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Cablegate: Airlines in South China Poised to Grow Despite Global

VZCZCXRO4234
RR RUEHCN RUEHGH
DE RUEHGZ #0614/01 3030547
ZNR UUUUU ZZH
R 300547Z OCT 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1059
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0315
RUEHBJ/AMEMBASSY BEIJING 0841
RUEHGH/AMCONSUL SHANGHAI 0251
RUEHCN/AMCONSUL CHENGDU 0252
RUEHSH/AMCONSUL SHENYANG 0261
RUEHHK/AMCONSUL HONG KONG 0323
RUEHGP/AMEMBASSY SINGAPORE 0008
RUEHKO/AMEMBASSY TOKYO 0038
RUEHIN/AIT TAIPEI 0236
RUEAIIA/CIA WASHDC 0298
RUEKJCS/DIA WASHDC 0294
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0112
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0012
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC 0003
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0178

UNCLAS SECTION 01 OF 03 GUANGZHOU 000614

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STATE FOR EAP/CM, INR/EAP, EEB/TRA/OTP AND EEB/TRA/AN
DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT, KGLATZ
FAA PASS TO RCICERO
BEIJING, TOKYO AND SINGAPORE FOR FAA REP

E.O. 12958: N/A
TAGS: EAIR ECON PREL BEXP CH
SUBJECT: Airlines in South China Poised to Grow Despite Global
Economic Slump

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) SUMMARY: The global economic downturn has had minimal
impact on major airlines in south China despite international
airlines industry losses of US$11 billion for 2009. Though some of
China's airlines have diversified their business portfolio and
others have made operational adjustments, the overall trend is
positive. Executives of three leading airlines in the region
acknowledge that increased attention on China's domestic air travel
market has elevated the level of competition both locally and
nationally, but they feel that their companies are well positioned
for further growth and expansion. Looking ahead, they plan to rely
on core strengths, innovation, and auxiliary services to grow their
businesses. During meetings with China airline executives, the
Consul General encouraged them to continue to purchase U.S.
aircrafts as well as aviation products and services. END SUMMARY.

Economic Slump Has Minimal Impact on South China Airlines
--------------------------------------------- ---------

2. (SBU) Guangzhou-based China Southern Airlines, the largest in
China in terms of fleet size and passengers carried, was relatively
unaffected by the global economic downturn, said its president, Tan
Wangeng, in a meeting with the Consul General. Because the
international market is only 20% of China Southern's business, the
airline fared well through the slowdown, making only minor
adjustments to its operations. One measure taken by China Southern
was the postponement of plans to increase some of its international
passenger and cargo flights. For example, Tan explained that China
Southern originally planned to step up service between Guangzhou and
Los Angeles to a daily basis, but opted to maintain flight frequency
at four per week. Tan also revealed that his company was prepared
to consider lay-offs to cut operational costs, but so far, there
were no plans to cut jobs.

3. (SBU) For Hainan Airlines, which is part of the HNA Group and
headquartered in Haikou, Hainan Province, the economic downturn
compelled the company to make minor adjustments to its business
model. Hainan Airlines chairman Chen Feng explained to the Consul
General that he saw the downturn as an opportunity to enter or
expand into other markets. Already operating in eight different
sectors including aviation, tourism, logistics, real estate, retail,
financial services, and catering, the airline is exploring new
opportunities in hotel management in the United States, said Chen.
He anticipates that a strengthened U.S.-China relationship will
bring additional opportunities to the company. (Note: HNA Group
also recently purchased the Westin Hotel in Guangzhou only days
prior to announcing plans to acquire Jumeirah Han Tang Xintiandi and
Conrad Shanghai, two luxury hotels currently under construction in
Shanghai's Xintiandi district. End note.)

Increased Domestic Competition and Other Challenges
--------------------------------------------- ------

4. (SBU) Competition is increasing in China's aviation industry, a
trend that has intensified with the economic downturn, according to
Liu Hang, a senior executive at Shenzhen Airlines. Because of
China's forecasted economic growth of eight percent and strong
domestic passenger air travel figures for 2009 (20% year-on-year
increase in the first half of 2009, per Civil Aviation
Administration of China (CAAC)), many airlines have fixed their
sights on taking a larger piece of the domestic market. Liu also
explained that rapid development of the Chinese economy and
increased customer needs, like on-time service and improved
in-flight service, have placed more demands on the aviation
industry. In addition, for a relatively small airline like Shenzhen
Airlines, securing routes, which are highly controlled, is very
difficult. Liu complained that the three big Chinese airlines --

GUANGZHOU 00000614 002 OF 003


China Southern, Air China, and China Eastern -- already occupied the
best routes and time slots, which he called unfair to the small and
medium-sized airlines.

5. (SBU) Chen of Hainan Airlines had a similar assessment of China's
airlines industry, but also voiced concern about the aircraft
market. As one of the first purchasers of the Boeing 787, Hainan
Airlines regrets that production of the new model has been delayed,
said Chen. He said that the airline viewed the delay as a "serious
situation" and hoped that Boeing can resolve the issue and deliver
the order soon. Chen also expressed frustration that there were
only two major aircraft producers worldwide.

Positioned to Grow and Expand
-----------------------------

6. (SBU) Seeing an upswing in domestic passenger figures and signs
of a global economic recovery, airlines based in south China are
looking ahead with optimism. China Southern has plans to increase
the international portion of its business to 30% and further develop
as a global airline. As part of this plan, the airline will begin
to offer daily flights to Los Angeles, Sydney, and Melbourne. If
the economy continues to show signs of recovery, said Tan, China
Southern will increase flights to Australia to three flights per
day. In addition, the airline hopes to open more Beijing-U.S.
flights, including a Beijing-New York route. The latter proposal
has been submitted to the CAAC and is currently under review. In
terms of fleet expansion, China Southern aims to increase its fleet
by 10% year-on-year, adding a net 30 aircrafts each year to the
current stock of 353 in the short term. China Southern's fleet is
relatively young and no more than 10 aircrafts are replaced each
year, said Tan. He also added that the airline was constantly
upgrading its fleet. For example, older Boeing 777's will be
replaced with Boeing 787's.

7. (SBU) Hainan Airlines also has an ambitious expansion plan.
According to Chen, two of the company's main objectives are to
become a world-class brand and rank among the top 500 enterprises
worldwide within five years. To help achieve this goal, Hainan
Airlines will increase its current fleet of 215 aircrafts by 300
over the next five years, adding 60 aircrafts each year.

8. (SBU) In 2006, Shenzhen Airlines launched the 369 Development
Strategy, setting a goal to achieve a certain degree of brand
recognition and value every three years. In addition, it laid out a
plan to increase the total number of its aircrafts in three stages:
70 by 2008, 100 by 2011, and 160 by 2014. Senior officials at
Shenzhen Airlines said that the company has achieved the second
stage in advance, currently owning 150 aircrafts (including planes
of its subsidiary, Jade Cargo), and is already a well-recognized
brand within China. The company also recently received approval to
open a branch office in Beijing. The airline's next step, said Liu,
is to tap the international market. Its current international
service reaches only the periphery of China, but Shenzhen Airlines
is also eyeing opportunities to service the U.S. and Europe.
However, Liu stated that as much as the company would like to go
beyond China's periphery, it recognized the difficulties, especially
during tough economic times.

Staying on the Cutting Edge
---------------------------

9. (SBU) Shenzhen Airlines, being the smallest of the three leading
airlines based in south China, has to exercise more creativity and
innovative thinking to secure its market position, said Liu. With
the best resources and routes going to major Chinese airlines,
Shenzhen Airlines has been cultivating relationships with local
governments of less developed areas to tap new markets and explore
new routes. Liu explained that his company also sees this strategy
as a way of developing local economies and helping China's economic

GUANGZHOU 00000614 003 OF 003


development.

10. (SBU) Although Liu acknowledged that Shenzhen Airlines' hardware
cannot compete with that of the big three airlines in China, he said
that Shenzhen Airlines' uniqueness in service and innovation made it
a rising competitor in the industry. Liu pointed to the airline's
youthful and robust employees, who average 25-26 in age; operational
efficiency; young fleet; and service innovations such as one-hour
ticket delivery, door-to-door passenger service, and onboard
sign-language translation as the company's advantages.

GOLDBECK

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