Introducing Hainan Airlines
Steve’s breakdown: Hainan Airlines looks to be in a position for big growth but they’ll have to keep getting the word out. Their US headquarters is in Seattle. 206-433-5150
It was hard to bet on Hainan’s success, given that it was the only private operator in a highly regulated market dominated by the big three state-owned airlines. While Air China is headquartered in Beijing, China Eastern Airlines in the financial hub of Shanghai, and China Southern Airlines in the bustling port city of Guangzhou, Hainan Airlines’ base lies in Haikou, capital of the southern island province of Hainan and only recently promoted to second-tier status.
Today, 42-year-old Xie is Hainan’s president and is tipped to be its next chairman. The airline’s red-and-yellow livery is painted on more than 160 jets and it has stakes, directly or indirectly, in close to 15 airlines both at home and abroad. Its cash-rich parent, HNA, is a Fortune 500 company known globally for being acquisition-hungry.
“The top three Chinese airlines had a combined income of slightly more than CNY100 billion [$15 billion] last year. For us as a group, we went from CNY150 billion in 2014 to CNY180 billion last year. We have been around for just over 20 years, so I think our development is considered pretty successful,” Xie tells FlightGlobal in an exclusive interview at the group’s headquarters in Haikou. In his spacious but simple office, a world map lines one wall.
Today, Hainan is focused on growing beyond China, and being the airline of choice for international passengers flying into the country. It advertises on CNN, touting itself as a young and vibrant carrier with a focus on service quality, and the only Chinese operator to have a five-star Skytrax rating.
It has been ramping up capacity on international services aggressively, but Beijing’s policy of having only one Chinese operator on each international city pair complicates its global ambitions. Having its secondary hub in Beijing means it plays second fiddle to Air China, and gets rights only to second-tier cities in the popular markets of Europe and North America.
SQUEEZED FOR SLOTS
While the flag carrier flies between Beijing and such blue-chip markets as New York, Los Angeles, London and Frankfurt, Hainan serves the likes of Seattle, San Jose, Brussels and Prague. It does fly to choice destinations such as Los Angeles, Paris and Rome, but only from second-tier Chinese cities such as Changsha, Xian and Chongqing.
It does not help that Beijing Capital International airport is congested, operating beyond design capacity, and has little scope for new slots. The only way for the carrier to launch international flights out of the capital is to adjust its existing slots and convert some domestic ones for international use.
“We started long-haul services later than the three big airlines. They have been operating out of Beijing, Shanghai and Guangzhou for many years and have a very strong foundation there,” says Xie. “So our strategy basically is to fly from tier-one cities in China to tier-two cities in Europe and America, and vice versa.”
The airline boss recognises the challenges posed by such unfavourable conditions, but says that against a backdrop of China’s booming outbound tourism and the country’s ambitious “One Belt, One Road” policy, it has managed to do well.
“Last year our international load factor was around 88-89%. In North America, our load factor is higher than our local competitors’ due to a combination of factors such as aircraft comfort, service levels and commercial sales,” says Xie, pointing out that although it usually takes longer to develop long-haul routes, the airline’s Beijing-Seattle service was in the black within a year of launching.
“Previously, the fuel price was high, so at that time we did not have obvious profitability. But after the oil slump in 2015 we have maintained profitability on our long-haul flights,” he adds.
The airline’s early decision to order the Boeing 787 also contributed to the quick success of its long-haul operations, says Xie. Since taking its first -8 in 2013, Hainan has used the type for its ambitious expansion into North America, believing the 213-seat widebody is the right size for breaking into second-tier intercontinental markets such as Chicago, Boston, Toronto and San Jose.
The carrier also has 30 of the longer-range -9s on order, and plans to take more from lessors. While its 10 smaller -8s will take the lead in launching new routes, the -9s will be put on services with higher loads or to destinations the -8 is unable to reach.
“The 787 has helped us open markets and expand our network,” says Xie. “If we were to use a 777, or an A380, to open a new route, it would have been tough.” He says the carrier is happy with the 787’s “functionality, economics, performance and comfort”.
This year, the airline launched services from Beijing to Manchester and Calgary as well as from Changsha to Los Angeles, and will start flying between Beijing and Las Vegas in December.
Despite its global focus, international operations contribute just 16% of revenue, but Xie wants this to rise to 50%. Hainan has connections to more than 20 international points, but the majority of its routes are internal.
Airlines typically seek codeshares and interlines as a fast and less metal-intensive route to network expansion. Asked why Hainan is not part of a global alliance, chairman Xin Di, who also spoke with FlightGlobal, alludes to the airline not being invited. “We have always been open about joining an alliance and actively looking for co-operation with the three alliances. I think it’s better for you to ask them why don’t they want a good partner like Hainan Airlines…. Maybe they have their own considerations.”
There are, however, other ways to co-operate globally, and Hainan has in recent years become the Etihad Airways of the east. It now has airline investments, either directly or through HNA Group, across five continents – in Europe (Aigle Azur), South America (Azul), Africa (Africa World Airlinesand Comair), Asia (Hong Kong Airlines) and most recently in Australia, with an A$159 million ($120 million) input into Virgin Australia.
Xie disclosed that it did not take long for HNA and Virgin to strike the deal. This tells of the speed and flexibility at which the conglomerate works, and reveals one of its strongest advantages over bureaucratic state-owned enterprises.
“We are breaking into the international market and of course we need closer co-operation. Being part of an alliance is one way, but through these shareholdings we feel it’s an even tighter co-operation,” he says, adding that the two forms of partnerships are not in conflict and that the airline is still open to joining an alliance.
The Shanghai Stock Exchange-listed airline also does not rule out selling a stake to a foreign carrier – in the style of Delta Air Lines taking 3.55% of China Eastern – and says such discussions have taken place. For such a deal to push through, however, it must be win-win for both parties and technical conditions must be met, says Xie.
He gets almost whimsical: “We will continuously pay attention to investment opportunities. But this is something like marriage: sometimes you may want to marry them, but the other party may not be willing. There is also a bit of fate and coincidence in play.”
If the HNA group is active abroad, it is even more so at home, where it has equity investments in at least seven Chinese carriers: Capital Airlines, Tianjin Airlines, West Air, Grand China Air, Lucky Air, Yangtze River Expressand Hong Kong Airlines.
This has allowed the mainline carrier to focus on its international drive, while using its Chinese subsidiaries to capture market share both domestically and around the region, says Xin. A look at Hainan’s network makes it clear that while it has been aggressively adding destinations in North America and Europe, and has a stronghold in east China, its regional network remains thin.
Xie says: “Our resources are limited so we need to direct them at our strategy, which in recent years has been on North America and Europe. But of course we won’t neglect the regional markets…. There are still a lot of opportunities in central and southeast Asia.”
With slots becoming increasingly scarce in the golden triangle of Beijing, Shanghai and Guangzhou, Hainan’s domestic strategy is to look for new opportunities in the likes of Xian, Chongqing and Urumqi. It has also launched joint-venture regional carriers with the municipal governments of Fuzhou, Guilin and Ningbo, to further bolster its domestic presence.
The airline is also keenly aware that the success of its intercontinental business is contingent on the strength of its domestic network. After all, flying passengers long-haul from tier-two Chinese cities such as Changsha and Chongqing means feed is essential.
Xie says Hainan is also evaluating larger widebodies such as the Boeing 777 and Airbus A350 for its “next step”, but does not see the A380 being part of its fleet in the medium term. He expects the carrier’s fleet to surpass 200 aircraft within a year or two, and hit 300 within five years. For now the fleet is dominated by 737s, but he says the widebody proportion will grow.
The size of its fleet, however, may not be entirely under its control, considering that Chinese carriers need regulatory approvals before ordering and taking delivery of aircraft. The private carrier Spring Airlines, for one, has had to slow its growth as it found approvals were being drawn out. On whether Hainan has been able to grow as fast as it would like, Xin says: “Often we feel like we want to do a lot, fly many routes, but we can’t do it quickly because we do have some resource limitations.”
Xie adds that the airline’s growth is also dependent on factors such as the growth of the Chinese market and the availability of pilots, and that there is a need to strike a balance to ensure a sustainable business. He views unique Chinese regulatory controls, such as having only one carrier on each city pair and requiring approvals before aircraft purchases, as necessary to ensure high safety standards and to prevent unnecessary competition.
“I feel that our main challenges are our resources at prime airports such as Beijing, Shanghai and Guangzhou because we’re latecomers. The policy is basically fair but as a latecomer we have to be more aggressive and put in more effort to play our part.”
Xie believes, however, that the carrier has been able to rise above its local peers. This is especially true on long-haul services, where the attention it has put on cabin product, meal offerings and customer service counts. It is clear that it takes pride in being the only Chinese carrier to be rated five stars by Skytrax, and it is keen to use that to its marketing advantage.
On the perception that some Chinese carriers’ offerings may not be up to what international travellers might expect, he says: “We are a traditional Chinese company and we have excellent eastern hospitality. Even before a passenger voices his request, we already anticipate the need.” Xie points to how one of its flight attendants made headlines last year when she hand-fed an elderly passenger on a domestic flight, adding that while it “certainly was not SOP [standard operating procedure], it shows how the airline exceeds service expectations”.
It also has an impressively clean safety record, with zero fatal accidents, despite its quick rise over the past 20 years.
Xin says: “We may not speak about this a lot, but our safety foundation is strong and the culture in-built. This is why we have been able to develop so fast, but are still able to keep a high safety standard. This is not an easy balance to strike but we have managed to achieve it.”