Sun Huang-Hsiang, Chairman of China Airlines, talks to Graham Newton about achieving sustainable growth in a volatile industry
How will China Airlines (CAL) take advantage of the growth in Asia-Pacific?
We’ve been concentrating on regional expansion recently because you have to get that right to feed a successful long-haul business. Obviously, the Mainland of China is the big market. We have more than 110 flights a week between Taiwan and the Mainland of China covering 25 destinations. There is still large growth potential in this area. According to our analysis, the number of passengers taking cross-strait flights only accounts for about 55% of total cross-strait travelers. This means 45% of travelers still transit through other regions on their way to China. So we would like to increase flight frequencies to China. '
Japan is important too. In 2011, there was further liberalization between our markets and we have expanded since then from 95 flights a week to 130 flights a week covering 13 destinations. And in South-East Asia we have been increasing frequencies to the major cities such as Manila, Jakarta, and Bangkok. But we are still a full-service airline and we still have a very viable long-haul business. In fact, our long-haul services account for around 45% of our passenger revenue. And the new aircraft we are getting have been bought with the long-haul sector in mind.
How has this strategy translated into your financial performance?
Financially, we have been doing okay. 2008 was a very bad year but 2010 was a very good year. Other years have seen only small profits or losses. The passenger side of the business is very strong and we are growing our passenger revenues about 10% per year on average. We are very happy to re-invest in this sector and that is the main reason we are getting new aircraft.
But the cargo side has been flat. In fact, we have three cargo aircraft still parked up. So we have extra capacity if needed and we are watching the market carefully to see if there is any upswing. There is no reason to put more money into this sector right now. At the moment, with the large-scale depreciation of the Yen and continuing sluggish economic conditions in the European Union, a down trend for Chinese exports and over-supply in the air cargo market remains. Overall, air freight yields have stagnated at a low level.
We expect the air cargo market will gradually recover from the second half of this year due to the launch of a number of consumer electronics. Also, if carriers can deploy their capacity carefully and wisely the cargo business will gradually improve in response to conventional seasonal shipping demand.
What will you do to boost cargo revenue and how crucial is cargo to your overall business plan?
The project aims to strengthen sales strategies and diversify the cargo mix for various products. Since cargo revenue represents around 30% of CAL revenue, we have fine-tuned networks and capacity to achieve an optimal balance for improving overall profitability.
What do you see as the main challenges to growth?
Weak economic conditions, low cargo demand combined with overcapacity in air cargo, and volatile oil prices will be the main challenges to future growth. Moreover, other Asian airlines as well as low cost airlines have also become viable competitors in recent years. I’ve been in this industry for 40 years but the last few years have definitely been the toughest. Airlines have been severely affected by events outside of their control. There has been global economic uncertainty, political instability, SARS and other potential pandemics, and fuel prices have soared.
It has become more and more difficult to manage an airline in such a volatile world. But while it is more challenging than ever, airlines have grown stronger. There have been many improvements and by strengthening our core competencies we are better able to adapt to the outside environment.
Is the volatility in the market the reason you’ve opted to lease some
of your new fleet?
One reason to use operating leases is to avoid residual risk. Additionally, based on the company’s fleet planning needs, operating leases allow for the flexible management of transport capacity via varying rental periods.
With the company’s good credit rating and recent low interest rates, capital costs for purchasing aircraft remain low. But, considering the other factors such as operational flexibility and residual risk, CAL plans to retain a certain proportion of leased aircraft as it expands operational capacity.
You’ve picked up awards for your brand. What have you done to market your brand and what are the keys to success?
A good brand is about being a good airline. Aviation safety, the fleet, the network, and service upgrades are four important areas. Looking at safety, our insurance premium in 2013 was 12% lower than the previous year. This shows that CAL’s safety efforts have been recognized by the insurance sector. Safety is always the number one concern. We will continue to aggressively maintain aviation safety and discipline to provide passengers with the safest travel experience possible.
Our passenger fleet will reach 55 aircraft by the end of the year. In 2014, three 737-800s, three 777-300ERs and one A330-300 will be introduced. Along with 21 freighters, CAL will operate a fleet of 83 aircraft by the end of 2014. Then, as part of CAL’s initiatives to keep its long-haul fleet up to date, a total of 10 777-300ERs and 14 A350-900s will be introduced from 2014 and from 2016 respectively. By operating those most advanced and fuel-efficient long-haul aircraft, and based on the feed from our robust regional networks as well as feed from our SkyTeam partners, CAL will not only further strengthen its long-haul networks to North America, Europe, and Australia but also enhance the brand.
CAL has the best connectivity in Taiwan and the strongest coverage in China and Japan. This not only increases flight options for local passengers, it also means passengers from Northeast Asia can stop over in Taiwan en route to Southeast Asia, and that passengers departing from within Asia can stop over in Taiwan on their way to North America, Europe or Australia.
The extra capacity strengthens Taiwan’s position as a regional air transport hub and so strengthens the brand. Last but not least, China Airlines aims to provide all passengers with attentive, sophisticated and timely services. We are committed to enhancing every aspect of a passenger’s journey, and the culinary feast is the latest in China Airlines’ efforts to win passengers over with an unmatched level of service. These include inviting Taiwan’s four top chefs to design the economy class menu as well as partnering with the W Hotel to create an ‘In-Flight Gastronomic Celebration’ for China Airlines’ First and Business Class passengers.
It is worth noting that China Airlines recently garnered fourth place in the “Best International First Class Wines on the Wing” category of America’s Global Traveler magazine’s “2013 Wines on the Wing”.
How important is SkyTeam to your growth strategy?
Membership in the SkyTeam alliance enables CAL to take full advantage of the alliance’s global market reach and provides our passengers with unparalleled global connectivity. Our transfer passengers and frequent flyer members have increased significantly since CAL joined SkyTeam in September 2011.
CAL offers 108 destinations in 29 countries while SkyTeam offers 1,024 destinations in 178 countries. Also, to further benefit frequent SkyTeam travelers between Taiwan and China, China Airlines, China Southern Airlines, China Eastern Airlines and Xiamen Airlines formed the Greater China Connection partnership in January 2013. Under the Greater China Connection program, more than 460,000 Elite and Elite Plus members are entitled to program benefits. The scope of the Greater China Connection program extends across more than 41 airports and more than 270 cross-strait flights a week. In other words, one in every two China-Taiwan flights is provided by a member of Greater China Connection.
China Airlines either fully owns or has an extensive interest in a number of other companies. How does this strategy add to the brand and the core product?
Our strategy is to strengthen China Airlines’ core competency and to establish a consistent brand image. The CAL group controls 36 companies covering airlines, ground services, logistics, air cargo terminals, catering services, bulk laundry services, information services and tourism, successfully maximizing group efficiency and creating economies of scale.
Can you detail your environmental strategy at the airline level?
China Airlines has cooperated with other industry-leading carriers on environmental protection and pioneered many eco-friendly practices in the domestic aviation and transportation industry. At CAL, environmentalism, like safety awareness, is part of the DNA of our corporate culture and our core values. CAL actively embraces green initiatives from the management level to the services level. A green and sustainable future at CAL is ensured through international collaboration and our efforts have won many awards over the years.
Looking at industry-wide environmental efforts, has aviation got its environmental strategy right and how important will the mandatory carbon offsetting scheme be to industry progress?
Aviation has certainly got its environmental strategy right as over 90% of aviation’s environmental impact is associated with fuel efficiency, greenhouse gases, and carbon emission. Airlines worldwide, including China Airlines, have developed specific environmental strategies focusing on IATA‘s three sequential targets and four-pillar strategy.
Regarding the IATA resolution supporting a mandatory carbon offsetting scheme, CAL recognizes its importance and believes that it can be made practical with suitable tools in place. CAL fully supports the ICAO stance on global carbon emission control and follows IATA guidelines on self-management. Any emission control or offsetting scheme should be controlled at the global level rather than regional level. This will help avoid “carbon leakage” that increases rather than reduces carbon emissions.
China Airlines and the Environment
- CAL has achieved ISO14001 environmental management and ISO50001 energy management system certification
- The airline’s Headquarter Park was certified as a “Taiwan Green Building” candidate and issued a Label of Energy conservation and Carbon Reduction by the Taiwan Environment Protection Agency
- Environmental key performance indicators are closely monitored to realize the airline’s sustainable development goals through systematic management
- CAL’s ECO Service was recognized by the Taiwan government at the 3rd Taiwan Green Classic Awards
- CAL was the first airline in Asia to operate an IAGOS (In-service Aircraft for a Global Observing System)-equipped trans-pacific climate observation flight in support of the Taiwan EPA Pacific Greenhouse Gases Measurement Project
- CAL submits regular reports to the Carbon Disclosure Project and is a member of the IATA Air Carbon Cargo Footprint working on the development of a calculation model for unifying industry standards on cargo carbon emission calculation
CAL has had a taskforce to focus on fuel efficiency and carbon emissions since 2007. ISO14064-1 has been implemented to manage greenhouse gas emission. With the fleet renewal in the coming future, the close monitoring of fuel efficiency, and active participation in global green initiatives CAL has its carbon well-managed.
Find more information on China Airlines website.