Is it time for China-US Open Skies? - December

Is it time for China-US Open Skies?

December

Is it time for China-US Open Skies?

New Visas for US –China travel

Last month US President Barack Obama announced changes to the student, business and tourist
visa programmes for visitors from China. The new arrangements, which also apply to US visitors to
China, extend the student visa to five years and the business and tourist visas to ten years.
Although they won’t change how long people can stay in either country they will significantly reduce
the cost and time incurred in the process of obtaining visas.

This comes at a time when the US and China are keen to deepen the economic ties between the
two countries. They are already closely linked through trade. China is the top import market for the
US, with Chinese goods making up 19% of all US imports, and is the US’s third largest export
                                                 1
market, accounting for 7.2% of exports by value . For China the US represents the fourth largest
import market (7.8%) and the second largest export market (16.7%).

Air Traffic between China and the US

Like trade, the market for air
travel between the two countries
is now also sizeable. In the month
of September 2014 two-way
passengers between China and
the US reached 540,000
             2
passengers , a 27% jump on a
year earlier. This followed an
increase of 13% over the previous
September and 15% compared to
September 2011.
If the year to September 2014 is
typical, the annual number of
passengers travelling between the two countries by air has now reached 5.7 million. Of the 5.7
million passengers 52% of journeys started at a Chinese airport while 48% started in the US,
according to OAG Traffic Analyser.

Both countries are huge geographically, although of course the population tends to be clustered in
cities and coastal areas. So passengers are travelling from a wide range of towns and cities in each
of the countries but there are only 24 airport pairs with non-stop air services between the two
nations. OAG Traffic Analyser shows that over the 12 months to September 2014 passengers used
one of 56,000 non-identical routings to travel between their departure airport in either China or the
US, and their destination airport, also in China or the US. Some of these routings used the direct air
services, connecting behind or beyond as necessary, but many did not. Instead many passengers
are connecting via airports in third countries.

1
 The World Factbook, CIA
2
  OAG Traffic Analyser – adjusted bookings data. At time of writing data was available to
September 2014.

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Is it time for China-US Open Skies?

Airline Capacity between China and the US

Airline capacity has attempted to keep pace with growth in traffic between China and the US. In
2014 there were 22% more scheduled frequencies of passenger services between China and the
US than in 2013, and this followed growth of 12% in 2013 and 11% in 2012. In fact, growth in
frequencies has exceeded 10% in 11 of the past 14 years.

In 2014 there were 20,811 flights operated by Chinese and US carriers between the two countries,
of which the US operated 54% and China the remaining 46%. On average the US aircraft were
slightly smaller than those operated by Chinese carriers, leading to the US carriers operating 52%
of seats and the Chinese carriers operating 48%. The total number of direct seats provided by the
carriers of both countries was fractionally over 6 million.

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Is it time for China-US Open Skies?

Each nation has four carriers operating a total of 24 routes between China and the US. While the
total capacity is fairly evenly split between US and Chinese carriers, the US allows services to 12
US gateway airports while 99% of all direct capacity in 2014 has been permitted via one of just
three major Chinese airports – Beijing Capital International Airport (PEK), Shanghai Pudong
International Airport (PVG) and Guangzhou Baiyan International Airport (CAN).

Interestingly, the three Chinese airports serve an immediate city population of 82 million, equivalent
to just over 6% of the total Chinese population. The 12 US gateway airports serve an immediate
population of 21 million, just under 7% of the total US population.

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Is it time for China-US Open Skies?

Evolution of the Market

In 2014 US and Chinese carriers operated, between them, the equivalent of an average 400 weekly
frequencies. This number has increased steadily from 214 weekly frequencies in 2000. While there
were 24 routes operated in 2014 these included 14 frequencies between SFO and WUH, so there
were 23 in regular operation. The only route to be dropped since 2010 is ATL-PVG which was
operated briefly by Delta. Some new routes have been added such as Hawaiian Airlines HNL-PEK.
The largest route by far is LAX-PVG which is operated by China Eastern, American and United.

The case for Open Skies

Since the United States entered its first Open Skies Agreement back in 1992 with the Netherlands,
it has increased the number of Open Skies Agreements that are in force with other countries to over
a hundred. Although the China-US Air Services Agreement has been amended on numerous
occasions, mostly to add capacity, it continues to exert a high degree of regulatory control over
routes operated by airlines of either countries with strict limits on the number of flights permitted.

The US has made no secret of its pursuit of Open Skies Agreements but what would the Chinese
gain by removing restrictions on flights? Of the 5.7 million passengers travelling between the two
countries in the year to September 2014, there were 3 million departures from Chinese airports and
2.7 million departures from US airports. Of those 3 million, however, 76% started their journey at
either PEK, PVG or CAN. So, despite 94% of the Chinese population living outside Beijing,
Shanghai or Guanzhou, only 24% used a domestic connecting flight to access the Chinese gateway
airport, or flew from their home airport to an airport outside China where they could connect to a
US-bound flight. Even adding the populations of cities close to PEK, PVG and CAN, such as
Tianjin, Hangzhou, Shenzhen and Foshan, into the equation only adds a few percentage points to
the proportion of Chinese who live near one of these airports.

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Is it time for China-US Open Skies?

While China has a policy of developing its Western regions, the current Air Services Agreement is
not extending the benefits of trade to these parts of the country. The vast majority of travellers who
are flying between China and the US appear to be travelling to and from one of the three major
cities.

So what might fewer restrictions deliver? A starting point might be a new route between New York
and Fuzhou, perhaps. Fuzhou is the major coastal city between Hong Kong and Shanghai and in
September 2014, four of the top seven unserved markets between China and the US were for this
city pair. A total of 6,788 passengers connected via Hong Kong, Beijing or Shanghai, equivalent to
226 passengers daily, or perhaps 80,000 annually.

                                    Top Unserved Routes Between US and China
                                                    September 2014
   New York-Fuzhou                   Rank                Routing        Passengers
   6,788 passengers                    1             JFK-HKG-FOC           3071
      226 per day                      2              JFK-PEK-FOC          1940
                                       4             JFK-PVG-FOC           1323
                                       7             EWR-HKG-FOC           454
                                OAG Traffic Analyser – Unserved Markets

Without a more fundamental review of the bilateral agreement there will inevitably be further
amendments adding routes and permitted airlines as a means to develop capacity in a controlled
way. An alternative means of adding capacity to meet demand growth might be to use larger aircraft
on the permitted routes but none of the US or Chinese airlines have A380 aircraft on order which is
the aircraft that could quickly add capacity. Is now the time to take seriously the idea of China-US
Open Skies?

  This article was written using data and reports from OAG’s Schedules Analyser. OAG is
  the global leader in aviation information and analytical services. Its flights status and
  airline schedules and capacity databases hold future and historical flight details for over
  900 airlines and more than 4,000 airports. OAG has been trusted and respected within the
  aviation industry for over 80 years.

  OAG's team of expert aviation analysts can provide ad-hoc aviation analysis or bespoke
  reports to exact specifications from one-off projects to regular reporting. For further
  information contact OAGMarketIntel@oag.com

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