How the rise of China’s airlines will affect American, Delta, United

An Air China Boeing 747-400.AP

• China‘s airlines are growing in their prominence and capabilities.
• China’s three largest airlines, Air China, China Eastern, and China Southern are state-owned. The fourth largest Chinese carrier is Hainan Airlines, which is civilian run.
• Chinese airlines have been accused of flooding the market with cheap subsidized airfares, which are great for consumers but bad for rival airlines.
• For American, Delta, and United, Chinese airlines can serve as both valuable partners and competitive threats. 

China is rising.

As the world’s second-largest economy, the Middle Kingdom now has the mega-airlines to serve its burgeoning masses of middle-class travelers. 

Chinese airline passenger traffic skyrocketed from 413.5 million people in 2013 to 589 million in 2017, Routesonline reported. That’s a colossal 42% increase in just five years. 

Incredibly, Chinese customers account for 20% of Boeing’s entire order book. 

And their rivals have certainly taken notice.

“China and China’s airlines are not sleeping giants,” Emirates Airline president Sir Tim Clark told Business Insider in an interview earlier this year. “They are growing rapidly…and the Chinese know the criticality of air travel to their economy.”

Over the past two decades, Chinese airlines have built up well-developed domestic networks. Now, they’re expanding internationally. 

Meet China’s airlines

The modern era in Chinese aviation started in 1988 when the Civil Aviation Administration of China or CAAC made the decision to disband its eponymous airline into six smaller state-owned carriers spread throughout the country. CAAC exists today, but purely as an industry regulator. After a few rounds of consolidation, only three of the carriers remain — Air China, China Eastern, and China Southern. 

A China Eastern Boeing 777-300ER.Flickr/BriYYZBy the late 2000s, privately-own Hainan Airlines had grown in scale and importance to form the fourth member of the quartet. 

Guangzhou-based China Southern is the largest of China’s airlines. With a fleet of nearly 600 aircraft, it’s also the largest airline in Asia. The only airlines in the world with more planes that China Southern are American, Delta, United, and Southwest. 

The second largest is Shanghai-based China Eastern with more than 500 aircraft. Air China is the most direct descendant of CAAC Airlines. In fact, it was operating many of CAAC’s flagship international routes. Air China is also the smallest of the three with a fleet of around 400 aircraft.

Read more: Here are all of the countries not allowed to fly into the US.

Hainan, a subsidiary of travel giant HNA Group, is the country’s largest privately owned international airline with about 225 aircraft and is the only one with a five-star rating from consumer aviation website Skytrax.

In fact, Hainan was rated the eighth best airline in the world for 2018 by Skytrax. 

How China’s airlines affect America’s airlines

So the question must be asked, what effect with they have on major US carriers like American, Delta, and United?

The answer to this question is rather complex. 

A China Southern Airbus A380.AirbusOver the past few years, American, Delta, and United have waged an all-out assault on Emirates, Etihad, and Qatar Airways. The US carrier accused the Middle Eastern carriers of allegedly receiving $50 billion in government subsidies over the past decade. According to the US carriers, the trio of Persian Gulf-based airlines have used this money to unfairly distort the competitive balance of the marketplace in violation of the OpenSkies agreements that govern air travel between the US and their countries of origin.

The Middle Eastern carriers have long denied these claims. But they aren’t the only airlines that have been accused of being propped up by subsidies. 

Read More: Emirates Airline profits are down by 86% and things may not get better soon.

“China’s state-owned airlines have gotten as much as, if not more, in subsidies over the years than the guys in the Middle East,” Henry Harteveldt, a travel industry analyst for Atmosphere Research Group, told Business Insider.

For example, Chinese airlines received $1.3 billion worth of subsidies in 2016 alone just from lower-tier municipal governments looking to develop non-stop international flights to their cities, Bloomberg reported.

The result is that Chinese carriers have flooded the trans-Pacific market with subsidized seat capacity. This has caused prices to bottom out. This is great for the consumer but makes things awfully tough on those trying to compete on routes. 

A Hainan Airlines Boeing 787-8 Dreamliner.BoeingAs fuel prices continue to creep back towards $100 a barrel, US airlines are certainly feeling the pinch.

So why haven’t the US carriers complained?

“The US carriers, unfortunately, do not have a leg to stand on in terms of the subsidies for some of these long-haul routes simply because there’s no OpenSkies agreement with China, therefore, there isn’t the protection it affords.,” Drusch explained.

And then there are the business ties.

China’s major airlines all have long-standing business relationships with their US rivals. China Eastern and China Southern (until the end of the year) belong to the same Skyteam airline alliance as Delta. While Air China and United both belong to the Star Alliance. 

Read more: The 10 best airlines in the world for 2019.

Taking it one step further, Delta spent $450 million in 2015 to acquire a 3.55% stake in China Eastern. Delta also has an observer seat on China Eastern’s board of directors. Last year, American Airlines invested $200 million to buy equity in China Southern.

“Delta has made it very clear that their plan is to, with China Eastern, build Shanghai into a major connecting hub between the US and the interior of China,” ICF vice president of aviation commercial advisory, Mark Drusch, told Business Insider.

According to Drusch, American has plans for a similar growth strategy by taking advantage of China Southern’s new mega hubs in Guangzhou and Beijing. 

Are they friend or foe?

In many respects, Chinese airlines are both friend and foe for America’s big three. 

Even though China’s airlines compete for business across the Pacific, it’s a significant source of connecting business for US carriers. Once they reach the US, Air China’s passengers connect onto United while China Eastern’s use Delta. China Southern passengers connect onto American and Delta. Hainan’s passengers use Alaska Airlines and JetBlue. And vice versa on China-bound flights. 

“I don’t think at this point in time they are a threat as much as they are combined (with a US partner), a smart way of further developing the Chinese market,” Drusch said. “The market is profitable for US carriers. In the aggregate, US carriers do make money flying to China, full stop.”

According to the former Delta and Continental executive, the recent failure of several United and American airlines routes in China can be blamed more on poor timing and overcapacity than Chinese competition.

An Air China Boeing 777-300ER.BoeingFor example, United abandoned both its San Francisco to Xi’an and San Francisco to Hangzhou flight last year because they were two of the worst performing routes in their network. Drusch attributes this to the fact that both of the Chinese destinations are secondary cities with travel markets that aren’t quite mature enough to handle such a flight. 

While American’s decision to end its Chicago to Shanghai and Chicago to Beijing flights is due to the fact that AA is the secondary carrier in the Windy City. It doesn’t the have the same level of connectivity as Chicago-based United, which is why American has decided to better focus their resources on Dallas and Los Angeles where they are much stronger. 

Finally, the strength of US airlines lies with its domestic business. For example, Delta’s domestic operations generated $7.4 billion in revenue during the third quarter of 2018. Its Pacific operation did just $730 million. 

“No foreign carrier can beat American in Dallas or United in Chicago or Delta in Atlanta. You just can’t,” Drusch explained. “They fall back on their strengths which are their primary hubs and all of the traffic from the US and other parts of this hemisphere they can collect and put on an airplane. “

Harteveldt takes a slightly less optimistic view. 

“These Chinese carriers are a mixed blessing of sorts for US airlines,” Harteveldt said. “The feeder traffic is great, but I’m sure US carriers would rather be making the money from the international flights.”