After years of frustration American Airlines finally has found a way to gain significant, meaningful access to the fastest-growing major air travel market in the world – one with 1.8 billion people, 60% of whom live in urban centers where average family incomes are expanding almost exponentially and who are being strongly encouraged by their government to fly abroad on both vacation and business trips.
At least that’s the best case scenario analysis of American’s financially modest $200 million investment this week in China Southern, the largest of China’s three big, state-owned airlines.
Another, mid-line scenario is that American and China Southern begin cooperating modestly, passengers on American get a few new options to reach second- and third-tier Chinese cities, and Chinese travelers get a few new options for reaching U.S. cities beyond American’s big gateway hubs at Chicago, Dallas/Fort Worth and Los Angeles. No harm. No foul. But nothing remarkable, either.
The worst case analytical scenario is that a frustrated American just threw away $200 million into a desperate attempt to gain significant, meaningful access to the fastest-growing major air travel market in the world. In so doing, according to this scenario, American risks triggering the partial collapse of its cherished and valuable oneworld global airline alliance. It also risks breaking up or significantly minimizing some of the key partnerships it has with three key oneworld member carriers on the other side of the Pacific – Hong Kong’s Cathay Pacific, Australia’s Qantas and, most notably Japan’s JAL. JAL is American’s most important Asian partner, one for which it was willing only six years ago to risk $1.4 billion to keep in the oneworld fold.
On its face, the American’ purchase of a 2.76% stake in China Southern makes a lot of sense. Though it is this nation’s – and the world’s – largest airline by passenger miles flown and by revenue, American long has had one huge, glaring hole in its global flight network – Asia.
In addition to its very strong position in the U.S. domestic market, especially among high fare-paying business travelers, American and its principal oneworld alliance partner British Airways dominate the lucrative (though declininingly so) trans-Atlantic routes between the U.S. and Europe. BA’s London Heathrow hub, which is the center point of the American-BA partnership arguably is, from a financial perspective, the best-performing hub in the world.
American also is, by far, the dominant player on routes between the United States and Latin American and the Caribbean. That’s a market that runs hot-and-cold with the fortunes of the not-entirely-stable Latin American economies and governments, but which nevertheless generates lots of demand and, most of the time, nice profits.
But for historical reasons, reinforced by a couple of key strategic missteps and some bad luck, American is a very distant No. 3 in competition across the Pacific with rivals United and Delta. And when you consider that even combined the three big U.S. carriers carry less than 50% of all trans-Pacific traffic it means that American really is only a bit player in the huge and fast-growing Asian market. That market is expected to continue growing rapidly at least through 2030.
by Dan Reed FORBES