China Eastern unit shifts to budget carrier

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Company takes low-price route to expand reach

After two years of preparations, China Eastern Airlines Co Ltd has officially announced that it’s converting China United Airlines Co Ltd, its Beijing-based subsidiary, into a low-cost carrier on Wednesday.

China United will be the first State-owned low-cost airline in China, making China Eastern the first of the top three airlines to take concrete action on moving into the low-cost market.

The average fare on China United will be 20 to 40 percent below current prices, a level made possible by improved efficiency and lower operating costs, said Zhang Lanhai, president of China United, who assumed the role this week amid the conversion.

 

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The carrier is also building its own distribution channel, which can cut costs and provide value-added services, he said.

“Strategic or financial investors may be introduced to the budget carrier in the future, as well” Zhang added.

By the end of 2019, the new carrier aims to have 80 aircraft, Zhang said, compared with a fleet of 26 Boeing 737 aircraft at present. That will increase to 31 airplanes by the end of 2014.

The airline also hopes to carry “tens of millions” of passengers annually, he said.

New planes will be configured to have only economy-class seats, a hallmark of low-fare carriers. The current fleet will still have first-class cabins, said Tang Bing, chairman of China United. Those cabins will be the airline’s value-added services, Tang said.

Driven by market demand and government encouragement, major Chinese airlines – including the three State-owned giants – are showing an interest in low-fare carriers.

This kind of airline “will have explosive growth in China,” said Liu Shaoyong, general manager of China Eastern.

Many full-service airlines have started planning to launch low-cost carriers, Liu said, and budget airlines are developing faster in Asia in recent years. But budget carriers in China have only 7 percent of the air travel market, while the global average is 26 percent.

“The market potential is huge in China,” Liu said.

Among the three largest domestic carriers, China Eastern has been the early mover in setting up a budget line. It established a low-cost joint venture in Hong Kong in 2012, which is still waiting for regulatory approval to operate flights.

The other two State-owned airlines may convert some of their subsidiaries into budget carriers, but privately owned carriers are moving faster.

The low-cost market in China is dominated by Spring Airlines Co Ltd.

Shanghai Juneyao Airlines Co Ltd expects its Guangzhou-based low-cost subsidiary (Jiuyuan Airlines Co Ltd) to offer its first flight in August.

HNA Group Co Ltd, parent company of the fourth-largest carrier in China – Hainan Airlines Co Ltd – plans to convert all its aviation subsidiaries except for Hainan Airlines into budget carriers, said Wang Yingming, executive chairman and executive president of HNA Aviation Holding Co Ltd.

Cao Yunchun, a professor at the Civil Aviation University of China, said that budget airlines are in their infancy in China, but their development is necessary for the improvement of the whole aviation sector.

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