Last month, American Airlines announced it was dropping 11 international routes, including a Shanghai-Chicago direct flight. This comes on the heels of American’s Beijing-Chicago route cancellation in May and a report that Hawaiian Airlines’ would drop its direct flight between Honolulu and Beijing.
Rising fuel prices are undoubtedly the biggest culprit behind these rollbacks. In May 2017, the price for a gallon of jet fuel stood at $1.41. A year later, the price had risen by 52 percent to $2.15. But many airlines and analysts also contend that unfair Chinese policies are undercutting international carriers and making their transpacific routes unprofitable.
Fuel prices are the primary driver of the recent route cuts at American, but Chinese airlines offering cheaper prices on many routes is a contributing factor that’s hard to ignore
Accusations of unfair government aid going to China’s airlines have circulated for years, and the country’s three biggest carriers—China Eastern Airlines, China Southern Airlines and Air China—are all state-owned. However, it’s clear last month’s route rollbacks at American were primarily driven by fuel costs.
By some estimates, fuel costs account for between 17 to 22 percent of airlines’ operating costs, and many expected cutbacks due to the steady rise in fuel costs. Long-haul routes are the logical initial cutback since they are more expensive per capita in terms of fuel. Moreover, the 11 routes American cut in August include routes like Philadelphia-Munich, New York (JFK)-Dublin-Edinburgh, and Los Angeles-Toronto. It’s not simply a China affair.
Still, it’s hard to deny that Chinese airlines, with the help of government aid, have a distinct edge when it comes to maintaining profitability on international routes by offering dramatically lower ticket prices. Part of this advantage is due to the lower-quality services on Chinese flights (compared to the standards on Western international carriers), but that disparity isn’t as dramatic as it was in the past.
Instead, the fault lies with Chinese governments—both at national and municipal levels—who have collaborated to make sure that Chinese cities have robust international connections, and the primary beneficiaries of these efforts are Chinese airlines. Subsidies make up the biggest share of this aid, although tying down exact figures is challenging.
Late last year, a report revealed that Chinese airlines received a total of $1.3 billion (RMB 8.6 billion) in state subsidies from municipal governments, with large metropolises like Beijing, Shanghai, and Guangzhou taking the largest shares. These airlines used this money to subsidize the costs of operating direct flights to long-haul destinations in the U.S. and Europe, and the sum accounts for almost the entire profit margin for the top four Chinese airlines.
In 2016, total subsidies for Chinese airlines grew to an estimated $1.3 billion
However, it isn’t just major urban centers that China aggressively seeks to connect to international locales. Smaller cities around China are also offering similar subsidies, spurring an explosion in the number of applications for new international routes by Chinese carriers. For example, the city of Qingdao offered $11,690 (RMB 80,000) per 200-seat flight to nearby Asian destinations. These subsidy agreements likely have little to no impact on the bottom lines of American or other international carries, but they do illustrate how smaller Chinese airlines can afford such quick expansions.
Chinese airline subsidies are particularly frustrating for destinations with their own carriers that have open-sky agreements with China, as the country is effectively giving government-subsidized Chinese flights access to destinations where they compete against unsubsidized carriers. Though it’s hard to calculate just how big a profitability advantage this gives Chinese airlines, even a seemingly minor advantage of a few percentage points could be enough to push other carriers off routes going in and out of China.
Chinese aviation authorities have opted to restrict expansion for international carriers and have also allegedly limited or denied their access to coveted times slots at Chinese airports
Of course, it’s not simply subsidies that are benefiting Chinese airlines at the cost of competitors. At the national level, the Chinese government has restricted international carriers’ access to many Chinese destinations. The Chinese government fined Emirates $4237 (RMB 29,000) last year for two “safety infractions” that both occurred in airspace over Xinjiang Province. The airline was also blocked from adding new destinations or aircraft to China for six months. The fine itself was not particularly punishing to the airline, but the restriction on expansion was undoubtedly damaging to the Dubai-based carrier in the China market.
International carriers have also complained that Chinese authorities give them consistently bad takeoff and landing times, making their flights more unattractive to travelers. American Airlines formally filed a complaint to the U.S. Department of Transportation against the renewal of an Air China route between Beijing and Houston, citing unfair treatment by Chinese aviation authorities.
So, while rising fuel costs have done plenty to help shut down long flights from international carriers, in China, strong government patronage of hometown airlines is certainly a factor as well.