Guangzhou-based China Southern Airlines Company is the biggest airline in China in terms of fleet, flights and passengers carried. By the passenger yardstick, it is No. 1 in Asia and the third largest in the world. However, its international footprint is still very small.
In 2005, Southern Airlines shifted strategy from being a point-to-point model domestic company to becoming a hub-based, international airline. The carrier has entered global markets aggressively in the past two years by leveraging Guangzhou's position as the biggest center in South China. The first international target was Australia, where Guangzhou has an edge because of its proximity. That has worked; in 2011, Southern Airlines carried 600,000 passengers on this route and has emerged as the largest player. It is now targeting Europe, with the objective of becoming the hub in a "Canton Route" between Europe and Australia.
But there are challenges. External demand has been shrinking and the high price of aviation turbine fuel has impacted the company’s finances. But cost control and other measures will see the airline through this difficult phase, says Tan Wan Geng, CEO of Southern Airlines, in this interview with China Knowledge at Wharton.
An edited transcript of the conversation follows.
China Knowledge at Wharton: Compared with last year, the airline industry is facing a more challenging environment now. How do you view the market for the rest of 2012?
Tan Wan Geng: This year is definitely worse than last year in terms of the macro-environment. In the first five months, margins have declined, mainly because of soaring oil prices, the slowing down of yuan appreciation [making oil imports costlier], and reduced demand from the European market. We expect a squeeze on profits.
China Knowledge at Wharton: How is Southern Airlines tackling this?
Tan: If we look at the rise and fall of U.S. airlines, we see that although all the companies that went bankrupt had different stories, they shared one thing: They were not cost effective. The survivors all enjoyed cost advantages. What we have learned from these companies is to watch our costs even in a more optimistic market environment. We believe only cost-effective companies can survive both good and bad times.
For airlines, costs that can be controlled account for a small portion of total costs. Most of the pie is oil and aircraft [purchase] costs. Our cost-control strategy involves monitoring daily operations, including maintenance and purchasing, and all kinds of oil-saving measures. For example, ensuring that our planes fly at the best level and in the best weather contributes to oil saving.
We are also restructuring our fleet. We have weeded out old models such as the McDonnell Douglas 82 and 90 and the ATR72. The Boeing 737-300 will be phased out next. An optimized fleet will not only improve fuel efficiency, but also reduce maintenance costs.
China Knowledge at Wharton: Talking of fleet restructuring, Southern Airlines is the first to fly Airbus's A380 super-jumbo in China, and will be the first to get a brand-new Boeing 787 Dreamliner on board soon. What do you plan to do with these two new aircraft?
Tan: Southern Airlines is always open to getting new models on board, so we have taken the lead in buying the Airbus A380 and the Boeing 787. The first Boeing 787 is expected in the third quarter the earliest and we plan to deploy it on the Guangzhou-to-Europe and America routes.
The A380 is being used on the Beijing-Guangzhou and the Beijing-Hong Kong routes. It will be deployed on international long-distance routes soon. That will optimize its operations.
China Knowledge at Wharton: Southern Airlines has become the biggest carrier in terms of passengers carried from China to Australia. How did you achieve that in just two years?
Tan: Southern Airlines started a strategic transformation as early as 2005. We tapped consultants and did a lot of deep thinking. We finally decided to change from a point-to-point airline to a hub-based, network-operating international airline company. To help this process further, we set up a strategic transformation office in September 2009. We assembled team members from various departments of the company to offer organizational support for the transformation.
The first breakthrough was on the routes to Australia. Guangzhou is the most efficient hub for passengers across China to fly to Australia. It’s two hours faster from Guangzhou than from Shanghai or Beijing. We concentrated our efforts on this route. We promoted ticket sales through our nationwide networks. We rescheduled our flights to ensure that every passenger from anywhere in China could connect to a flight to Australia within two-to-four hours after he or she arrived at Guangzhou.
Our convenient transit service is an important measure as well. We have improved the efficiency of check-in procedures from last year. Right now we offer “check-in once, one-stop service” in 46 airports in China and 20 airports outside China for passengers who fly via Guangzhou. The luggage goes to the destination automatically.
We have built up a national network for flights to Australia. In 2009, we had only three Guangzhou-Melbourne flights and seven Guangzhou-Sydney flights each week. Today, there are 42 flights every week from Guangzhou to Sydney, Melbourne, Brisbane, Perth and Auckland. Passenger traffic from Guangzhou to Australia and New Zealand has grown at 132% from 148,000 in 2010 to 343,000 in 2011. Southern Airlines carried nearly 600,000 passengers [both ways] on the Canton Route in 2011. We are the biggest on this route.
China Knowledge at Wharton: What are your future plans?
Tan: Next on the agenda is London. On June 6, we started the first direct flight from Guangzhou to London. It is the first long-distance international route we have started this year. This will enable us to carry more passengers to Australia and Europe, and strengthen our Canton Route. We are looking at Southeast Asia also, and other international markets.
China Knowledge at Wharton: Can you tell us more about the Canton Route?
Tan: There is a famous Kangaroo Route in the airline industry which is the Australia-Europe route via Hong Kong, Singapore or Dubai. These are among the most profitable and competitive routes. Data shows that there are more than 1 million passengers using these hubs for London alone every year. Passengers from London to Southeast Asia via these three hubs are also nearly 1 million.
In terms of geographic location, Guangzhou is very competitive. It is the nearest to Australia. For international routes between Europe and Australia, Guangzhou has the same deviation rate [a measure of the angle from the straight-line route] as Hong Kong and Singapore. This makes it an ideal air transit hub as well. The Canton Route was launched to connect Europe with Australia.
The load factor for the first flight from Guangzhou to London reached nearly 90%. The average load factor for flights in June crossed 80%. Nearly half the tickets are sold in Australia and New Zealand. Most of the passengers are from Sydney and Melbourne.
We are planning to explore more international routes in the future, and will continue to increase the flights to major cities in Australia. By the end of 2015, we aim to have more than 110 flights every week to and from Australia. We are planning to increase our flight schedule to Southeast Asia. In addition, we will expand the network to South America, Africa and Europe, with the aim of building Guangzhou into a real global hub.
China Knowledge at Wharton: The eurozone crisis has weakened external demand. Will Southern Airlines slow down its global expansion?
Tan: We have to take these external elements into account and carefully review these issues. However, from a longer perspective, you can’t stop your international steps when the external market is performing weakly. It takes time to cultivate the international market. It is therefore important to take the time to gradually cultivate new opportunities when the market is not doing well.
On the other hand, more international flights will improve domestic flights load factors. For example, 53% of the passengers who fly Australia-Guangzhou do not end up in Guangzhou. They fly from Guangzhou to various destinations across China.
China Knowledge at Wharton: What are the challenges for your international strategy? What disadvantages do you have compared with global airline companies?
Tan: The gap between first-rate global airlines and Southern Airlines is mainly in the ability to explore new overseas markets and the marketing and management talent pool needed for that. There is also a gap in terms of service level, especially in language communication, cultural communication and food service. However, Southern Airlines has an extensive domestic flight network. The foreign companies may have the advantage of management talent, but their market is contracting. For Chinese airlines, it is the opposite. We have a growing market but not enough management talent. For Chinese airlines, there are therefore both opportunities and challenges for the next several years. We have to not only grow well in the domestic market, but also further expand our market share in global markets.
China Knowledge at Wharton: What are you doing in the domestic market?
Tan: From a strategic perspective, for Southern Airlines, Guangzhou may be the core hub, but Beijing has also been chosen as a major hub for international flights to Europe and America. Urumchi [capital of Xinjiang province in Northeastern China] is the core hub from middle-Asia to China. Chongqing [in Central China] is a plateau hub to transit passengers to Tibet and Sichuan province.
Due to the saturation of the current Beijing airport, we signed a strategic cooperation agreement with the Daxing District Government of Beijing last year on building a new Beijing International Airport. This is expected to be completed by 2017. In Chongqing, we started Chongqing Airline in 2007, a joint venture between Southern Airlines and Chongqing Development Investment Company. This has around 20% market share in the Chongqing market today. We expect to expand the Chongqing hub from a plateau hub to a key hub to connect domestic two-and-three-tier cities in the future.