United Continental Remains Optimistic On Chinese Growth

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Despite the recent uncertainty around the economic growth in China, United Continental Holdings (NYSE:UAL) continues to perceive the world’s second largest economy to be one of the most lucrative markets in the long term. Consequently, last week, the airline announced its plans to launch a direct seasonal flight from its San Francisco hub to Xi’an, capital city of Shaanxi Province in Central China, subject to regulatory approvals [1]. With the new flight, United will become the first US airline to operate a trans-Pacific service to the unserved city. Given that United has the maximum non-stop flights to China, and caters to the largest number of cities in the country, we believe that this move will solidify the airline’s already strong presence in the Chinese market and enable the airline to gain an edge over its competitors by penetrating into the untapped Asian markets.

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Source: Google Finance

What Is United’s Game Plan?

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At a time when a majority of the companies globally have become cautious and are trying to contain the impact of a potential slowdown in China, United’s decision to grow its Chinese exposure indicates the airline’s confidence in the country’s economic growth over the long-term. Besides, the International Air Transport Association (IATA) has predicted that China will become the largest passenger market by 2030. Thus, it is reasonable for any US airline to eye the much coveted market, even though this investment may not pay off in the near term due to the anticipated slower-than-expected economic growth in China.

The Chicago-based airline, United Continental, which began its nonstop service to China in 1986, currently serves all the major cities in the country such as Beijing, Shanghai, Chengdu, and Hong Kong, through its various hubs at Chicago, New York, San Francisco, and Los Angeles. Apart from this, United has a bilateral partnership with Air China that includes code-sharing on selected routes and provides customers with additional travel benefits such as airport lounge access and frequent flyer program reciprocity. Consequently, United has the largest capacity between the US and China compared to its peers Delta Air Lines (NYSE:DAL) and American Airlines (NASDAQ:AAL), who have only recently started ramping up their operations in China. Until recently, these airlines were more focused at growing their presence in the European and Latin American markets. Thus, we see United’s decision as a step to further strengthen its dominant position in the Chinese market.

UAL_China

Having captured a sizeable share in the prominent cities in China, United is now concentrating on increasing its reach in the secondary cities of the country. The airline’s Vice President and Chief Revenue Officer, Jim Compton, expects a large amount of the Chinese demand growth to be driven by its secondary cities over the next five years. Since Xi’an is one of the oldest and untouched markets, it is reasonable for the airline to launch direct flights to the city. Moreover, having direct flights to any of these secondary cities will reduce the airline’s dependence on Air China for passenger traffic.

Additionally, United expects to receive the delivery of six Boeing 787 aircraft (Dreamliner) by the end of 2015, which it plans to operate on the San Francisco-China route. These 787 aircraft are much more fuel efficient compared to the traditional jets, which will make it commercially viable for United to operate direct flights on the route which would have been otherwise loss-making. Thus, United aims to fly three weekly direct flights on the route from May to October 2016, subject to approval from the US Department of Transportation (DOT).

To summarize, we believe that United’s decision to expand its Chinese operations will further strengthen the airline’s dominant presence, providing it a competitive edge over its competitors and easy access to the under-served Asian markets. Even though the airline’s move may not bear fruits immediately, it will add value to the airline in the long term.

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Notes:
  1. United Applies To US DOT To Operate 787 Service To Xi’an, China []