China Southern Airlines Co. (1055) is undercutting Qantas Airways Ltd. (QAN) by as much as 34 percent on the cost of Sydney-to-London tickets and from April 1 will operate more flights to Europe than the Australian carrier. The Guangzhou, China-based airline said it’s ready to sacrifice profitability as it lures traffic from Singapore and Hong Kong.
China’s three biggest carriers, including Air China Ltd. (601111) and China Eastern Airlines Corp. (670), have tripled flights from Oceania to Europe over the past five years, while upgrading services. The route will provide experience needed for further expansion into North America and Europe as annual spending by Chinese tourists exceeds $100 billion. Qantas is fighting back with discounted fares to Asia.
“The sheer volumes of travelers mean that eventually China can be the most powerful transit country in the region, probably the world,” Peter Harbison, executive chairman of CAPA Centre for Aviation, said by e-mail. “They will be able to price very, very competitively.”
The shift is squeezing carriers on the route, which started in 1935 with a 12 1/2-day trip between London and Brisbane. Stopovers once included Brisbane, Darwin, Singapore, Bangkok, Calcutta, Karachi, Cairo, Rome and Frankfurt, according to Aussieairliners.org, giving rise to the trademarked Kangaroo Route nickname.
Revenue passenger kilometers, a measure of traffic, declined for ten months at Qantas and five at Cathay (293) Pacific Airways Ltd. on reduced capacity between Europe and Oceania, according to data compiled by Bloomberg.
Cathay and Singapore Airlines Ltd. stand to lose from the Chinese carriers’ growth, said K Ajith, an aviation analyst at UOB Kay Hian Holdings Ltd. Transit passengers make up about 30 percent of traffic at Singapore’s Changi Airport, spokesman Ivan Tan said by e-mail.
China Eastern shares rose 1.9 percent to HK$3.23 in Hong Kong trading. Air China fell 1.9 percent and China Southern declined 1.2 percent.
Qantas shares rose 2 percent to close at A$1.745 in Sydney trading, while Cathay fell 0.4 percent after reporting annual profit that beat analyst estimates and Singapore Air advanced 0.2 percent.
The lowest price for a non-Chinese airline, on Malaysian Airline System Bhd. (MAS), was 19 percent more expensive at A$1,721. Emirates tickets started at A$1,896 while Singapore Air’s was at A$1,940.
The cheapest Qantas ticket was 51 percent more than China Southern, at A$2,180.
Air China and China Eastern put an inch more leg room than Qantas in economy class while China Southern leased one of Sydney Airport’s most expensive billboards for three years and put massage chairs in first-class cabins.
“At the beginning of the operation we might lose some money,” said Henry He, China Southern’s managing director for Australia and New Zealand. “The most important thing for us is experience.”
China Southern has 42 weekly flights out of Australia. Qantas will reduce its service to 28 a week as part of a tie-up with Emirates.
Every week, 74 flights travel through mainland China, up from 21 five years ago and compared with 98 each through Emirates’ Dubai hub and on Singapore Air (SIA)’s network through Changi, according to a Dec. 20 report by the Australian Competition and Consumer Commission. Cathay flies 70 times a week to Australia, said Dominic Perret, southwest Pacific operations general manager.
Competition on Australia-to-Europe routes will probably intensify, said Andrew Orchard, an airline analyst at CIMB Group Holdings Bhd.
Chinese tourists, who spent $105 billion overseas in 2012, are forecast to make 94 million trips this year, almost double the level in 2009, according to China Tourism Academy reports.
There is “huge potential” for routes to Australia, China Eastern said in a statement. It plans to “deploy better aircraft” and add flights to Melbourne and Sydney.
Still, Chinese carriers’ service falls short, said Paul Sheridan, chief Asia consultant at Ascend Worldwide Ltd. First- class passengers get on-board showers on Emirates and sheepskin mattress covers on Qantas’s beds. Singapore Air’s cabin crew train for 15 weeks.
The Chinese carriers “are on our radar,” said Simon Hickey, head of Qantas’s international unit.
The competition “keeps us on our toes,” Singapore Air spokesman Nicholas Ionides said by e-mail.
China Southern flies five Airbus A380s and has ten Boeing 787 Dreamliners on order. It’s recruited Australians as cabin crew and is setting up a school for elite stewards.
“If we want a good future, we should develop worldwide,” He said. “Napoleon said: if the soldier doesn’t want to be a general, he won’t be a good soldier.”
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