International airlines fly into the unknown

Updated: 2012-06-02 11:47

By Todd Balazovic (China Daily)

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International airlines fly into the unknown

Global airlines such as Scandinavian Airlines are ready to take off in China, particularly in second- and third-tier cities, where they find real opportunities for growth. [Photo/China Daily] 

Travel to China's rapidly developing destinations is set to take off to new heights as international airlines eye expansion plans in the nation's flourishing second- and third-tier cities. With the untapped growth of China's hinterlands luring multinational companies, as well as curious travelers, away from high-cost commercial centers such as Shanghai, Guangzhou and Beijing, international air carriers are following suit and discovering new emerging markets to serve as transportation hubs.

"It's a chicken and egg scenario," said Welf Ebeling, regional director for the Global Business Travelers Association Asia. "Sometimes industry goes into a destination first and the airlines follow, sometimes it's the other way around."

Almost every major airline worldwide has a foot in the door of China's air market via the top-tier cities, but with the rent and wage rises in these over-saturated mega metropolises, the real opportunity for growth is in the untouched potential of China's second- and third-tier cities, from Urumqi to Xiamen.

"First, airlines all went to Beijing and Shanghai, but now, in order to stay competitive, they are heading to second-tier cities," Ebeling said.

Although no solid definition exists, second-tier cities are described informally as the provincial capitals, with third-tier referring to any county or prefecture-level capital.

Finding its wings early, the German airline Deutsche Lufthansa AG opened two new routes last month, enabling easy access for business people traveling back and forth from Frankfurt to Shenyang, capital of Liaoning province, and to Qingdao, a coastal city in Shandong province.

"Lufthansa's strategy is to grow with our customers," said Juerg Christen, managing director for Lufthansa in China.

He added: "When they show a considerable demand for mobility and new destinations, we are happy to provide those connections when they make sense economically."

But for Christen, calling such cities second- or third-tier is difficult, considering both of Lufthansa's new destinations in China dwarf even the largest of Germany's cities.

It's the sheer size of China's 23 second-tier cities that has made the shift so alluring for international carriers. Several have populations of 5 million or more.

Lufthansa, which in 1926 was the first international airline to fly to China, is among several now flying to destinations less well-known to the outside world.

Finnair began operating its first direct flight from Southwest China to Europe in May, running four weekly flights from Chongqing to Helsinki. Its new route is expected to boost passenger numbers by at least 100,000 annually.

Qatar Airways has also recently added Chongqing to its destination list.

Other hot second-tier destinations for international travel include Dalian, Shenyang, Fuzhou and Kunming.

But in the airline industry, where something as simple as a slight shift in the price of oil can quickly send revenues into the red, opening such routes carries huge risks.

"It is extremely expensive to open a new route," said Lars Olofsson, general manager for Scandinavian Airlines in China. "It's a multi-million dollar investment.

"Some international airlines are operating in various second- and third-tier cities and are not profitable."

Even after opening a new route, it can take up to two years before it begins to turn profitable.

Docking, equipment rental, employee wages and plane maintenance costs quickly add up, when airlines are already suffering hard times due to the global financial crisis.

Last year, they yielded only $8 billion in profits, down from $16 billion in 2010, with only $3 billion expected this year, according to the International Aviation Transport Association, which represents more than 230 airlines from 180 countries.

Adding to the burden of fuel and air navigation costs, the fees charged for certificates and services at airports in China are among the highest in the world.

Olofsson says SAS is using partnerships with Chinese airlines, primarily Air China Ltd, to utilize their Beijing and Shanghai routes as a base to explore new locations.

"From there we can determine which cities are most likely for us to expand into," he said.

He said the airline is currently researching areas including Suzhou, Ningbo and Hangzhou, all cities with heavy Scandinavian influences.

However, if global airlines want to maintain revenues and look to new cash streams, China is a must, said Tony Tyler, director-general and CEO of the IATA.

"China is a big market and it's growing fast. It's a no-brainer that you're going to want to be here," he said.

The driving force behind the growth is not fueled solely by Western multinational companies moving away from China's main cities. The real potential lies in the increased number of Chinese travelers venturing out of the country.

By 2015, the number of Chinese traveling by air is expected to grow to 212 million - a quarter of the projected 815 million worldwide.

Currently, the average US citizen is expected to take two air trips per year, compared with an average of 0.2 for Chinese citizens.

"When the Chinese travel as much as the Americans do - considering the population here is six times that of the United States - just think of the number of passengers that will be," Tyler said.

"That's why the airlines want to be here. In the long run, you must be in the Chinese market."

In 2001, there were just 32.5 million seats per year on international flights operating to and from China, compared with 92.4 million last year.

And that number continues to rise, with an expected 10 percent growth in the number of airline passengers China-wide in 2012, according to statistics from the Civil Aviation Administration China released last month.