AIRYY Air China Limited (PK)

By Susan Carey 

United Continental Holdings Inc. recently added nonstop flights to the Chinese city of Xi'an and plans to roll out service to Hangzhou in July, part of a high-stakes bet to expand its leading position in the country.

The big commitment to linking some of China's second-tier cities directly to the U.S. is made possible because the current U.S.-China air treaty doesn't include as many limits on the number of flights to secondary cities, compared with the two largest Chinese markets. United's efforts revolve around the use of its new long-range, but relatively small, 219-seat Boeing Co. 787 Dreamliners, which the airline said are the right size and range for such routes.

United said it also is building on the strength of its hub in San Francisco, which offers travelers many connections to and from domestic U.S. airports, and is aided by the airline's long-standing relationship with China's flag carrier, Air China Ltd.

The goal is to give United an inside track in China, the world's most populous nation. This year, China is set to overtake the U.S. as the largest business-travel market, according to a recent study by the Global Business Travel Association. While more than 95% of that business is domestic, international travel also is growing strongly, it said.

But growth to China, which United has been serving for 30 years, brings its own challenges. U.S. and Chinese carriers have ramped up their capacity, offering more seats and flights than demand warrants, which is pinching prices. The U.S.-Chinese aviation treaty caps flights to Beijing and Shanghai -- and U.S. carriers are close to their limit, restricting future opportunities there. Also, China's once-torrid economic growth has slowed.

Even so, Chinese demand for flights to the U.S. has doubled in the past five years, said Brian Znotins, United's vice president of network. "It's still a huge, hot economy," he said. "The middle class is really booming. And the secondary cities are the growth engine."

According to the Centre for Aviation, an airline think tank in Sydney, the four largest Chinese airlines offered 2,028 weekly flights to the U.S. last summer, compared with 1,853 flights from U.S. carriers to China. That is sharp change from 2011, when U.S. airlines operated nearly twice the number of flights to China as Chinese carriers operated to the U.S.

United's move comes as the airline has slipped to third place in traffic among its U.S. rivals. Its pretax margins lag behind its largest competitors and it has a new chief executive from outside the industry, who is learning as he goes. CEO Oscar Munoz took a five-month medical leave after he suffered a heart attack in October. He underwent heart-transplant surgery in January and returned to work in March.

China, where United is the leading U.S. operator, is a bright spot, with flights there overall as profitable as those in its domestic network, said Mr. Znotins.

"Now is the time to create a beachhead there," before China and the U.S. eventually adopt a liberal "open skies" air treaty and competition heats up, said John Thomas, leader of L.E.K. Consulting's global aviation practice.

United's homegrown competitors, American Airlines Group Inc. and Delta Air Lines Inc., said they are for now concentrating their efforts on building up in Shanghai and Beijing. The two currently are vying for U.S. government permission to fly daily between Los Angeles and Beijing. American also is adding service to Hong Kong, another destination where United is dominant.

Flying direct to smaller Chinese cities "is something we are looking at as a longer-term opportunity," said Paul Baldoni, Delta's managing director for the Atlantic and Pacific networks. "But we don't think at this point it's economically viable."

However, some European airlines are using that strategy, and Chinese carriers are beginning to explore it.

The Air China partnership is important to United. The two have an extensive code-sharing arrangement in which they sell each other's flights as their own on 41 round-trip routes in China, 65 round-trip routes in the U.S. and 16 trans-Pacific routes between the U.S. and China. United, on its own long-haul planes, carries 3,000 passengers a day in each direction between the two nations, including traffic to and from Hong Kong. Delta carries about 1,500 a day in each direction.

Aside from Xi'an, the capital of Shaanxi province, with a population of 8.7 million, United flies to Chengdu, the 10.5-million-population capital of Sichuan province. The Chengdu flights, which began in 2014, operate three times a week in winter and four times a week in the summer. Mr. Znotins said the planes are about 75% full and the number of passengers buying these flights is growing faster in China than in the U.S.

Xi'an, a tourism destination, receives United nonstop flights three times a week during the summer, with the route set to go dormant in late October for the rest of the year. The ancient city is home to the Terracotta Army of early Emperor Qin Shi Huang and was the eastern starting point of the Silk Road trade route. Hangzhou, the capital of Zhejiang province, will receive daily United nonstop flights starting in July. Hangzhou, with a population of nine million, is the home of e-commerce company Alibaba Group Holding Ltd.

Mr. Znotins said there are a dozen cities with large populations in the Chinese hinterland that could be ripe for nonstop service. He declined to say whether United is receiving any subsidies from the new Chinese destinations. "It's not uncommon when we start a new route to have incentives," he said, adding they are "pretty commonplace in cities of the world that don't have [direct] service to the U.S."

(END) Dow Jones Newswires

May 31, 2016 19:14 ET (23:14 GMT)

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