ch-aviation CEO Thomas Jaeger caught up with Byron Ding, President of Lucky Air, at the Aviation Festival Asia. Read our exclusive interview to find out about the Chinese airline’s low-cost model, fleet deployment, and regional and international expansion.
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It must be a very exciting time for you right now because you’re about to start long haul operations at Lucky Air?
Now we have the long-haul aircraft and we have become a low-cost carrier, which is a mixed low-cost carrier really, that means we’re not just focused on the traditional LCC model per se. Hence in the future, we can manage some national, international and intercontinental routes to more countries. We can focus on the long haul LCC, how to do this and how to explore this. Our market plan is based on South Asia and East Asia, and some European routes as well. So, since March we have the first widebody aircraft and we will now start with Moscow as the first long haul destination from Kunming.
And after that, when the 787s come in, what is your plan at the beginning and how does it change once you get your own fleet that you have ordered directly?
The main aircraft we have planned to operate are A350s and B787s and we will divide them into different bases. Our widebody aircraft plan is according to a low-cost strategy, and the A330 is just a solution for an intermediate stage. We will import more A350s in the future, and it will be our main aircraft model.
Also, we will separate our bases. Right now, we have four bases in China – Kunming, Lijiang, Zhengzhou and Chengdu – and we will maybe separate them into two regions, the Southwest and Central regions: one focused on Kunming, and the other focused on Chengdu. So, in the future, both A350s and B787s will be our imported aircraft models, but we will separate the bases, with each base operating with one aircraft model. Maybe the A350s are just to be based in Kunming and the B787s in Chengdu. Something like that is operationally sensible and is part of an LCC strategy. This is our current plan.
There are many other Chinese airlines right now expanding very aggressively on inter-continental flights. Also from a lot of ‘regional’ cities, from second and third tier cities flying into Europe and so on. How will Lucky Air be able to differentiate itself from China Eastern Airlines, from Air China, from Hainan, flying from all the regional airports to Europe? For example, there are flights from Chengdu to Paris. There are flights from Kunming to Paris or to Dubai and so on. So how will your strategy be different from what the big Chinese carriers are already doing in all the smaller cities?
China’s airline industry is a little different from the West. China has a big market, providing our LCC companies with huge room for development, especially as our consumer standards are rising continuously. Right now, travelers’ needs are still not fully met. The issue here is how we are going to be different from these companies in the future. Because we are operating in a low-cost system, our cost and fare structure is different, providing travelers with a much better intercontinental flight experience.
At the same time, these companies operate mainly through their hubs, strategically located hubs … For instance, China Eastern Airlines will use Shanghai as their key hub to operate intercontinental airline services. But low-cost airlines like us can operate intercontinental routes from point to point. In this way, our ticket prices relative to the competition will leave us in a strong position.
In addition, China’s departing travelling market keeps getting bigger, and compared to first tier cities there are enough travelers choosing to take intercontinental routes from third or fourth tier cities.
Furthermore, adding to the two points above that we will provide cheaper ticket prices as well as easy and convenient point to point flight service in the future, we will also provide products and services which are suitable for our customers, to get closer to their needs.
These are 3 main strengths that we will have.
So essentially you would be doing something like what other long haul low-cost carriers are doing? I can buy the seat only and I get a lower fare or I can buy the seat, plus the meal, plus a bag, plus…
Yes, yes. The price is the very attractive thing and the diversity of products is the other thing. Also, in the West, because the number of people in each spending group is limited, big airline companies build many hubs to be able to optimize connections. But China’s population and consumption growth rate supports point-to-point flights, and this is important.
Secondly, China now has a newly developing consumer group; they are younger, more fashionable. Their individual needs are very clear, and our company will provide them the products closest to their needs. This may be more advantageous for us compared to the 3 big airline companies, as they will provide a general service according to their business model. But these groups want a traveling experience of their very own. Therefore, we have a high advantage on service products and network plans. So, we have a very clear target audience, and that can drive how to plan routes and different products to provide to these customers.
Yes. That’s a very interesting point because the low-cost carrier model that has been very successful in America, the US, in South East Asia, it’s been very slow to be adopted in China. I think it’s now been one year since you said: ‘I am a low-cost carrier.’ So how has this transition gone? What did you have to change within the company? How did you sell to customers as part of this transition from a full-service carrier into a low-cost carrier yourself? What is Lucky Air’s experience after one year of being a low-cost carrier?
After we declared our low-cost strategy, from a direct performance perspective our seat load factor increased by 10% and our ticket prices decreased by 20%. Also, our profit has increased significantly. These are the key performance indicators. Also, the revenue potential has increased immediately. So that is the very direct effect on performance since we transitioned to LCC.
How did you have to change internally to make this happen? Because it’s a very big change, to change the mindset of people to say now we are different than before.
Actually, a low-cost strategy shows capability because it does not mean providing a low-quality service. For a company to adopt a low-cost strategy, it needs to have good standards of internal management and revenue management. It also needs to have a good understanding of customer needs. All these aspects must be managed well for a successful transformation.
One thing that fascinates me about the airline industry in China is that it’s going in the complete opposite direction of how the industry is going in the rest of the world. So, if you look at South East Asia, Europe, North America, all the airlines are trying to merge and consolidate. But in China, HNA for example set up a joint venture with investors in Yunnan and set up Lucky Air and set-up a joint venture in Urumqi … They set up West Air, another LCC by now. So why do you think in China it’s going in the opposite direction, and you’re setting up more airlines rather than merging them together? Lucky Air itself is setting up Shenniao Airlines in Chengdu. So why have you set up an additional airline? And again, why do you think it’s going in a different direction here than everywhere else in the world?
The reason is that China has so many opportunities, because it is a newly developing market. The development of the airline industry is not completed yet, hence we have many opportunities for development. Unlike European airlines which are in a state of fixed structures and competition in the market.
Given the situation of a new market like China, we have many companies to encourage competition for segments of the market. Because the Chinese government has set many limitations, more and more companies are trying to secure certain segments in the market. For instance, TravelSky … You have to use TravelSky [as your passenger services system]. So, you cannot use the other systems to run that side of the business.
Secondly, different companies operate different business methods. In the future, once the market gets mature, companies like us will eventually face the process of consolidation, just like in Europe. At the moment, it is a period of fast development. Separating a company allows better opportunities for resources, customers, and new business models.
But is that also a problem for you because now most of the investments that HNA got for Lucky Air comes from Yunnan? The local investors that are part of the Lucky Air joint ventures are all from Yunnan. So is it a problem for you when you say, well I have an idea. I would like to set up a base in Zhengzhou which is very far away from Yunnan…
So, you mean the boundaries come from government or HNA?
Are the local investors mainly investing because they want Lucky Air to be in Yunnan, or do you have the freedom to say, “I would like to set up a base in Zhengzhou which is very far away,” and you can just do that? Or is that a problem for you in how Lucky Air can grow that with the current investors you can only grown in Yunnan? So, to grow in Zhengzhou, do you have to set up a new airline like Shenniao, so you can get investors there locally and then grow the Zhengzhou operations? Is that the reason why you set up new airlines in different places yourselves?
This is more a consideration of the network planned in the future, not because of investments. We are planning for a strategic network in the whole part of Western China, which will be the strength for us in China. Also, we will have point to point flights to Southeast Asia and Western countries and third tier cities in China through our various hubs.
You have gone further north now, with your fourth base in Zhengzhou. So far, your international flights have been mainly focused on the ASEAN region in the South, so with the new base do you also plan to expand further into Korea and Japan? Is that one of the reasons why you went North? Or was it mainly for domestic purposes?
Not just Korea and Japan. Also, connecting Zhengzhou to Western countries, because the main flights to Western countries are from first-tier cities, like Beijing, Shanghai, Shenzhen. But second or third-tier cities like Zhengzhou also have potential for flights to Western countries, and hence we can operate point to point flights. So that is why our network strategy needs those places.
Okay. So as a last question, if you look three years ahead now to 2020, how many bases do you plan to open in China by then? And how many aircraft do you think you’re going to be flying long haul from China?
By 2020, our fleet will have more than 100 aircraft, plus on top of that, our widebody aircraft will be close to 20. Our bases will be built on second or third tier cities that show potential. According to our plan, we will add 10 new bases, more or less … which is our main goal in the future. We will choose to build our bases in second or third-tier cities just like Zhengzhou as mentioned just now, which is highly populated.
Yes. Most of your cities are bigger than European countries.
Yes exactly. What I meant was, regarding population, the number of people flying only increases based on demand. Their population size may be big but they are not our customers yet, they do not have the purchasing power. But in 5 to 10 years, as the airline industry develops, the number of people using airlines to travel will increase very quickly. So that is why we choose these cities. To them, we can have a very well matching product and service. The product that an LCC company provides will suit their needs.