Dogfight over China’s skies

Competitors of Hainan Airlines unite to throttle its low price strategy

Dogfight over China’s skies

Shu: “Fly Hainan. Why pay more?"

The leading lady in Feng Xiaogang’s blockbuster film If You Are the One plays an air hostess. For close observers of China’s aviation scene it will come as little surprise which airline she’s flying with.

Indeed, while her appearance serving drinks in the business class cabin occupied only a few minutes of the movie, the sight of the actress Shu Qi in the livery of Hainan Airlines was a masterful few moments of product placement. Then again, such a publicity coup is to be expected where China’s most aggressive carrier is concerned.

Hainan has been in the news a lot lately – thanks to its bubbly property market, its astronomically high hotel room rates over Chinese New Year, and rumours it will be allowed to open casinos and even allow gambling on horse racing (see WiC48). Not to be outdone, the tropical island’s airline has also grabbed headlines too.

To the fury of its competitors, it has been massively discounting fares on seven routes that depart from the capital of Sichuan province, Chengdu. In order to drum-up off-season traffic in January it slashed the prices by 70%, according to the Chengdu Business Daily.

Retaliation was swift. The country’s big three airlines – Air China, China Eastern, China Southern – along with regional player Sichuan Airlines got together to thwart this aggressive move, ordering travel agents in Chengdu not to sell any Hainan Airlines tickets.

Ticket agents didn’t have much choice but to comply, as they were told by the rival carriers that if they sold Hainan Airlines fares they’d be barred from selling seats on the other four airlines. A local ticket agent told China Enterprise News it was a simple business decision: “Air China, China Eastern, China Southern and Sichuan Airlines have a much larger number of customers [in aggregate] than Hainan Airlines, so it is not worth our while to let Hainan Airlines affect our sales performance.”

The four airlines even convened a meeting of the larger ticket agencies, and told them they would audit the tickets they sold, to check whether they were violating the ‘blockade’.

Adam Smith would readily recognise this as a classic example of a collusive cartel trying to fix prices. In the US an antitrust suit would get filed. But China is not the US and it is not hard to see why the cut in fares prompted such a fierce reaction. Until recently, China’s big three airlines have been losing money – thanks to higher fuel costs and bad derivatives bets. They have only slowly nursed their way back to profitability. The last thing they need is a price war.

The country’s aviation regulator meanwhile wants profitable airlines too: it has mandated that fares should be set on the basis of ‘cost plus profits’. Rather than intervene in this fracas, it has stood back, taking the view perhaps that the four carriers have merely penalised Hainan Airlines for ‘dumping’ tickets below cost.

Since the bulk of Hainan Airlines tickets were previously sold through agents, the impact of the blockade has been severe. A member of the carrier’s Chengdu sales department admitted to newspapers that it had been “disastrous”, with sales down 30%.

So far Hainan Airlines has refused to succumb to the pressure from its rivals. Instead it has overhauled its sales strategy: it now bypasses agents and sells its cheap Chengdu flights on its website and via mobile phone text messages.

And China’s fourth biggest airline may well have the financial muscle to brazen out this price war. It is the core asset of the HNA Group, a Hainan-based conglomerate that began in aviation but now straddles eight industries, employs 70,000 staff and last year had revenues of Rmb45 billion ($6.58 billion).

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