China Eastern Airlines Plans Budget Carrier ENLARGE
China Eastern Airlines Boeing 737-800 planes at an airport in Taiyuan, Shanxi province.
Joanne Chiu
BiographyJoanne Chiu
@joannechiuhk

HONG KONG -  China Eastern Airlines Corp. plans to convert one of its units into a low-cost airline, becoming the first Chinese state-run carrier to enter Asia's booming budget-airline market after Beijing's move to liberalize its aviation sector. China United Airlines, a Beijing-based domestic carrier controlled by China Eastern Airlines, will transform itself into a low-cost airline, said James Wang, China Eastern's company secretary. "We believe the low-cost carrier market has enormous growth potential in China given its low penetration rate, which is just 5% now, much lower than a 30% to 40% penetration in developed markets such as the U.S. and Europe," said Mr. Wang. He declined to give details about when China United will begin operations as a budget airline. ENLARGE
Beijing this year unveiled new guidelines to jump-start its fledgling low-cost-airline market after its decision last year to lift a six-year-old ban on establishing new airlines. The guidelines included simplifying approvals for new low-cost airlines as well as measures to help existing budget carriers expand more quickly. Based at Beijing's Nanyuan Airport, a smaller military-and civil-use domestic airport roughly 8 miles from downtown Beijing, China United Airlines operates a fleet of 26 Boeing 737 aircraft and flies to about 70 cities in China. It plans to triple its fleet size to 80 aircraft by 2019 and will then relocate its home base to Beijing's planned second major airport when it commences operation by the end of this decade. Mr. Wang said China's aviation market is big enough to absorb more competitors and lower airfares could spur ticket sales. "People may consider going on multiple trips instead of just one a year. Those who used to travel by train would consider going by air now because of lower ticket prices," he said. Among China's three state-run carriers, Shanghai-based China Eastern is likely the most vulnerable to the budget-airline boom. Spring Airlines Co., the nation's largest budget airline, is also based in China's financial capital and has grown its fleet to roughly 40 Airbus A320 aircraft, which fly short-haul flights to popular markets such as Japan, South Korea and Hong Kong. Low penetration in China's budget airline market has also prompted traditional full-service airlines to jump into the discount race. Chongqing-based regional carrier West Air Co., which like Hainan Airlines Co. is controlled by HNA Group, a privately owned Chinese conglomerate, last year transformed itself into a budget carrier. Meanwhile, privately owned Juneyao Group, which also controls Shanghai-based Juneyao Airlines, in June announced a plan to set up a budget offshoot called 9 Air - which translates as "Nine Bucks Airlines" in Mandarin - in Guangzhou later this year. The increasing number of budget airlines setting up shop in China raises concerns that growing competition could hurt profitability in one of the world's fastest-growing aviation markets. However, Credit Suisse analyst Timothy Ross said the pace of liberalization will likely remain tightly managed by China's aviation regulator, whose aim is still largely to protect the interest of the state-owned carriers. The authorities "would probably restrict landing rights or slot availability at large airports, and probably offer some degree of incentives to the LCCs to serve more outlying areas. That way you'll achieve your social aim without being detrimental to incumbents," he said. Mr. Ross said China Eastern's move into the low-cost carrier sector also "reflects both a newfound opportunity and growing frustration at the inability of Jetstar Hong Kong" to get off the ground in Hong Kong amid opposition from de facto flag carrier Cathay Pacific Airways.
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China Eastern, the smallest among the three state-owned carriers in terms of fleet size, in 2012 announced a plan to set up Jetstar Hong Kong, a stand-alone budget airline based in Hong Kong under a joint venture with Qantas Airways Ltd.'s Jetstar Group and Shun Tak Holdings Ltd.
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, which is controlled by Macau businessman Stanley Ho. But the airline, which had been scheduled to begin operations in 2013, is still seeking regulatory approval from Hong Kong's government to start flights. In September, Cathay Pacific filed a formal objection with Hong Kong's government against Jetstar Hong Kong's plan to roll out services, citing possible violation of the city's mini-constitution, the Basic Law. The approval of Jetstar's application would set "a dangerous precedent by granting control of Hong Kong's hard-negotiated sovereign air traffic rights to a carrier that is nothing more than a franchise operation controlled by a foreign airline," Cathay Pacific said. Cathay Pacific said Wednesday its position on Jetstar Hong Kong is unchanged. Write to Joanne Chiu at  Save Article