Earlier this week, stated-owned Chinese flag carrier Air China announced intentions to commence a salvo of new routes from its Beijing hub to expand its long-haul network in Asia, Africa, Oceania and North America in 2015. Among the list of new destinations Air China wishes to serve from Beijing include Melbourne, Johannesburg, Auckland, Mumbai, Addis Ababa, Montreal and Havana.
Assuming these routes all materialize, it will represent a major series of firsts for both Air China and many of the aforementioned cities. Despite the rise in popularity to access the Chinese market in recent decades, global airlines and regional airports have encountered numerous stumbling blocks along the way, encountering political and infrastructural red-tape that have thwarted expansion efforts.
Ironically, the lethargic behavior that the Civil Aviation Administration of China (CAAC) has shown in opening up China to the world, in stark contrast to the hands-off regulatory authorities in the Middle East and Turkey such as the United Arab Emirates, Qatar and Turkey, has actually come at the expense of China’s “Big Three” carriers themselves: Beijing-based Air China, Shanghai-based China Eastern Airlines and Guangzhou-based China Southern airlines. Unbeknownst to most parts of the globe, China Southern, China Eastern and AIr China each rank #5, #7 and #9 largest carriers, respectively, in the world by system traffic. Yet, despite this impressive claim, all three are relatively unknown outside of their own backyards. Less than 10% of their available seat miles reach markets outside of Asia-Pacific.
Of course, much of the slow approach to growth has been a direct result of poorly-timed fleet planning and overhaul, as Chinese carriers were late to the game in replacing aging Airbus and Boeing aircraft to enable growth to long-haul markets on more fuel-efficient aircraft, specifically the Boeing 777-300ER and 787-800. Fortunately, those days appear to be in the past as collectively each have pulled Boeing 747s and Airbus A340s from long-haul routes and replaced them with 777s.
Air China Is the First Asian Carrier to Serve Montreal and Caribbean
Montreal is presently one of the largest North American markets without scheduled nonstop or direct service to Asia. A presentation compiled by Aeroports de Montreal in September 2014 isolated Beijing as the largest unserved Asian market from Montreal, with approximately 43,600 passengers traveling annually between the two cities. This breaks down to approximately 120 passengers per-day, each-way (PDEW). The second largest market is Shanghai at 23,900 (65 PDEW), followed by Hong Kong (55 PDEW). Computing the top 12 Asian markets from Montreal, including India, and the PDEW volume approaches roughly 500 passengers traveling betwen Montreal and Asia each day.
Passenger Traffic Counts from Montreal to Asia
|3. Hong Kong||20,100||55.07|
|7. New Delhi||13,900||38.08|
|10. Ho Chi Minh City||7,400||20.27|
Source: Aeroports de Montreal
*PDEW figures are calculated by dividing annual passengers by 365
It is therefore conceivable that there are political motives behind Air China’s intentions to operate its own metal into Cuba, with cargo being the likeliest driver. Not much has been mentioned surrounding the background for expanding into Cuba, but it is not uncommon for Chinese carriers to venture into unchartered territory for “friendship purposes” even if such operations prove to be costly, if not unprofitable, for the airline. Meanwhile, no Asian carriers presently serve the Caribbean islands, which is not surprising given that there is hardly any business need to connect the two regions directly.
Cuba is a particularly interesting go-to choice for Air China given its political isolation from the U.S. Canada has always maintained friendly ties with the largest Caribbean island, primarily revolving around travel and tourism, although there is some degree of business relationship between the two nations. Noticeably, the nations capital city, Havana, is only connected to Toronto Pearson via Air Canada, whereas popular beach resort destinations such as Holguin, Cayo Largo and Varadero are connected to a much larger array of Canadian cities.
Air China – Air Canada Joint Venture Still in the Making
Canada’s flag carrier Air Canada likely has a stake in the launch of the Beijing – Havana route via Montreal given its previously stated intentions to implement a revenue-sharing joint venture with Air China towards the end of 2015. It is a strategic move for the traditionally risk-averse Air Canada and Air China who, although not highly exposed in each others’ respective countries, are members of Star Alliance and have formulated deeper commercial agreements in recent years.
There are broader implications for a China – Canada joint venture: Air Canada flies to Beijing from its Toronto Pearson hub and Vancouver, but while it wishes to increase frequencies to Peking airport, it has not been able to receive favorable slot times in the past to add additional weekly flights from both cities. Working with a Chinese carrier, however, can enable that opportunity if a partnership is strong.
Meanwhile, there are opportunities for Air China in Quebec that Air Canada has left on the table. Despite the fact that Montreal – Asia is a highly underserved market, Air Canada has focused growth in Asia entirely from Vancouver and Toronto. Even Calgary received a nonstop flight to Tokyo before Montreal was even given a consideration, despite the fact that Montreal is Air Canada’s headquarters and is slightly less than twice the size of its Calgary hub. Without an existing Asian competitor serving the Montreal – Asia market, Air China could be unlocking a potential goldmine, and entering into a revenue-sharing agreement with Air Canada lowers the risk for both carriers.
Fifth-freedom Rights to Havana TBD
It is still unclear whether Air China will be able to carry fifth-freedom traffic between Montreal and Havana, although invariably the route will fail without permission to do so. Given the high operating costs of deploying a widebody aircraft over 7,000 nm to a foreign country, then continuing a roundtrip onward to an island over 1,500 nm from there, the plane will need to be filled with local traffic between Canada and Cuba. Leisure travel from China to Cuba alone will not fill the plane to Havana, given that Cuba’s allure as a leisure destination is too far removed and unfamiliar to Asian tourists.
In all likelihood, these details will eventually emerge once the JV terms between Air Canada and Air China materialize further. One major thread between the two carriers is the heavy favoritism each tend to receive from their regulatory bodies. At the end of the day, both Air China and Air Canada each hold golden tickets: Air China is sitting on coveted landing slot times at Beijing airport, which can be relinquished to Air Canada, so long as Air China is permitted to fly fifth-freedom to Havana and split the costs and revenues evenly.
In other words, the science of Guanxi, as is central to Chinese society, will be a driving factor in this transaction. You scratch my back, I’ll scratch yours, so to speak. It will be the first of its kind for both Air Canada and Air China, given that neither carrier enjoys an immunized joint venture agreement across the Pacific Ocean. However, neither carrier is completely unfamiliar with the concept: Air Canada has been part of the A++ agreement with Lufthansa and United across the Atlantic for several years, and Air China has a JV with the Lufthansa Group between Europe and China.
A transpacific agreement will be the first of its kind for Chinese airlines, and Canada. Few might have predicted that any movement would bring the first Asian carrier to the Caribbean, but if so, this may be an indication that the concept of 5th freedom routes are not going away anytime soon.