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CEO Interview – China Eastern Airlines: A Bright Future Beckons:

Liu Shaoyong, Chairman of China Eastern Airlines, tells how domestic strength will enable the airline to overcome the global economic malaise and pursue growth opportunities

Liu Shaoyong - CEO China Eastern Airlines

China Eastern’s shopping spree for new aircraft continues. What is the airline’s growth strategy?

The potential for growth in Chinese aviation is huge. The new Chinese leadership has ambitious development plans and by 2020 the per capita income will be doubled. The goal is for China to be a developed country by 2049, which is the 100th anniversary of the People’s Republic.

Once per capita income reaches $10,000 a year [from approximately $5,500 today, according to the United Nations] it will make an enormous difference to the number of flights taken by the general population. We need to meet this potential and that is why we are making changes.

In the past four years the airline has phased out older aircraft such as the MD-11, CRJs, some Airbus aircraft, and the Boeing 767. This means the airline can now simplify its fleet structure to improve fleet management, reduce maintenance costs, cut emissions, and enhance customer service. For long-haul flights a Boeing 777 will be used, for medium-long routes an Airbus A330, and for short-medium destinations a Boeing 737 and Airbus 320.

In the past three years, China Eastern has spent more than $20 billion in list prices to renew its fleet, including the most recent $5 billion order.

I am optimistic. It will be difficult, but I see a bright future. Civil aviation will play an important role in growing the economy, especially in international trade and communications. It should be a win-win situation. There are plenty of opportunities out there.

Chinese carriers are doing well domestically, but haven’t made an impact in the international sector. Do you have a plan to counteract that?

It is true that we make most of our money on domestic routes, but it is only a matter of time before Chinese carriers have an impact on international markets.

It takes time to adjust the product and the sales and marketing strategy for the international market. We are still in the early steps of this adjustment. The latest IATA figures show that China will account for one in four of the additional passengers through 2016, but also that the United States is still by far the largest international travel market. We won’t be on a par with them until 2030 or so.

But Chinese carriers are learning quickly. Quality and safety management will be important to attract customers and build the brand. The safety record of Chinese carriers is first rate. Our fleet plans will help us improve customer service. And we will need to keep the right balance between domestic and international markets to achieve the results expected of China Eastern.

The point is to have strong roots that enable growth. The leaves are not as important and can be pruned to encourage further growth.

How important is SkyTeam to the airline’s future?

The cooperation with SkyTeam is excellent and the alliance is very strong. SkyTeam has 19 members, including near neighbors such as Xiamen Airlines, China Airlines, and China Southern Airlines. The network has grown 17% in just two years and the alliance serves 187 countries and more than 1,000 destinations. It means you can provide more choice to your customers and enrich the product.

But it also means China Eastern can take part in the excellent staff exchange programs. We have sent staff to France and the United States, for example, and this will improve our management team and fast track China Eastern’s strategy and growth plans.

So do you see the neighboring airlines as rivals or partners?

We are first and foremost colleagues, both in the alliance and in China. We speak a lot about competition in the industry, but cooperation is also important and a vital part of a healthy industry. Cooperation benefits customers and safety, and paves the way for the sustainability of the industry. Healthy industry development means a more convenient way of serving the customer.

When Chinese aviation was still young, 25 years ago, there were some accidents in China. But now the situation has changed completely and there is a very impressive safety record, even by international standards, and this shows the value of cooperation.

Do airlines deliver sufficient returns to investors?

It’s true that the return on investment in airlines isn’t great and that makes it very tough for investors. But it’s also very tough for the airlines. The aviation industry is high risk; it has huge capital demands, needs a lot of new technology and has an enormous appetite for skilled personnel.

Regulations, such as the restrictions on foreign investment in airlines and restricted traffic rights and airspace, can also impose limitations. Coupled with this is the fact that many other transportation modes, such as high-speed rail, can get government subsidies.

So it is a tough task for airlines to appeal to investors. Governments could help. Connectivity is critical, so a healthy aviation sector is in the national interest. But governments often fall short of creating the operating conditions necessary for the industry to be successful. For China Eastern, we are fortunate to be in a good position. Our net return on capital is very high compared with the industry average. In the past three years our average returns exceed 35%.

Airlines should also consider where they can invest. Chinese carriers have been given permission to invest in airports, hotels, and ground handling, for example, and I believe this will be crucial in helping to balance the risk and rewards of the industry.

How should governments support the industry?

Governments must consider the role of industry. Airlines cannot be considered in commercial terms alone—characteristics of public service also exist.

Governments’ support can be shown in several ways. Taxes and fees could be reduced and infrastructure could be improved. This would help the industry develop and, importantly, would also help grow the economy. Governments have already realized the importance of the aviation industry and understand that developing aviation would lead to a better economy.

Are carriers competing on a level playing field?

Governments can certainly help state carriers by injecting capital. But it isn’t such a simple picture. If you look at Chinese carriers, we are most like a public company, but we are also listed and have shares available in the market. Government support can make an airline strong, of course, but the aim for any state carrier should be to stop relying on government support.

In China, the government has also invested heavily in high-speed rail—far more than in the airlines in fact—so it’s not a case of nationalized carriers being better off, because they also have many challenges to face.

China opposed the European Union Emissions Trading Scheme (EU ETS), but now that the clock has stopped how should talks go forward?

The voice of the Chinese carriers and of China is also the voice of Russia and the United States, for example. Many countries got together to talk about opposition to the EU ETS.

We all totally agree with Europe on the need to reduce emissions. As mentioned earlier, China Eastern has invested heavily in new aircraft, partly because of our desire to reduce emissions. What we can’t agree on is a regulation that contravenes international conventions. The Chinese people will not compromise on their morals. 

We welcome the clock being stopped. It gives us time to talk and find a solution to this problem. I hope ICAO will be successful.
 
Can Chinese aviation grow without increasing emissions and air traffic congestion?

We believe in a fair solution to this issue. We have only one planet so everyone must take equal responsibility. The Chinese population is big, but the number of times per year they fly is small—less than half the global average. So we can double traffic volumes and still only be at the global level. A fair solution should acknowledge this.

Chinese infrastructure development is impressive, but there is still an issue with air traffic congestion in certain regions.

Air traffic management is an important issue. China Eastern operates more than 500 flights a day. If a flight is delayed for 10 minutes it costs us about $1,600 (CNY 10,000). Multiply that across all flights and the loss would be about $800,000 (CNY 5 million) a day, which is more than $160.2 million (CNY 1 billion) a year. That’s a lot of money. And that’s without thinking about the inconvenience to customers and possible loss of business.

There is frequent communication between the various ministries and the aviation industry to try to resolve this issue and there are plans to optimize the air routes. We have recently managed to optimize routes between Beijing, Shanghai, and Guangzhou. We have also agreed to introduce flexibility so that if airspace is not being used by the military then civil aviation will be able to use it.

ATM is not the only reason for delays, however. The weather can be unpredictable in certain regions of China and because most passengers fly to, from, or through Beijing, Guangzhou, and Shanghai, bad weather can affect the whole network. It is a tough challenge involving crew changes and aircraft.

We are confident that the new Chinese government will take actions to improve the situation and eliminate air traffic problems. It is an issue we cannot ignore as demand grows and more aircraft take to the skies.

Finally, how would you describe your management style?

It seems like a simple question, but actually it needs a complex answer, and that is because running an airline is complex. Management systems and the technology involved pose a lot of challenges on a daily basis. The idea is to have some straightforward rules that allow you to manage the entire company.

I am a pilot, a captain, and I first went into management to gain some experience of how an airline is run. So I have adapted my professional habits as a pilot into my management style. That means a clear strategy and targets. When you fly you know your destination and the route you will take. You want to fly the most efficient way possible.

And you need forecasts too. So if it is snowing in Geneva you can make plans to land in Frankfurt. That is about controlling risk and managing a dynamic situation.

Finally, you know you can’t do it alone; you need teamwork. Everybody must work closely together. The captain must be a leader of a skilled team.

www.ceair.com  (Chinese), en.ceair.com  (English)

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