Leading Asian airlines are gaining a valuable competitive advantage from their proximity to China, as this market’s enormous potential transforms into rapid growth. The big question now is how long it will take China’s own carriers to exploit the boom and join the Asian giants in the industry’s top echelon.
A notable theme of the latest Aviation Week Top-Performing Airlines (TPA) study is the dominance of carriers with high exposure to the Chinese market. These airlines feature even more heavily in the most-improved list, suggesting that this trend will only strengthen in the future.
North American carriers generally improved, but airlines from the Asia-Pacific region—and to a lesser extent Latin America—figure more prominently at the head of the rankings. The five-member TPA council of advisers, which is comprised of veteran consultants and analysts, agrees that this is no surprise, as these regions contain the markets with the most growth potential. The European heavyweights, with the notable exception of, continue to lag.
Of the Asia-Pacific carriers, those best positioned to tap into China demand are among the strongest performers. This is true of(SIA)—the top-scoring mainline carrier for the sixth time in seven years—and second-place Cathay Pacific. Also in the top 10 are and Taiwan’s , which are both increasingly reliant on China routes.
The list of the top 10 most improved airlines reinforces the China effect; Korea’ssaw the biggest score increase, followed by and the two major Taiwanese carriers. In each case, the booming Chinese economy helped propel their rise.
TPA adviser Craig Jenks says the preponderance of “China periphery carriers” on the most-improved and overall rankings lists is hard to miss. SIA and Cathay are obvious examples, since they both rely heavily on connecting traffic in this region.
Others also fall into this category. Having gained increased access to China routes, Taiwan’s EVA Airways and China Airlines can act as “hub carriers into the mainland,” says Jenks. Airlines from Korea and Japan are also placing more emphasis on China service.
Michael Dyment, another TPA adviser, citesprojections that traffic within the Asia-Pacific region will grow three times faster than in North America. And China is rapidly overtaking Japan as the key driver of intra-Asia traffic.
The mainland Chinese carriers are at the heart of this market, but they are lower ranked. They need to continue strengthening their brand value, product and service levels to match their regional competitors, says TPA adviser Bryan Terry. These are important factors in building customer loyalty and boosting yields, he says.
“If you look at the [overall] rankings, the big three Chinese carriers are still not particularly impressive and are still being outperformed by the likes of Singapore, Cathay,and ,” Jenks says. “But if you look at the most improved, then China Southern and are very high. This is significant.”
An important caveat is that the Chinese airlines’ growing financial strength is inflated by their government’s “very bold infusion of equity since 2009 into what it sees as its consolidated carriers,” says TPA Project Manager Michael Lowry.
Terry notes that “the markets are speaking loud and clear regarding their future view of the industry,” with Air China having the largest market capitalization of any carrier worldwide and with China Southern andalso in the top 10 under this measure.
The nature of the transpacific market will eventually change, TPA adviser George Hamlin believes. “Right now, the dominant market is Japan, both for local and flow traffic, but the dominant market is going to become China,” he says. The rising influence of the Chinese carriers obviously has huge implications for airline alliances. Jenks says thealliance was previously weaker than the other groupings in the high-growth China market, and it has attempted to rectify this by adding China Eastern and China Southern as members. This pair may not add much value now but will definitely do so in the future. As Hamlin points out, “In 20 years’ time, who do you want as your linchpin airline partner in the Pacific, or a Chinese carrier?”
Of course, the China influence is far from the only reason airlines such as Cathay and SIA shine in this year’s rankings. These two carriers have consistently been among the top scorers. SIA achieved the highest attainable score of 99, the first time this has occurred in the recent history of the TPA study. As Lowry says, SIA “really hit it out of the park this year.” And Cathay achieved a score that would have ranked first in previous years.
Jenks says that while conventional wisdom holds that SIA relies on the advantageous location of its connecting hub, good management is much more of a factor. “Singapore Airlines is carrying people on significant geographical deviations, because it—together with—is so good at what it does,” he says.
A regional breakdown sees a much more varied picture, though. Latin American carriers performed well, with Copa Airlines andin particular building further on their high rankings from last year. The pair are positioned sixth and 11th this year, respectively, with TAM Linhas Aereas following closely in 12th position.
Copa continues to reap benefits from its strong connecting hub in Panama City, helping it achieve some of the best operating margins in the industry. The airline was second only to SIA in its TPA financial health rating. TPA adviser Raymond Neidl says he “never thought anything with wings on it could bring a company profitability like that.”
Consolidation has changed the landscape of the Latin American industry dramatically, and LAN has been a major beneficiary. After its merger with Brazil’s TAM and purchase of Aires Colombia, LAN “will be in every major growth market in Latin America,” Neidl says.
The standard-bearer for North American carriers is once again, last year’s top-performing airline in the mainline category. While Alaska has only lost two points from its total score, SIA and Cathay both gained enough to surpass it. And while the U.S. majors all saw double-digit increases in their total scores, the overall improvement throughout the category kept them in the mid-to-lower range in the rankings.
The European mainline sector, meanwhile, has been relatively lackluster in its performance in this year’s TPA study.- and languish near the bottom of the table, and even SAS Group and , in the top 10 last year, have plummeted.
One glaring exception to the poorly performing European sector is Lufthansa. Traditionally a mainstay of the top five, it climbed to third in this year’s rankings. It is the highest-rated of the carriers with more than $20 billion in annual revenues.
(For complete charts listing rankings and further stories on regional and low-cost carriers, see the July 11 issue of Aviation Week & Space Technology. AWIN subscribers can see an expanded version online at AviationWeek.com/awin/TPA).