Northeastern Hot Potato: Hebei Airlines

Sometimes it seems like a new Chinese airline starts operations every other week, however though there is plenty of room for growth there are several brakes on expansion. It would be wise for new airlines to take note of the travails of several of the older new startups that have suffered a torrid time. Some like xxx have not survived whereas others like Hebei Airlines have struggled on with constant changes of focus. Only now is the airline finally finding its legs.

Hebei Airlines Boeing 737-800WL B-1930 Panda Models 1:400 Scale Model Airliner

Northeast Airlines of China was formed in 2006 to operate from Shenyang by Shenyang Aircraft Company, itself a subsidiary of AVIC. This made it one of relatively few Chinese airlines with roots in Chinese industry rather than local government. Sichuan Airlines was also a 33.5% shareholder and provided initial equipment in the form of a pair of Embraer ERJ-145s and a single Airbus A319 (B-6170). The startup was not successful and in 2009 the airline moved in its entirety to the Guilin in the nation's South - somewhat upsetting the carrier's name! Less than six months after this Sichuan stepped in and took over 97% of the airline's shares.

---

Sichuan took the airline in yet another direction (North again) and it was reborn as Hebei Airlines based at Shijiazhuang, the capital of Hebei province in June 2010. This followed an agreement with the Hebei Municipal Government. As is often the case with Chinese airlines optimistic growth projections called for profitability and 20 aircraft by 2015 but unfortunately yet again that was not to be the case. Between 2011 and 2015 Hebei Airlines lost nearly $160 million and by mid-2014 the fleet was only 11 aircraft. The fleet was switched to Boeing products with a pair of ex-Xiamen Airlines 737-700s arriving in 2010, followed by 737-800s. The Airbus A320, that had followed the A319, was returned to Sichuan. The smaller ERJ-145s have also gradually been replaced by new Embraer 190s with six onstream by 2016.

With its lack of success Sichuan decided to downsell its share to Jizhong Energy Group but in November 2014 China Southern's large well run semi-independent subsidiary Xiamen Airlines came onboard and took a 99.23% share holding (Jizhong Energy Group actually owns 15% of Xiamen Airlines anyway). Backed up by a cash injection and loan guarantee from Xiamen it has been hoped that Hebei Airlines will allow it to expand in the Northeast of China.

Part of Hebei's woes have been caused by its inability to deliver results in the face of the vibrant LCC Spring Airlines which itself opened a base at Shijiazhung in mid-2009. The local government found it more profitable to support Spring than its local airline as the former required less subsidies and was profitable. In fact at the time of the Xiamen purchase Hebei Airlines had a smaller market-share (21:29%) at its homebase than Spring.

One of the major limiting factors on Chinese airline expansion is the lack of skilled management and technical staff and this appears to have been a key factor in Hebei Airlines problems. In addition Shijiazhung is impacted by a high speed rail services which can compete against the airline traffic. Whereas Spring has actively partnered with the railways to use the rail inks to feed its operations Hebei seems to have suffered losses to the rail network.

It appears that one of the major factors in Xiamen Airline's thinking in its purchase of Hebei has been the possibility of creating a hub operation for it at Beijing's new Daixing airport, when it opens, which borders Hebei province. There is hope for success considering Xiamen Airlines long run of profitability however this is tempered by uncertainty at Xiamen surrounding their expansion into long haul services.

Since the takeover Hebei Airlines has been posting positive results - gradually increasing its fleet to 16 aircraft and reporting steadily improving passenger numbers. In addition its corporate customers have increased by 25% and by October 2015 it had regained the top marketshare spot at Shijiazhung. Whether Hebei Airlines can survive and prosper remains to be seen but its history is so far an illustration that starting new airlines in China is fraught with difficulty if they do not have the backing of an established carrier, an invested local government and good management.

References

2014, November 9. Hebei Airlines' sale to Xiamen Airlines illustrates the challenges faced by China’s startup airlines. CAPA