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Spring, Juneyao target overseas market

2009. 29 July

by Wang Xinyuan
( Spring Airlines and Juneyao Airlines two privately run carriers based in Shanghai, are seeking permission to operate overseas flights to capitalize on the 2010 World Expo in Shanghai.

However, industry analysts said yesterday that their push to expand might not necessarily reap immediate profits but create a larger market share and the chance to offer IPOs in the future.

Spring Airlines, known for its low-cost flights and non-existent in-flight service, expects to get the nod from the Civil Aviation Administration of China (CAAC) by the end of the year. It plans to provide flights to Hong Kong, Macao, Southeast Asian region, plus Japan and South Korea, according to Zhang Wu’an, spokesman of Spring Airlines.

“We want to grab the business opportunity of the World Expo in Shanghai next year, which will surely attract numerous tourists from overseas,” Zhang said.

Juneyao Airlines filed its application with CAAC for overseas routes and expects to win market access to Hong Kong, Macao and eventually to the Southeast Asian region, Japan and South Korea within the year, Xinhua quoted Wang Junjin, chairman of Juneyao Group as saying.

The carriers want to boost their values, occupy market resources and prepare for future listings to earn financing. To get listed, they need to expand and offer the maximum value, Zou Jianjun, a professor at Civil Aviation Management Institute of China, told the Global Times.

“It’s hard to make a profit on the overseas market facing competition from foreign carriers which have advantages with their service and brand awareness,” said Yu Jianjun, a civil aviation industry analyst at Huatai Securities.

“Whether their overseas presence is successful depends on their market positioning,” Yu said.

Juneyao airlines traditionally targets business passengers including the middle and high-end markets, while Spring Airlines targets tourists with low-fare flights organized through China Spring Tour, a travel agency under Spring Airlines, according to Zhang.

Air routes to Japan and South Korea are currently saturated and the profit margin is limited, Zou said.

If domestic airlines rely on low fares for overseas market share, it’s doubtful whether they will make a profit given that AirAsia Airlines have entered the Chinese market, Zou added.

The Malaysia-based regional airlines claims to be the world’s best low-fare airlines, serving Malaysia and Southeast Asia.

Juneyao Airlines will have larger operational risks since it targets individual passengers and it’s difficult to guarantee the number of passengers. It also lacks overseas experience and market recognition, a source at CAAC told Beijing Business Today (BBT) newspaper.

Although the domestic aviation market has started to bounce back and has grown by 28 percent in June, overseas traffic in June decreased by 12 percent over the same period last year, according to a Guotai Junan Securities report.

Compared to the same period last year, the overseas scheduled traffic showed a 9.3 percent drop in passenger demand in May due to the weak economy and A(H1N1). Freight demand in May was down by 17.4 percent.

Asia-Pacific carriers recorded a 14.3 percent drop in demand, according to the International Air Transport Association.

Three giant State-owned carriers dominating China’s civil aviation market – Air China based in Beijing, China Southern Airlines based in Guangzhou and Shenzhen and China Eastern based in Shanghai – all suffered losses from their international flights last year.

Air China’s operating income in 2008 fell by 12.88 percent year-on-year for flights to Japan and South Korea. China Eastern’s operating income from overseas flights plunged 9.29 percent, and China Southern’s dropped by 4.03 percent year-on-year.

Meanwhile, many privately-owned airlines, such as United Eagle and East Star, have failed, and were either acquired by State-owned airlines or suspended operation. But Spring and Juneyao earned profits in 2008, enabling them to be courageous to apply for overseas flights, according to BBT.

The two carriers might push down airfares, which will benefit passengers, analysts said.