and the unified aviation transportation market established between Australia and New Zealand.
Currently, the liberalization of global aviation transportation is progressing, together with economic globalization. A new polarization is taking shape in the world aviation transportation industry. The open skies policy has accelerated the integration of global aviation companies. Alliances between airlines and super carriers with multiple hubs and large networks have become the trend. Relaxing control has been an important aspect in the emergence, development, and strengthening of budget airlines, while new business models and changing consumer behavior will also propel budget airlines toward operating longer-range routes. Similarly, polarization also exists in today’s aviation cargo transportation industry. The large companies remain perpetually large, while the powerful companies remain perpetually powerful. As alliances between aviation cargo transportation and giants of aviation cargo transportation emerge, small and medium airlines have to struggle for their survival through outsourcing or simply by getting out of the business.
Integration agreements among global airlines these days are all motivated by the liberalization of global aviation transportation. In Europe, in 2003, Air France and KLM Royal Dutch Airlines merged to become the Air France-KLM Group. In 2005, Lufthansa Group acquired Swiss Airlines. The reorganization of British Airways and Spanair is also being conceived. The future European aviation market will largely be dominated by these three large aviation groups. In North America, reorganization and mergers in the aviation industry have touched almost all major airlines. United Airlines and Delta Airlines have already begun a merger negotiation, while US Airways have launched an acquisition offensive targeting Delta Airlines. The top six American airlines will probably be reorganized into three. Air Canada, the largest aviation company in Canada completed its merger with Canadian Airlines International, the second largest aviation company in 2000. In the Asia-Pacific region, in 2006, Cathay Pacific Airways merged with Dragon Airlines, and Air Nippon integrated with Japan Air System. Singapore Airlines and Qantas have been in discussion on the subject of reorganization for some years. After Europe and America, one or two super carriers may soon emerge in the Asian aviation market.
Industrial alliance is an inevitable outcome of economic globalization. As the trend of alliance and cooperation becomes more and more palpable, the pattern of future market competition will be reliant on alliances as well as super carrier networks. In the face of this mega trend, we must urgently address the question of how we want to place ourselves.
KNOW YOUR WEAKNESSES
With the pressures of economic globalization all around it, China cannot keep its skies closed any longer. By the end of 2006, China had already signed 106 bilateral aviation transportation agreements (including 13 draft agreements) with foreign airlines, and had already opened the fifth aviation right (the third-nation transportation right) on a trial basis for some cities. From 2010, China and the United States will negotiate the full opening up of aviation transportation markets between the two countries. After the open skies agreement between China and the United States, China and Europe will sign a similar agreement. The opening up of aviation rights to all major countries in Asia, notably Japan, South Korea, and Singapore, almost cover all “flyable” cities in China. A fierce competition with strong aviation powers and super carriers is imminent.
The liberalization of global aviation transportation, initiated by the United States and practiced by aviation powers, is in fact a plan to gradually take over the resources of the weaker players, under the guise of “liberalization.” Thus, it is not hard to understand why aviation powers represented by the United States, and countries with relatively few domestic aviation market resources, such as Singapore, are the most active in promoting the “open skies.” We usually say that a weak country is always in an underdog position in diplomatic relations. When there is a wide gap between nations in terms of economic strength, each nation’s gain in economic globalization is far from equal. If nations without a developed or competitive aviation industry passively accept such international rules of the game, they are bound to pay a heavy price. That is why the concept of liberalization was widely resisted by other nations and regions in the beginning, including those in Europe. However, after the European Union countries had established a unified, strong aviation market, they signed the “open skies” agreement with the United States in March 2007.
The liberalization of global aviation transportation is sure to pose serious challenges and threats to the Chinese aviation transportation industry. We can analyze the three principles involved in aviation liberalization: fair game, liberal reciprocity, and equal benefits. These three principles were originally founded on the basis of safeguarding the maximum national economic benefit. However, through a detailed analysis, we can discover the hidden secrets.
The so-called fair game is not always the case. The Chinese aviation transportation market, which is rapidly growing, has long been perceived as a target by aviation companies in the United States, who saw China as a golden market. It is reported that the international routes of American airlines that make the largest profits are concentrated on a few routes, such as Japanese routes, Chinese routes, and British routes, whereas airlines in China have sustained losses on their Sino–U.S. routes. Until now, many airlines in China are still struggling to make the break-even point.
The operational gap between airlines in China and the United States mainly lies in the margins of scale and strength. In terms of passenger structure, the American government has set a restrictive entry policy on China with relatively strict visa rules and complicated entrance procedures. What is more, the United States is not yet a major tourist destination for Chinese people. Therefore, as we analyze the whole Sino–U.S. route market, the ratio between Chinese people going to the United States and Americans coming to China is about 1:4. This means that American passengers take up the main market share, for American airlines are their first choice while traveling.
Compared to their foreign counterparts, the Chinese airlines remain in a weaker position. In 2002, foreign airlines accounted for 52 percent of the passenger transportation market in China. The figure continued to rise and peaked at 56 percent in 2006. The ratio of international route passengers carried by Chinese airlines and foreign airlines is 44:56, with Chinese airlines’ market share lagging behind by 12 percent. In China’s international aviation cargo transportation market, Chinese airlines took up 40 percent of the market in 2001, but the number has now dropped to 18 percent, whereas foreign airlines climbed to 82 percent, and this means that the Chinese cargo transportation companies have been marginalized.
In the past few years, China has adopted a more liberal aviation open policy toward South Korea, granting Korean aviation companies rights to enter many Chinese cities. Whereas China is a large country with a wide area, dense population, and a large hinterland market, South Korea is relatively small, with fewer destinations. Therefore, the Sino–Korean liberalization agreement is not reciprocal. This rationale can also be applied to small nations such as Japan and city-state nations like Singapore.
A more liberal aviation policy has stimulated a rapid growth of passenger traffic between the two countries. South Korea has already become China’s second largest international aviation market, bringing in huge benefits for Chinese tourism. However, it should also be noted that South Korean airlines carry a large number of sixth aviation rights passengers departing from or arriving in China, especially sixth aviation right passengers between China and North America. In this market, the aviation company that takes up the largest market share is not from China, but from South Korea. When Star Alliance approved Asiana Air’s entry, this airline highlighted its network coverage in China. Currently, Asiana flies to 14 cities in China, exceeding all other Star Alliance members. If we allow this situation to continue, foreign airlines will stand in the way of the building of the Beijing and Shanghai hubs, threatening their position as key international airports, and weakening the international competitiveness of hub-network style airlines such as Air China.
Take the Sino–U.S. aviation market for example. The first-class round-trip price is usually ten times that of the economy class. Not only does the United States side take up about 60 percent of the market in Sino–U.S. routes, it also monopolizes most of the high-yield passengers, whereas Chinese airlines are operating at an overall loss. Therefore, through the gradual opening up of aviation rights, domestic airlines have gained the reciprocity right, but they have not reached the flight numbers stipulated in the agreement, and thus have not benefited from this opening up due to their inadequacy in fleet numbers, route networks, and marketing measures.
Facts have already proved that the so-called principles of fair game, liberal reciprocity, and equal benefits promoted by the open skies policy are actually unequal and one-sided. This policy has resulted in a great strain for domestic aviation companies. Compared with powerful aviation countries, China’s civil aviation industry still has a long way to go in the following five aspects.
First, industrial interrelations should be straightened out, and an appropriate developmental environment should be further nurtured. In recent years, in the light of the transformation from the traditional planned economic system to a market economy, China’s civil aviation industry has successfully carried out numerous reform initiatives. These reforms should be pushed even further to meet the demands of the new era. In particular, relations within the industry should be straightened out in terms of system and procedure. Only then can we transform from just a big nation to a strong nation in civil aviation. Currently, Beijing, Shanghai, and Guangzhou airports are obviously in an inferior position in terms of airspace and international transfer business. To solve these problems, support from related government departments is required. For example, customs and border inspection departments should adopt active measures to make possible such policies as One-Stop Clearance, Visa Free Transit, and Visa upon Arrival, which are all required measures for the development of international transfer business at portal hub airports without prejudice to national security. Only by doing this can the time for passenger transfer and cargo clearance at hub airports be effectively shortened. Other than that, government administrative departments should actively promote the construction of a highly efficient, integrated traffic system that will enable the swift flow of both passengers and cargo, and help elevate the international competitiveness of domestic airlines.
Second, corporate operations and development concepts should be further refined, and industrial development should be better managed. Currently, a large number of aviation companies still pursue extensive development, and this increases the operational risks for the whole industry. The first risk is capacity overexpansion. Based on the airplanes ordered by all airlines from 2007–2010, delivery times will overlap, leading to a rapid increase in capacity. The second risk comes from excessive market competition. Price battle is related to an excessive capacity increase, but it is largely the result of mistaken operations concepts.
In the past two years, private airlines have attracted wide attention. At present, there are 40 private airlines. Some have obtained business approval and others are applying. Private capital’s entry into civil aviation is, without a doubt, vital to the promotion of the aviation transportation industry, as it will stimulate the market, increase national welfare, and boost social economic development. However, if too many private airlines emerge in a short period of time, this can easily result in a fierce struggle between companies for such important resources as pilots, which will then destabilize the whole industry.
Third, aviation companies are shouldering too much of the burden, and lack the energy to sustain development. The first problem is high liability. Compared with foreign airlines, the average asset-liability ratio for China’s three largest aviation companies’ is more than 80 percent, and even over 90 percent in some cases, whereas the same ratio for foreign aviation companies ranges between 60 percent and 70 percent, and can even be as low as 30 percent and 40 percent in some cases. The second problem is the too rapid rise of upstream costs and the regular fixed costs. Due to external reasons, the major costs for Chinese aviation companies, such as aviation oil, increase rapidly, while upstream unit costs remain fixed. These problems have made it difficult for airlines to operate as full market entities. The domestic price of aviation oil has always been higher than the international market price. Around the year 2000, aviation oil already accounted for 20 percent of the total cost for domestic airlines. In recent years, this percentage has increased by more than 10 percent to peak at 40 percent, making oil the single largest cost for airlines. The third problem is high tax rates. Domestic airlines have to pay tariff on imported airplane engines as well as a value-added tax that can be as high as 17 percent. Such taxes are exempted in regions and countries such as the European Union, Japan, and the United States. At the same time, many countries adopt financial support policies for airlines, such as reduced interest rates for airplane purchase.
Fourth, domestic aviation companies are generally small in scale and weak in international competitiveness. This is first demonstrated in the small number of airplanes and their limited capacity. At present, Chinese aviation companies own a total of 1,026 transport airplanes of all models, whereas a large airline in the United States usually has 800–900. The three largest aviation companies in China own a total of 22 cargo airplanes, whereas FedEx alone owns more than 610 cargo airplanes. In 2005, the three largest aviation companies in China all failed to make it into the top 20 in world ranking of world airlines for transportation turnover volume. The comprehensive transport capacity of Air China, ranking 20th, was only 27.4 percent of the capacity of the champion Air France-KLM, 42.6 percent of fourth-ranking Lufthansa, and 53.7 percent of Air Nippon, which ranked tenth.
The structure of China’s route network is unsystematic, and its over-all scale is small. The development trend of world aviation transportation shows that all large airlines in the world are hub-network airlines, while the largest airports in the world are all hub airports. For a long time, China has focused on point-to-point routes without a hub network, resulting in a general lack of support from the domestic route network, and directly undermining the international competitiveness of the three backbone aviation companies.
The operational rights for international routes has yet to be concentrated. For a long time, China’s aviation resources have been widely scattered, making it hard to form integrated power to face international competition. The usual pattern was for several domestic airlines to operate on one international route, leading to fiercer domestic competition than competition with foreign airlines. According to statistics, in 2006, there were 15 airline companies in China flying to 88 destinations in 43 countries. As many as 28 international and regional routes were operated by several domestic companies. Four domestic companies operated international routes in Beijing Capital International Airport. In contrast, in foreign countries, different routes are operated by different companies to avoid domestic competition as much as possible, so as to concentrate their strength for competing with foreign airlines.
Information systems have yet to be upgraded to comply with industrial development. Right now, no Chinese airline can provide IT products capable of competing with the world’s most advanced airlines. No domestic airline can realize all-round information services, such as online booking and paying for transfer services. This has not only impacted Chinese aviation companies’ marketing capability at home as well as abroad, but also posed potential risks to the stable operation of route networks. Without the support of advanced IT systems, an aviation company with a large capacity and wide route networks will be exposed to huge operational risks. To solve this problem, continuous efforts must be made to upgrade the supporting facilities and uplift the professionalization of civil aviation IT supporting companies.
Fifth, the air traffic control system needs to be upgraded in order to address the inadequate airspace and air route resources. In recent years, flight punctuality has become an issue of wide concern. Many factors impact the punctuality of flights, 20 percent of which are caused by the airlines themselves. Statistical data show that in 2006, 16 percent of Air China’s flight delays were due to its own internal problems. Among the rest, air route inadequacy and air traffic control were the dominant causes. Currently, of the 143 civil airports in China, the airspace of about 20 airports is almost completely saturated. The three largest airports in China are facing even greater inadequacy in airspace resources. The situation is such that not a single additional flight could take off from Beijing and Shanghai airports. This has restricted the growth in flight investment for the three largest airlines, while increasing operational costs and lowering service quality. Given the current situation of the Chinese aviation transportation industry and the inroads of foreign aviation companies, we cannot afford to just wait and see. We must act fast to come up with feasible countermeasures.
RE-INTEGRATE IN COMPLIANCE WITH MARKET TRENDS
Players in the industry generally think that the reorganization of nine large aviation companies in 2002 laid the foundations for enlarging, strengthening, and optimizing domestic aviation transportation companies. In view of the severe challenges posed by the liberalization of global aviation transportation, it is necessary to reorganize the domestic airlines once again, with a view to clearly positioning domestic airlines on the basis of product positioning and a market-based division of labor. Some airlines will develop into hub-network aviation companies, targeting the high-end market and mainly operating international routes. Some will evolve into budget aviation companies, targeting the public market and mainly operating domestic point-to-point routes. Still others will grow into cargo transport aviation companies, aiming at the domestic and international aviation cargo transportation market, and mainly engage in aviation cargo transportation and ground logistics.
This thinking on integration is of strategic importance for the cultivation of new competitiveness and a competition model for the national aviation industry in the following four ways.
First, it is good for China’s aviation transportation industry to pool the majority of its advantageous resources in international routes in order to achieve synergy. This will further help optimize the fleet structure, and give full play to the radiation advantages of each region and each geographic position in the international route network. We need to focus our energy on building international hubs in Beijing, Shanghai, and Guangzhou, as well as regional hubs in Xi’an, Chengdu, Wuhan, Kunming, Shenyang, Urumchi, and other cities, to form an ideal domestic and international route network. This will effectively elevate our international competitiveness.
Second, it is good for domestic airlines to adjust their structures, forming a model where passenger transportation and cargo transportation develop together, and the differing demands of the high-end and low-end markets are satisfied. Central state-owned, large backbone airlines, local state-owned airlines, and private airlines can rationally divide labor and develop together. In this way, the phenomenon of strategic homogeneity among aviation services and aviation companies will be eliminated, vicious horizontal competition can be effectively avoided and investors’ profits will be protected.
Third, it is good for the development of the budget passenger transportation market to meet public demands. When industry positioning and market division are clearly defined, state-owned backbone airlines will appropriately exit from feeder air routes and leisure routes to widen the development space for private budget airlines. This will also help prevent China from the encroachment of budget airlines from neighboring countries.
Fourth, it will help concentrate the cargo transportation resources of domestic aviation companies to reverse the current situation of being marginalized.
Put in the global perspective, this integrated way of thinking also complies with the experience of the aviation industry in developed countries. Countries with developed aviation transportation such as Britain, France, Germany, Australia, Canada, Italy, and others all concentrate the right to operate international routes on one airline in order to gain an upper hand in fierce international competition. Air China used to operate long-range international routes (especially European and American routes) at a loss. Over the past few years, as Air China’s operation has improved, other domestic airlines have also joined the market. They are not making a lot of profit, and some of them have even suffered serious losses. In competition, domestic airlines should be united so as to compete with foreign airlines. However, we are presently fighting one other, which only serves to benefit foreign airlines.
SEEK A WIN-WIN SITUATION THROUGH COMPETITION AND COOPERATION
In the face of worldwide competition and challenges, we should also adhere to the concept of competition-cooperation. Competition-cooperation is a future-oriented, broad-minded mode of thinking on operations that can stimulate the harmonious development of the global aviation industry. To some extent, competition-cooperation is a quality expected of a large country, and those that can effectively implement this strategy are likely to become the winners.
Competition-cooperation refers to the effort to seek partnership amidst competition, and elevate competitiveness by means of cooperation with the ultimate goal of realizing a win-win situation. Competition and cooperation are binary opposites that can attain dialectical unity on a higher level through constant conflict and adjustment. It preserves the efficiency-driven primary motivating power of competition while at the same time making up for the lack of synergy in a purely competitive environment. As the industry moves from competition to competition-cooperation, we will see a new trend of international economic and political development against the backdrop of globalization.
The profit-earning capability of a company is dependent on its ability to integrate and utilize its internal and external resources. It should be seen that economic globalization is bound to bring about industrial alliances. This applies not only to the aviation transportation industry, but also to retail enterprises such as Wal-mart, which has developed franchised chains worldwide. At a time when the aviation business is developing rapidly and experiencing fierce competition and high costs in domestic and foreign markets, not a single airline company could win this war of attrition all by itself. Therefore, the idea of competition-cooperation must be pursued, and so must the strategic principle of promoting development through alliance and concentrating strengths through integration. We must seek the right opportunity to enter into cooperation with other airline companies and organizations in all fields such as capital and business. Only then can we find the motivating power for further development.
In competition-cooperation, you first have to be powerful. The weak should never seek partnership with the strong. Otherwise the weaker party will only become the adjunct and find it hard to share in any profits with the stronger company. In the 1980s, Air China wanted to sign a code sharing agreement with United Airlines, but was refused. In 2003, as Air China had experienced significant growth, United Airlines took the initiative to come to Beijing and sign an agreement with Air China. Since then, the two companies have become good partners, supporting each other in various aspects of business.
Through competition-cooperation, Air China has been repositioning itself in the game on a worldwide scale. The Star Plan, which sealed the union between Air China and Cathay Pacific Airways, has largely improved Air China’s profit-earning capability.
On May 22, 2006, Air China signed an MOU with Star Alliance, the biggest aviation alliance in the world, signifying Air China’s entry into the organization. There are three major aviation alliances in the world—Star Alliance, Sky Team, and One World—and Star Alliance is the most powerful. Initiated by Lufthansa and United Airlines in 1997, the alliance has more than 20 aviation companies on its membership list, such as All Nippon Airways, Air Canada, and Singapore Airlines. With route networks covering 842 destinations in 152 countries, Star Alliance hires a total of 360,000 employees, owns 2,800 airplanes, provides 15,500 flights per day, and serves more than 425 million passengers. The alliance’s business accounts for 30 percent of the global aviation industry.
A Star Alliance airplane takes off or lands every three seconds. This high platform is very appealing for Air China. Joining Star Alliance will give Air China access to the alliance’s international route networks, enabling its own routes to extend to all corners of the world. Domestic passengers can buy tickets from Air China that will take them to any destination operated by Star Alliance members through a smooth transfer. Air China can also leverage the powerful sales network of Star Alliance members to largely enhance its own sales capability.
Implementation of the Star Plan and joining the Star Alliance are successful competition-cooperation moves taken by Air China toward its competitors. The effect of these moves will be more deeply felt in the future.
BE COMMITTED TO BECOMING AN INTERNATIONAL SUPER CARRIER
Global aviation alliances are playing an increasingly indisputable role in the international aviation transportation market. Since these alliances are gaining greater momentum and are taking up almost 70 percent of this market, Chinese aviation companies must join such alliances or they will be isolated.
In a bid to get their own slice of the pie, the three major global aviation alliances have accelerated their entry into the Chinese aviation market in recent years by getting in touch with all major Chinese airlines. If domestic airlines join different alliances, the competition in the Chinese market will become further complicated. At present, the competition among domestic airlines is already closely enmeshed with the race among the three external players for the largest slice of the China market. Many theoretical and practical factors need to be studied in this regard. For example, foreign airlines are mostly private-owned, and companies must comply with different restrictive mechanisms in market competition, whereas the three largest airlines in China are still state-owned, making it difficult to set up a powerful coordination mechanism in market competition. Therefore, the overall interests of the country and the industry are hard to guarantee. In the context of all the powerful airlines joining global aviation alliances, some medium and small domestic airlines, which mainly operate domestic feeder air routes, will find their survival seriously threatened.
Domestic airlines encounter similar problems in their effort to introduce foreign capital. It should be noted that investments by foreign airlines in the domestic airlines comply with the latter’s need to expand survival space in the international market. In terms of gains and losses, domestic airlines gain development capital, whereas foreign airlines get a once-and-for-all ownership of a segment of Chinese aviation resources.
We should pay close attention to the impact of foreign airlines’ investments upon the Chinese aviation industry. Domestic airlines should refrain from taking any major strategic moves unless they truly meet their interests. Otherwise the pattern of domestic airlines will become rigid, making it very hard to initiate any reorganization of the Chinese aviation industry due to the opposition of foreign airlines. The situation of “divisive rule by feudal lords” will become all the more severe in the Chinese aviation industry. If each of the three largest Chinese aviation companies has a different foreign airline as its shareholder, the strategic coordination within the Chinese aviation industry will become more difficult, the market competition will become fiercer, and, in the end, the Chinese aviation market will be sliced up and completely controlled by international super carriers.
In order to win this battle of the century, we must build a flagship for the Chinese aviation industry that can compete with international giants as a super carrier. In fact, based on the current state-owned asset management system, China is in the best position to develop a world-class super carrier of its own. The State-owned Assets Supervision and Administration Commission of the State Council has already released the Guidelines on the Promotion of the Adjustment of State-owned Assets and the Reorganization of State-owned Enterprises, raising the point that we should comply with the development trend of economic globalization, and safeguard national economic security, in our effort to cultivate large state-owned enterprise groups with international competitiveness. Accordingly, the Chinese aviation industry should create a Chinese super carrier through measures such as reorganization, merger, and integration. Only then can the Chinese power emerge on the stage of world aviation.
If we can create this world-class super carrier as soon as possible, we will be able to take advantage of Air China’s cross-holding relation with Cathay Pacific Airways, add in the strength of Air Macau, and actively develop cooperation with airlines in Taiwan, with the ultimate goal of forming a “Greater China aviation alliance.” Without doubt, this strategic plan will have significant implications for promoting communications across the Taiwan Straits, maintaining the stability and prosperity of Hong Kong and Macau, and accomplishing the cause of national rejuvenation.
The future development of the Chinese aviation industry requires the domestic market to be opened up in the right way. The market should also be further divided to ensure orderly competition. In terms of the international market, aviation companies should concentrate their energy as much as possible on developing international competitiveness. For China to evolve from a large nation in civil aviation to a strong one, one of its aviation transportation groups must secure a place among world-class super carriers.
In fact, Air China has already discussed the possibility of cooperation with the top management of some domestic airlines. We predicted that if the idea of “one integration, one unification, and one exchange” could be adopted, the two parties’ profit-earning capability would be swiftly enhanced. “One integration” refers to the integration of the two parties’ cargo transportation capability into a joint-venture cargo transportation company with international competitiveness. “One unification” refers to the joint operation of the routes that both companies operate. “One exchange” refers to the cross-holding of each other’s stocks and the exchange of senior managers in between. Agreements based on these three principles would contribute to the development of the whole Chinese aviation transportation industry, even though Air China would benefit less than our partner in the short term,
Here we need to redefine the concept of “monopoly.”
Another round of reorganization and integration among domestic airlines will most likely trigger off public concern about an “industrial monopoly.” Around 2002, when the three largest aviation transportation groups were founded, such views were expressed. Actually, there is no monopoly, just excessive competition in the current Chinese aviation market. This so-called “monopoly” has much to do with perspectives and standpoints. The U.S. Government, which advocates free competition and opposes monopoly, played a dominant role in promoting the merger of Boeing and McDonnell Douglas. On the other hand, Boeing and Airbus dominate civil airplane manufacturing in the world, and this has not been perceived as a monopoly.
In the domestic transportation market, Chinese railways and highways have been developing fast recently, due to their greatly enhanced operational efficiency and service quality. Trains now run six times faster, and represent serious challenges to the civil aviation industry. By 2020, China will invest RMB 2 trillion to construct “four horizontal and four vertical” railroad passenger transportation lines and three inter-city rapid passenger transportation systems, with a total mileage of 12,000 kilometers and at a speed of more than 200 kmph. By then, the substitution of civil aviation by the railroad will become more obvious and the traffic mileage of Chinese highways will reach 80,000 kilometers, surpassing the United States as the country with the longest highways in the world. In the medium-and short-range transportation market, highways are more flexible than civil aviation and railroads, becoming a more likely substitute for civil aviation. This means that civil aviation is not a monopoly in the transportation industry.
China now has more than 40 domestic airlines, both big and small, and it is also a destination for almost 90 foreign airlines, making civil aviation one of the industries with the fiercest competition. In view of this, the industry’s reorganization will help overcome duplicated investment, excessive competition, and resource waste. It will also lower corporate operating costs, and achieve an economy of scale, obtaining positive economic and social benefits. This is definitely not a monopoly, but a path that must be taken to promote the sustained and sound development of the industry.
Once the misconceptions about what constitutes a monopoly are eliminated, we can move forward boldly.
IDENTIFY THE DIRECTION AND OCCUPY THE COMMANDING POINT
A study on the current trends in the aviation industry points out four developmental directions for the future.
Formation of super groups. The aviation industry will exhibit more features of economies of scale and of scope. Becoming a super carrier will be the common goal. This was covered earlier in this chapter.
Professionalization and specialization. An increasingly fierce market competition means that aviation companies must elevate their level of professionalism in every link of the chain. As a result, cargo and passenger transportation will be operated separately, and specialty companies will be set up to engage in airplane repair and maintenance, ground service, and catering.
Marketization of industrial units. To put it simply, this refers to business outsourcing. The modern economy features an increasingly high degree of division of labor, and the aviation market is no exception. An aviation company is served by various specialized companies, such as airplane rental companies, pilot and crew member training companies, and global professional marketing enterprises. In the future, an airline company will evolve into a “virtual enterprise,” which carries out its passenger and cargo transportation business on the basis of an outstanding brand, and reasonably distributed aviation rights and route resources. In terms of factors of production, including fixed assets and employees, it will rely fully on division of labor. This will not only effectively reduce operational risks, but will surely lay down new rules for the game, forcing the aviation industry to pay even greater attention to the fundamentals of corporate operations, such as branding, strategic planning, and resource allocation. Both Lufthansa and All Nippon Airways (ANA) are showing signs of heading in this direction. In the past, the aviation hotels operated by ANA earned good profits, and these hotels appeared wherever ANA flights went. However, ANA sold all these hotels and spun off some businesses, such as ground services and airline catering, for market-oriented operation, so that it could concentrate on aviation transportation. This has inspired us and made us realize that Chinese airlines must no longer stick to the operational pattern of being “big and comprehensive” or “small but comprehensive.”
Internationalization of domestic competition. At present, the “open skies” policy has extended to China. Currently, China has signed 106 bilateral aviation agreements, making it a destination for more than 90 foreign airlines. At the same time, as foreign airlines have flooded into China under the “open skies” policy, foreign capital has also made its way into the Chinese aviation industry in various forms. Besides joint ventures and cooperation agreements with Chinese airlines, foreign airlines and capital have also bought Chinese aviation shares, especially those merit-based, large-cap shares. Therefore, competition in the domestic aviation market is becoming increasingly internationalized.
These four aspects reflect not only the trends of industrial development but also point to the industry’s dominant areas that are just now unfolding. And someone, very soon, must occupy these dominant areas to save this key national industry.