Is China The New Growth Market For United Continental?

by Trefis Team
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The Chinese market is set to pass the United States, to become the largest market for business air travel. In line with this development, a number of airlines are looking to establish a firm foothold in this market. The reason behind why carriers, like United Continental, are looking at expanding their international presence in China can be understood by the country’s higher standard of living and the booming middle class which is expected to be the future growth driver for the world’s fastest economy.

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Why China?

As mentioned above, the growth potential within China is immense. It’s middle income class is forecast to grow to 600 million by 2022, while its GDP continues to grow at a 6% – 7% pace. Further, the economy’s gross consumption is anticipated to reach $6.5 trillion in the next few years. The growing income and increasing consumption patterns indicate the rising demand from Chinese citizens towards goods other than necessities.

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Further, according to South China Morning Post, passenger traffic in China has grown by an average of 10.4% annually, while its commercial fleet has grown from 1,047 planes to 2,645 over the past five years. As a result, the Chinese aviation industry’s cumulative profit grew to 180 billion yuan, more than tripling in five years. Boeing projects that in the next 20 years, China will overtake North America as the world’s largest air-traffic market. Another factor which can explain the U.S. carrier’s interest in the market is the approximately 2.01 million Chinese immigrants residing in the United States.

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If these numbers are anything to go by, China’s aviation market has just begun its growth trajectory as international travel by China’s middle class is just taking off. It is expected to contribute significantly towards profit for any carrier which ventures in the market.

Existing Presence In China

With 14 destinations in Asia, United currently holds the largest amount of capacity of any airline between the U.S. and China. The carrier already has presence in the major business centers of the country, such as Beijing, Tai Pei, Hong Kong, and Shanghai. With its bases covered in the most prominent Chinese cities, United expanded its services in some of the more popular second-tier cities, namely, Chengdu, Xian, and Hangzhou. All the secondary cities had their services focused out of the San Francisco airport.

Legacy Carrier’s Existing Presence in China 

(as measured by seat capacity)

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Further Expansion

United Continental hopes to continue growing aggressively in China to maintain its leading position. To expand further into the country, they plan to connect more second-tier cities in China to the U.S.  Consequently, it has already partnered with a local carrier, Air China, in the country. The partnership includes code-sharing on selected routes and provides customers with travel benefits, such as airport lounge access and frequent flyer program reciprocity. The deal will allow United to launch more flights to cities in China in the coming years. United’s management said that the move enables it to offer its customers unique flights between the West Coast and a number of Chinese cities. Additionally, passengers traveling from China to the U.S. will find it more convenient and easy to connect to various U.S. destinations.

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Hurdles

However, like any business associated with China, expanding its presence in China will not be an easy proposition for United. The U.S. – China aviation treaty minimizes flights to and from the country’s first-tier cities like Beijing and Shanghai where opportunities are bigger.

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Further, the Civil Aviation Administration of China (CAAC) recently tightened rules on setting up airlines, around five months after it suspended authorizations, due to “safety concerns.” It said that the number of new carriers to get authorization will be severely restricted. However, United remains undeterred by this as it expects China to be the next big market.

Have more questions about United Continental (NYSE:UAL)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for United Continental

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