United to exit Hangzhou market
America’s giant closes poorly performing route while local govts encourage cross-continental travel
Published: Aug 03, 2017 05:43 PM

A United aircraft landing at Hangzhou Xiaoshan International Airport in Hangzhou, East China's Zhejiang Province Photo: IC


Having only operated a route to Hangzhou, capital of East China's Zhejiang Province, just over a year, United Airlines, one of the US' three main carriers, is set to exit that market in October due to stagnant performance.

United joins the growing list of overseas players that have recently declared they are quitting or suspending certain routes in the Chinese market after just one year of operation.

In January this year, British Airways closed its route to Chengdu, capital of Southwest China's Sichuan Province, and in October 2016, Lufthansa suspended its route from Frankfurt to Shenyang, Northeast China's Liaoning Province.

United opened the route from Hangzhou to San Francisco in July last year which flies three times per week with Boeing 787.

Initially, Hangzhou was not the priority city for United's Chinese market venture and the airline was at first hoping to open a frequent route from Shanghai to San Francisco, but this fell through. Subsequently, it reconsidered Hangzhou and rushed to open the route as a quick alternative.

However, not long after the Hangzhou route opened, United won a slot to open a second daily flight from Shanghai in October 2016, but this resulted in an overall oversupply of flights from Eastern China and a skewed load factor.

United's withdrawal from the Hangzhou market announcement also comes as the carrier vows to beef up efforts in improving flights in its home market and as its business in the broader Asia Pacific market decreases.

In its latest financial report released last month, United informed that its passenger income in the Asia Pacific market declined by 1 percent year-on-year to $1.01 billion while its yield declined by 2 percent compared to the same period last year.

United's CCO and VP Andrew Nocella said the company will make "really careful" moves in the Asia Pacific market, particularly in Shanghai and Beijing, over the next 12 months with regard to capacity deployment. Currently, the airline operates flights to five destinations in the Chinese mainland.

Sluggish performance

The US Department of Transportation's data shows that from July last year to January this year, the average load factor for the Hangzhou route was 61 percent, lower than the average 81 percent for other Chinese routes of United.

By contrast, United's Chengdu route - one of China's second-tier cities that the airline sought earlier on - reached an average load factor of 82.2 percent in 2016, slightly lower than the 83 percent in Beijing.

Given United's performance in the Hangzhou market as well as in the wider Asia Pacific region, it seems reasonable for the airline to exit the former.

Also in October 2016, Sichuan Airlines launched a route from Chengdu to Los Angeles via a stop in Hangzhou, which flies twice per week and may have posed some competition for United.

Although this is Sichuan Airlines' first route to the US, due to a poor load factor, the airline limited the number of flights to just one per week.


A boom in second-tier cities

Many routes that open in second- and third-tier cities receive government subsidies as local governments are looking for new driving forces to develop their economies.

They believe the aviation industry could stimulate the development of other sectors and ample subsidies could be the key to this.

To encourage airlines to open up routes in these cities, airports across China normally enact advantageous policies such as decreased landing fees or subsidies for players operating international routes. These ''discounts'' amount to millions of yuan per year.

However, airports have gotten more clever recently, particularly in those popular Chinese destinations. Some media reported that the airports in Sichuan and Hangzhou have selected some particularly canny business strategies on the subsidized routes.

For example, they will not only cut amounts, but will also shorten the subsidized time, lowering time from three years to one or two years, which means the airlines could possibly result in a loss without subsidies.

The latest data showed that in the first half of last year, there were 244 new routes approved by Chinese regulators, 63 percent of which opened in second- and third-tier cities. Cross-continental routes accounted for a significant proportion of the number.

In fact, the most important factor for second-tier cities when opening cross-continental routes is to have a stable passenger flow and demand. If not, stopover passengers could be a beneficial substitute.

It could be suggested that it is not necessary to require each busy city to have a direct flight to first-tier cities in Europe and the US as it is not easy to gain slots in the busy Western airports. A wise move for the airports would be to ensure their location be a connection stop to retain a stable passenger flow.