High-speed trains force airlines to drop route
There is only one way to get from Zhengzhou to Xian these days and it does not involve flying.
As a harbinger of how China's expanding high-speed rail network could eat into the market share of airlines, all flights between Zhengzhou and Xian stopped this week as a fast train link between the two cities that began operation last month made it more attractive to travel by train.
The 35.3 billion yuan (HK$40.12 billion) service launched on February 6 has cut train travel time for the 505 kilometre journey from over six hours to less than two hours. Every day, 14 high-speed trains race between the two cities at speeds of up to 350 km/h. Flying takes just over an hour but Xian's airport is at least an hour's drive from downtown. Before the high-speed rail link started service, domestic carrier Joy Air was able to fill more than 60 per cent of its seats on that route. Henan Airlines has also ceased flying the route.
By 2012, high-speed railway will pose a major threat to domestic flights in China, Daiwa Securities analyst Kelvin Lau warned.
Beijing wants the country traversed by 13,000 kilometres of high-speed rail lines by 2012, making it the world's biggest high-speed rail network. By 2020, the high-speed network would cover 18,000 kilometres, said Zheng Jian, the chief planner of the Ministry of Railways.
'Short-haul flights will be very badly affected' by the growing high-speed network, Lau said.
Nomura analyst Jim Wong said the shorter the distance, the bigger the impact on airlines. 'We have seen in countries like Japan and Taiwan where high-speed trains have a travelling time of within two and a half hours, airlines lose a huge amount of market share,' he said. 'Beyond three hours, the competitiveness of rail versus air diminishes.'
For example, on the 515 kilometre Tokyo-Osaka route, similar in distance to the Zhengzhou-Xian route, railway commands more than 85 per cent of the travel market share, according to the International Union of Railways (UIC). For the 310 kilometre Paris-Brussels route, high-speed railway has more than 90 per cent market share, according to UIC.
Although the impact of high-speed railway on airlines' revenue will not be large, the impact on profits will be significant because the profit margins of Chinese airlines are already thin, Wong said.
China Southern Airlines, China Eastern Airlines Corp and Air China make 80 per cent, 60 per cent and 50per cent respectively from domestic routes, Wong estimated. China Southern has said 25 per cent of its domestic routes overlap with rail.
One analyst estimates the portion of Chinese airlines' revenue that will be significantly hurt by high-speed rail at less than 5 per cent. Lau estimates 10 to 20 per cent of airlines' revenue will be affected.
'I don't think it will be that severe that all flights will be grounded,' Lau added. 'Some domestic air routes will still be sustainable, as there is high demand for them.'
For example, the Guangzhou-Beijing and Guangzhou-Shanghai air routes have a viable future, because there is extensive travel between these cities, Lau said.
He said the Zhengzhou-Xian air route had not been very profitable as demand was not strong. Many low-end travellers ply that route, so it was also more price-sensitive, he added.
Paul Ng, a partner at international law firm Stephenson Harwood, said airlines would still be able to compete against high-speed railway on price.
'In Britain, with the advent of low-cost carriers, people still take to the air because the cost of flying is lower than rail,' said Ng, a lawyer with expertise in aviation. For example, it was cheaper to fly between London and Birmingham than taking a train, Ng said. The trip took 45 minutes by air but 21/2 hours by train, he said.
