Airlines slash prices as high-speed trains prove popular

08:19, February 11, 2010      

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China Southern Airlines Co, the nation's largest carrier, and Air China Ltd are slashing prices to compete with the country's new high-speed trains in a battle that Europe's airlines have largely already ceded.

Competition from trains that can travel at 350 km per hour is forcing the carriers to cut prices as much as 80 percent at a time when they are already in a round of mergers to lower costs.

Passengers choosing railways over airlines will also erode a market that Boeing Co and Airbus SAS are banking on to provide about 13 percent of plane sales over the next 20 years. "There's no doubt that high-speed rail will defeat airlines on all the routes of less than 800 km," said Citigroup Inc analyst Ally Ma. "The airlines must get themselves in shape, increase their profitability and improve the network."

China Southern cut economy-class tickets to 560 yuan from 700 yuan on flights between Guangzhou and Changsha, Hunan province, after a high-speed train started on the route in December. The trip now takes two-and-a-half hours by train instead of nine hours.

"The high-speed train is invincible on this route," said a civil servant from Guangzhou, who opted to travel by rail. "There's no doubt it's more convenient for trips to the cities along the line. Airlines can't compete with trains for the spacious seats."

Air France, Lufthansa

In Europe, where some long-distance rail journeys have been cut to three hours or under with the introduction of high-speed lines, airlines have either seen their share slashed or quit flying the route altogether.

In 2002, as the Paris-to-Brussels route became faster, Air France SA dropped its five daily services between Paris and Brussels. Deutsche Lufthansa AG and Germanwings quit the Paris-to-Stuttgart route after rail travel got faster.

High-speed railways will connect all of China's provincial-level capitals and cities with more than 500,000 residents on the mainland by 2020, serving more than 90 percent of the population, the Ministry of Railways said.

A third high-speed line from Zhengzhou, Henan province, to Xi'an, Shaanxi province, started operation on Feb 6. Other lines will follow including a link from Beijing to Shanghai that may undercut one of Air China and China Eastern Airlines Corp's most profitable routes.

The ministry aims to spend 700 billion yuan on rail this year and add more than 18,000 km of high-speed track by 2020 - enough to go almost halfway around the world. China's 8.7 percent economic growth last year is fuelling an expansion of airports even as trains gain customers. Investment in airport and aviation facilities will rise 50 percent to 90 billion yuan this year, according to the aviation regulator. A total of 25 airports, including a second one in Beijing, will start construction this year.

Boeing, Airbus

The airports will handle more planes. China ordered 160 Airbus aircraft worth $17 billion in November 2007. Boeing has a 2005 deal for as much as $9 billion of planes.

Domestic passenger traffic on airlines grew 22 percent last year, said Laurence Barron, head of Airbus China.

"With this kind of growth; the planes are full," said Barron. "I expect in future the planes will remain full and the trains will be full and the roads will be full and the ships will be full. This country needs transport."

Chinese airlines may need 3,770 new aircraft worth $400 billion in the 20 years from 2009, according to Boeing. Airbus forecasts a need for 3,272 new planes in that time.

"We have considered the potential impact of high-speed rail in our forecast," said Randy Tinseth, Boeing's vice-president of marketing. "This impact is especially strong for cities within 500 km of each other."

Consolidation

As trains win more passengers on shorter routes, the process of consolidation in the airline industry may accelerate.

China Eastern merged with smaller local rival Shanghai Airlines Co last year. A State-owned group including Sichuan Airlines Group in November bought private carrier United Eagle Airlines Co, now renamed Chengdu Airlines.

"We have been encouraging consolidation," said Xia Xinghua, deputy director at the Civil Aviation Administration of China on Feb 1. "We encourage the merger of China Eastern and Shanghai Air if it helps cut costs."

China had 86,000 km of track at the end of last year. The rail ministry plans to increase that to 120,000 km by 2020.

Source: China Daily
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