China’s high-speed rail is so popular, it’s hurting the domestic airline industry

March 31, 2014
March 31, 2014

China Southern Airlines is the latest Chinese airline to post miserable year-end 2013 results. Net profit dropped 24% to 1.99 billion yuan ($321 million), and operating profit fell 70%. China Southern Airlines joins Air China, where net profit dropped 32% in 2013, and China Eastern Airlines, where it fell by 25%.

High oil prices, as well as increased competition from low-cost carriers and each other, have taken a toll. But, as each airline has recently acknowledged, so has China’s massive and growing high-speed rail system.

As Quartz reported last August, the costly and sometimes under-used rail network was shaping up to be a vital part of China’s growth strategy. It doesn’t have the hurdles of the airline industry: Airlines in China struggle to get clearances from the military to expand flight paths, and China’s major airports have earned the title of the most-delayed in the world, where passengers sometimes riot to protest long waits and miserable customer service.

The high-speed rail system, on the other hand, has quickly grown to over 6,000 miles (9,700 km) in five years, and will expand to 19,000 kilometers (11,800 miles) by 2015. It is already transporting some 2 million passengers a day on trains that are rarely delayed, and which go nearly 200 miles an hour, twice as many passengers as domestic airlines.

If there were no rail network, these passengers wouldn’t all necessarily have taken flights instead, of course. Some might not have traveled at all, or gone by car, bus or slow train. Still, to see how this has hit the airlines, take a look at China Southern’s domestic passenger activity, which peaked in 2011, and on most months hasn’t hit the same highs since, according to the Center for Asia Pacific Aviation:

Screen Shot 2014-03-31 at 7.01.19 PM

In 2013, China Southern’s revenues from domestic operations dropped 5.5% to 81.3 billion yuan. At Air China, revenues from domestic flights likewise fell over 5% in 2013, though the number of passengers increased by 7.3%. “The rapid development of high-speed railway and the evolution of low-cost carriers on the mainland will further intensify competition on domestic routes,” the company said when it announced results March 25.

China Eastern’s chief executive complained about the subsidies the railways get in an interview last year, saying “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.”

It’s a sticky situation: while all of China’s big three airlines are publicly traded, the Chinese government continues to hold controlling stakes in the companies. That means the cannibalization of domestic airline passengers by the railways is a case of the government eating its own profits.

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