EASTERN ACADEMIC FORUM

Economic Globalization and Internationalization Paths of China’s

Airlines
PENG Juzhen, WU Wen
School of Economics and Management, Beijing Jiaotong University, P.R.China, 100044

Abstract: Under the background of economic globalization, China’s airlines need to realize their
internationalization for customer exit, domestic economic slowdown and other factors. China’s airlines,
focusing on customers and capital, choose international markets based on situations of economic,
tourism, overseas study and other factors. Japan and South Korea, Southeast Asia, Europe and the
United States, Oceania are viewed as focus of the current market, and BRICS countries as potential
market. Internationalization models of Chinese airlines can be divided into two categories: one is the
point-to-point, which is suitable for Japan and South Korea and other peripheral market. The second is
the hub-spoke networks, which is suitable for Europe and the United States, Australia, trans-ocean and
trans-continent distant markets.
Keywords: Economic globalization, China’s airlines, Internationalization path, Internationalization
model

1 Introduction

With economic globalization and "open skies" of the world civil aviation, internationalization has been a
compulsory step for China’s airlines. China’s airlines are and has been exploring the internationalization
paths. However, few studies in current literature have systematically researched the internationalization
theory of airlines to better promote their internalization. This paper attempts to analyze the causes,
direction and paths of internationalization of Chinese airlines, to fill the blank in this research field, and
to provide theoretical basis for airline companies.
The trend of economic globalization, going forward with great strength and vigor, has been an
irreversible development of human society. Until 2012, China had become the world's largest exporter
and second largest importer for 4 consecutive years, with the second position in the total volume of
import and export. According to South Korean Industry Trade Resources cited from WTO statistics,
China’s import and export volume is expected to surpass that of the United States to become the number
one in the world this year, as an important integral part of the global economy. In 2012, the number of
Chinese citizens outbound reached 83,182,700 person time, with a growth of 18.4% than the last year. In
the first half of 2013, the number of foreigners entering to China has reached 64,111,600, 9,979,700
people in the plane. In 2012, the number of passengers of China civil aviation international airline
reached 23,360,000, increasing 2,180,000 times than 2012, with the growth of 10.3%.

2 China’s Airlines Internationalization

Before China’s reform and opening up, Chinese civil aviation had been engaged in international routes.
Then the Chinese civil aviation industry was run enterprises, and China established special international
airlines routes, mainly responsible international routes based in Beijing and Shanghai. By the 1990s,
China Eastern Airlines, located in Shanghai, and China Southern Airlines in Guangzhou had opened up
a lot of international routes. The former is mainly engaged in the lines to Japan and South Korea and the
latter prominently in lines to Southeast Asia. Since then, globalization of the world economy has been
more and more obvious, economic exchanges and personnel exchanges between China and other part of
the world of has been increasingly closer and closer. Different from the Chinese airlines that are cautious
in their step towards the market, the mature international airlines have taken great strides to open the

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Chinese market and occupied the dominant positions, with mature thinking and steps.
In the 21 Century, China’s airlines have started a new round of internationalization. Among these, Air
China, China Eastern Airlines, China Southern Airlines have made useful attempt and made the
preliminary progresses. Air China has won profits in lines to Europe and America and China Southern
Airlines has made a good performance in line to Australia, taking 55% in that market.

3 Reasons for Chinese Airlines’ Internationalization

At least four factors determine that China’s airlines have to realize internationalization.

3.1 Economic globalization is inevitable

The globalization of economy and market globalization bring China's economy has been an inseparable
part of the world economy, especially since China's accession to the WTO. Since the open and reform in
China, China's economy has become an important part of the world economy. If China’s airlines did not
go to the overseas market to run international business, the foreign airlines would come into China
market to compete with local companies. China’s airlines have to face the global competitors and
partners whether in the form of competition or cooperation.

3.2 To meet customers’ need

The regular customers of Chinese airlines are flocking to the global, airlines company should conform to
the needs of customers and provide global services.
A research report from international CPA firm PWC 6 released in Paris showed that, in 2012 China's
foreign investment amounted to $65,200,000,000, making a high record. The Commerce Ministry of
China announced that, during January to July 2013, the actual use of foreign investment is
$71,392,000,000, with the growth of 7.09% than the same period last year.
The number of outbound visitors from China may surpass 100,000,000 person time this year. In
twenty-first Century, the number of Chinese students studying abroad has sharply risen on an
unprecedented scale. And China has become the world's largest source of international students. From
2007 to 2012 years, the yearly growth proportion are more than 20% for 5 consecutive years, in 2013 it
is expected to reach 490,000. Those students include PHD, master, colleague students, high school
students and even children. The number of their family numbers and relatives are three times of this
number. By comparison, this group of customers, in quality, are the good customer resources or
potential customer resources for Chinese airline companies. They are likely to choose the domestic
airline service when in China, which gives Chinese airlines certain advantages in competing in the
international market.

3.3 The size of China's airlines is too big to merely rely on the domestic market
The China Southern Airlines has more than 540 aircrafts fleet, ranking 3rd in the world, with the 3rd
larges carriage of 86,400,000 passengers in 2012. Recently, Air China, with its subsidiaries consolidated
statements, in accordance with the relevant rules of China, in fleet size and passenger volume may have
overtaken China Southern Airlines to become the first. Such large airline companies as Air China, China
Southern Airlines, and China Eastern Airlines should seek global resources and the market to win
enough space for continuous growth. Otherwise, their development must be hampered by the lack of
space.

3.4 China's economic speed reduction provides another power for the internationalization of
Chinese airlines
It is an indisputable fact that even China's economic growth slides down to 7%, it is still a high speed.
But the uncertainty in transformation and upgrading will affect the development of the aviation market.
The recent airline index falls, earnings quality is not so good as before, benefits declines, issued interim

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profits of major airlines this year may decrease 70% - 80%.

At the same time, the economic recovery of the USA is evident, Europe economy is restoring. Li
Ka-shing’s policy to invest in Europe reflects the optimistic perspectives about Europe's economic
future. The international market provides good opportunities for China’s airline companies to solve their
excess capacity.

4 China’s Airlines’ International Market

The internationalization of Chinese airlines follows a rule: following the customer, following the capital.
No matter where airline customers go, the airline service should provide service, and customers follow
the pace of capital to the places of economic prosperity in the world. By this reasoning, the prior
international directions of China’s airlines will be the followings.

4.1 North America

First, the United States is the largest economy in the world, the economic recovery trend is obvious. It is
also the first foreign trade power, China is the first exporting country, their economic and trade
exchanges are frequent. Second, the United States has the largest Chinese students studying abroad,
Chinese students studying in the United States is the largest among the number of international students,
reach 194,029, accounting for 25.4% in the total number of international students 764,495. Third, the
United States is the Chinese people’s first immigrant destination. In 2012 there were 110,000 Chinese
immigrants went to the USA. Fourth, the academic exchanges between the two countries are frequent.
Every year, all kinds of Chinese delegations went to US in a continuous line, People from America also
shuttles between China and the United States. Similar to the situation between US and China, Canada
has a close links, especially in study and immigration with China. Reports show that Chinese has
become the second largest language in Vancouver.

4.2 Europe
European economic rebound trend becomes more and more obvious, should quickly go through the
most difficult time. Economic and trade exchanges between Europe China are frequent, the EU is
China's largest trading partner. The UK, Germany and France are Chinese students’ favorite destination
countries. Also a number of Chinese nationals live in Europe, for example the Paris 13, Wenzhou
community. Every year there are a large number of tour groups, study tour groups flock to Europe,
China’s culture of a long history also attracts people in Europe to China. All of these provide enormous
business opportunities for airline companies.

4.3 Oceania
Oceania, mainly consists of two countries: Australia and New Zealand and welcomed by the Chinese
people. It is not only the Chinese people’s overseas study destinations, immigration country, but also an
important source infant milk powder. The shorter distance than America and Europe has strengthened
the connection, in recent years, China's passengers to Australia have been in rapid growth.

4.4 Japan and South Korea, Southeast Asia and surrounding

Similar to Japan and South Korea, and Southeast Asia and China have similar culture and short distance,
especially a large number of Chinese expatriates living in Southeast Asia. These expatriates have been
living and doing business over a number of generations, and do not forget the motherland. Exchanges
between, these countries and China are very large. Basically like the China domestic aviation market,
China’s airlines must maintain and develop the backyard market.

4.5 BRICS
China, Brazil, Russia, India, the Republic of South Africa is the "BRIC countries", their rapid economic

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development, plays a more important role in the global economy, is a typical representative of emerging
economies. China and the other four countries belong to the BRICS, their economic and trade exchanges,
and interflow between the people have been increasingly close. These countries are the huge potential
market for Chinese airline companies who should plan in advance.

5 Model of China Airlines Companies’ Internationalization

The airlines should take different development modes according to different market’s population, size
and distance.

5.1 Point-to-point mode

In view of the air lines with close distance and adequate customer source, small aircraft and
point-to-point mode should be employed.

○ ○
Waypoint A Waypoint B
Figure 1

Due to short distance, the flying time is short, and then relative discomfort of small aircraft cabin is easy
to be tolerated and ignored. From the economical perspective, if large aircraft is used to fly short-haul
international routes, even if customer source is sufficient and guest rate is high, it will lead to a loss.
Because the aircraft depreciation (such as aircraft engines in accordance with the thermal cycles
depreciation, such long range and short range flight number is the same as the depreciation, short haul
flights have high cost) leads to large aircraft fixed cost is too high, on and off for long time in short-haul
routes, which cannot improve the aircraft utilization rate, which can not be diluted fixed costs, thus
losses may occur.
Based on the above, the international market suitable for point-to-point mode includes:
(1) Japan, and South Korea market;
(2) Southeast Asian market.
Japan, South Korea and Southeast Asian countries and China have shot distances, the relationship
between countries and cities are very close, and public cultures are similar. Therefore, as long as there is
enough to open source of direct flights, China’s domestic flights can be open market with the
point-to-point methods and evaluation method is the same with domestic marker. Therefore, Air China,
China Eastern Airlines, China Southern Airlines, Hainan Airlines and other large Chinese airlines are
suggested to open direct lines to Japan, Korea, and Southeast Asia. In addition to Beijing, Shanghai,
Guangzhou, Shenzhen City, the various lines from northeast China to the South Korea and Japan have
good performance. In addition to a large airline companies, small airline companies can fly successfully
in high-quality destinations, such as Spring Airlines flying from Shanghai to Japan, Dalian Airlines
flying from Dalian to Korea, the newly established Qingdao Airlines in future will also get benefit from
Qingdao - South Korea route.

5.2 The hub-spoke mode

Different from the surrounding market which like an extension of the domestic market, the remote
market is for Chinese airlines, as "flying to the other side of the world", which requires the trans-ocean
flight, transcontinental flights and different running mode.
Because the long voyage (at least more than eight hours, and some needs to fly nearly 20 hours), large
aircraft must choose strong endurance flying, such as A380, A333, B747, B787 etc. Large aircraft’s
another characteristic is rich seats, which also brings another problem: maybe no city has sufficient
source to fill the plane. In this case, open up the international market hub. It is to collect other customers
to the waypoints, from a certain point and the surrounding area, to fly together, and improve the

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occupancy rate, to finally achieve operating profits and sustainability.

Hub A
Hub B

Figure 2

This model applies to remote markets like North America, Europe, Oceania, South America, South
Africa.
5.2.1 The domestic gateway hub (to take the guests out)
Air China has established aviation hub for European and American in Beijing. Through its own network
all over the country, it carry customers traveling to Europe and the United States to a waypoint at
Beijing airport, and then through the connection, in Beijing, Beijing around the guests, together with the
plane, flying to a shared destination.
China Eastern Airlines has built up the hub for Europe, the United States’ hub in Shanghai. As the
Yangtze River Delta’s incomparable economic strength and strong population, Shanghai do not need to
add so many outside tourists in meeting the requirements of most foreign waypoint flight conditions.
Shanghai hub more need to establish air-rail transport, air-land transport, air-ship transport system
carrying customers from Wuhan, Xuzhou, Zhoushan and other places to delivery to Shanghai, and share
fly with natural customers there together.
China Southern Airlines has established the southern hemisphere hub in Guangzhou, mainly for
Australia and New Zealand. In fact, flying to North America and Europe, Guangzhou is not a good point,
comparing with Beijing and Shanghai. Because the route set along the continental margin, Guangzhou
starting flights without any cause or reason more than one and a half hours to voyage ranging from three
hours than Shanghai, Beijing, which may increase costs and make profitability difficult. In addition, the
passengers in the area of Pearl River Delta, the rest of the guests by Guangzhou deviation coefficient are
far higher than Beijing and Shanghai. Moreover, for Guangzhou, there is another strong competitor,
Hong Kong.
5.2.2 International hub (with the passengers’ extended jouney)
Brazil, the Republic of South Africa are members of the "BRICS", their rapid economic development,
good diplomatic relations with China, and frequent personnel exchanges make them to be good markets
with future potential.
But now China’s single domestic market can not provide so many guests going the two places, and the
distance is too far away. So the hub is needed to build up in overseas countries, with the three place’s
guests together to fill the plane and achieve profitability. For example, China Southern Airlines, set up
Oceania hub in Guangzhou, and opened the "Guangzhou road" products to attract British guests to
enrich Guangzhou to Oceania route. In order to further open up the South American market, it opened
another front South American, such as Brazil, Argentina route, the construction of Sydney aviation hub
is advised, connecting China and South America, to realize sustainable management and provide travel
services for passengers.

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Hub C Hub B
Hub A

Figure 3

5.2.3 International return hub (let the passengers flew back)

From domestic to abroad, China’s airlines can collect customer using the mature network of their own,
to benefit the target, but on the return flight, how to do?
First is the alliance, the coalition forces and the hub, organizing the return customers.
Second is the acquisition, through investment in the country of destination, to make their own hub-spoke
network. The organization model is equivalent to the domestic.
At present, Air China generally use the alignment approach, to solve the backhaul tourist organization.
Air China Joined the Star Alliance, the ally Lufthansa’s network support it in Europe line. China
Southern Airlines has joined the SkyTeam Alliance, an important ally Delta Airlines in the United States
helps it organize return customers at Los Angeles.
In the future, it will be a good choice for China’s airlines to purchase in the returning counties, forming
new branches, subsidiaries, and to construct the return air network industry.
Twenty-first Century sky is the sky of globalization, it is the most economies’ consensus to open the sky,
Chinese airlines is flying around the world.

6 Conclusion

China’s airlines internationalization is a necessary step under the background of economic globalization.
China’s airlines companies should view North America, Europe, the Oceania, Japan, and South Korea,
Southeast Asia markets as the focus, and Brazil, South Africa as the potential market. For nearer markets,
China’s airlines can refer to domestic airline operation mode of point-to-point flights, hub-spoke
networks operation mode for cross ocean, transcontinental route should be chosen.

References

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[4]. The "1-7 Months of 2013 China's Absorption of Foreign Direct Investment" of the People's
Republic of China Ministry of Commerce 2013.8.26
[5]. The "2012 Overseas Trends Survey" Education Online 2012.12
[6]. The "China South Airlines 2012 Annual Report" China South Airlines 2013.3.26

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[7]. The "China International Migration Report (2012)" Wang Huiyao / Liu Guofu, Social Sciences
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