Star rises in China

Air China, Shanghai Airlines outline benefits alliance membership can bring

Charles Anderson
in Beijing and Shanghai

If it involves China, it’s going to be big. When Air China and Shanghai Airlines joined Star Alliance late last year - the first two carriers

‘IT integration was the most difficult lesson to learn’

Zhou Chi Chief Executive
Shanghai Airlines
to sign up from one country simultaneously - there were lavish ceremonies in Shanghai and Beijing where giant new airport terminals are nearing completion. Vice-premier, Zeng Peiyan, attended the signing ceremony in the Great Hall of the People. Sixteen of the 17 existing member carriers sent a chairman or chief executive to mark the occasion.

This was a time when China wanted note taken of the strides its airlines have made to gain acceptance in the world order. There are 57 requirements to be satisfied before a carrier can join Star Alliance and all member airline bosses must vote in favour. Membership does not come easy, however keen they may be to gain a Chinese partner.

But, as the dust began to settle and round upon round of official speeches ended, Zhou Chi, chief executive of Shanghai Airlines, was concerned with the nitty-gritty of what comes next.

Shanghai Airlines has ambitious fleet expansion plans, linked to a fast growth in international routes on the back of Star Alliance membership. Currently it has a 50-strong fleet, mainly B737s, but also including 11 B757s and seven B767s, working 80 domestic routes and to 10 Asian cities.

The carrier, founded and still controlled by Shanghai municipal authorities and which listed there in 2002, has nine B787-8s and 10 A321s on order and says it wants to double its fleet size by 2012. An unspecified number of A330s are under consideration as it looks to boost revenue from international flights to 30% of its total from the current 10% in five years.

But plans to fly to the U.S. and Europe, slated for this year when the first B787s were due to arrive, may be shelved until late 2009 because of delivery delays of Boeing’s new aircraft. And then there is the question of balancing official strategy with the aims of a private company.

“Our biggest challenge next year is introducing aircraft which we can operate on international routes and then [working out] the destinations. We have a lot of choices,” said Zhou.

Currently, Shanghai Airlines is looking at direct flights to either Los Angeles or Seattle as its introduction to West Coast services. Zhou prefers going hub-to-hub to California, in keeping with Star Alliance thinking.

“But the CAAC (Civil Aviation Administration of China) thinks Seattle is the best choice because a lot of airlines operate to Los Angeles,” he said. “Perhaps we would prefer LA, because it is hub-to-hub. This kind of strategy is Star Alliance strategy. It is very difficult to make the choice now.”

In Europe, Frankfurt has been ruled out because of a lack of slots, leaving Berlin and Hamburg – Zhou’s preference – as likely choices. “Next year we will make the final decision,” he said.

At home, where Shanghai Airlines rates second in the Shanghai market behind China Eastern Airlines (CEA) – with 18% of business compared to the state giant’s 35% - delays caused by traffic congestion might cause connecting passengers some discomfort.

“We are putting all our efforts into this,” said Zhou, who was reluctant to forecast traffic growth at home other than to say Shanghai’s World Expo in 2010 was expected to attract 70 million visitors. “But, especially when it comes to air route controls, perhaps you could ask CAAC for better ways to solve the problem. Every year, however, we do get new slots.”

The Star Alliance induction ceremonies were informed that more air corridors to Shanghai and Beijing, and across the Yangtze and Pearl River deltas are now likely to be opened to cater for extra traffic resulting from the two carriers’ membership.

Shanghai Airlines was open to outsiders taking a stake in the carrier, said Zhou, although he was less forthcoming about any plans on its part to invest elsewhere.

Across the hall, however, Air China’s chairman, Li Jiaxiang, was talking about his airline buying into someone else. And it was not CEA as had been the case when the national flag carrier continued to raise its stake in the airline in an apparent attempt to stymie Singapore Airlines’ US$920 million acquisition of CEA shares.

“Air China is interested in considering the purchase of a stake in foreign carriers, but we have to go through the process of analysis and research first to see what’s beneficial to our operations and performance,” said Li, who has since taken over from Yang Yuanyuan as China’s aviation minister.

Earlier he had appeared to reinforce his argument made in November that China needed two “super carriers” – not three as at present - capable of competing with international airlines. “The same organization can own two entities, just like carriers do in Europe,” said Li in an apparent reference to Lufthansa and Swiss International Airlines, which Lufthansa owns and which are both Star Alliance members. “They do not swallow each other up. They exist in harmony. The collaborative concept by Star Alliance should come to China.”

Air China, which has a 17% cross-holding in Cathay Pacific Airways, has 215 aircraft in its fleet and 66 more on order, including 15 B787-8s, some of which were due to arrive in time for the Beijing Olympics next August, but which will now be delayed.

Service to Pyongyang in North Korea has recently started, but Europe is a more important Air China target. Athens was added late last year and Berlin, Zurich and Warsaw are targeted for 2008. “We will definitely enlarge our international route network,” said Li who also drew attention to the business to be done between China, Japan and Korea – which have All Nippon Airways (ANA) and Asiana as Star Alliance carriers. Nine million passengers travelled between the Mainland and its North Asia neighbours in 2006.

During two days of ceremonies in China’s two leading cities, much was said about the progress the two airlines have made in securing a place alongside some of the world’s leading carriers.

And with China Southern Airlines now also a member of the Skyteam alliance, there were signs of pride in the industry’s achievements alongside optimism about the economic benefits cooperation can bring to both Star Alliance members looking for stronger route networks into and within China and to the home carriers wanting to expand internationally.

Vice-premier Zeng pointed to the opportunity alliance membership offers for the airlines to improve their management and service. He also called for them to sharpen their competitive edge in the global market.

Star Alliance chief executive, Jaan Albrecht, said with fully developed code-shares and frequent flyer programmes, new alliance

‘We had to learn from each other, we had to test each other’

Jaan Albrecht
Chief Executive
Star Alliance
members have typically grown passenger numbers by up to 10% within three years.

“If we are successful in developing the hubs [in China] and in getting the airport authorities to support a hubbing environment, we should definitely be targeting these figures,” he said.

One key is the “under one roof” concept where all Star Alliance carriers group together in the same terminal at a specific airport. Beijing Capital Airport’s terminal three, due to open in March, will follow that concept as will Shanghai Pudong Airport’s new second terminal, opening around the same time.

“Pudong’s terminal two is important because the existing terminal one was not designed with a hub concept in mind,” said Albrecht. “The new terminal has been designed to allow the easy transfer of international inbound and domestic and international outbound traffic.”

And that can pay off. Tokyo’s Narita airport, once only an international, origin and destination facility, saw a 30% growth in connecting passengers when Star Alliance joined with ANA to build a domestic hub there, he said.

Lufthansa and ANA acted as mentors for Air China and Shanghai Airlines respectively during a lead-in period that Albrecht described as intense. “The challenge we faced was not only to add two airlines and to support the integration process, but also to prepare the IT and operating infrastructures … and the move under one roof at the beginning of the new hub environment in Shanghai and Beijing airports,” he said.

Shanghai Airlines’ Zhou pegged IT integration as “the most difficult lesson to learn”. “It was hard work, but [state information provider] TravelSky put in a lot of effort to help solve the issues,” he said.

There were other challenges as well. “This was untapped territory for us,” said Albrecht. “The culture, the way of doing business in China, is different to the way we believe we do business in the western world. We had to learn from each other, we had to test each other, and we had to identify the drivers in the business in China. I’m sure it was exactly the same for the Chinese carriers, even though Air China is building formidable international exposure.

“The customer has to get the assurance that whenever he connects from one flight to another the seamless service is guaranteed. This is where cultural aspects play an important role, especially for the frontline staff. Everybody has to learn, they have to adapt. But we have a good feeling that they will.

“We have spent so many hours coming here, working with our colleagues in Shanghai Airlines and Air China, to educate the travel trade, the media, the employees and the corporate accounts based here.

“Ten years ago, who spoke about alliances? No one. We have invested huge amounts of money explaining to the customer what this means. China, not having been part of an alliance, has been no different.”