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Business Deals

Budget carriers push JAL and China Eastern into unique marriage

Battle for the skies now focused on medium-haul flights

Japan Airlines and China Eastern Airlines are targeting demand for business fliers going to regional areas.

TOKYO/SHANGHAI -- Japan Airlines and China Eastern Airlines announced a comprehensive tie-up Thursday, expanding their collaboration amid competition from budget rivals on shorter routes.

"The partnership accords with international trends," China Eastern President Ma Xulun told a press briefing at the airline's Shanghai headquarters. "We will cooperate broadly on international flights, most domestic routes and rewards programs," he said.

The rise of low-cost carriers pushed JAL and China Eastern to reach beyond their respective alliances. Flagship airlines would take a hit to their margins if they tried to compete with budget carriers on price. Rather, they will have to bolster existing advantages, such as the number of cities they serve, flexible schedules and smooth transfers.

The unique "joint venture" scheme, as industry insiders have called it, will begin as early as fiscal 2019 if the carriers can gain antitrust immunity from regulators in both countries by that time.

Although the airlines already have a code-sharing arrangement despite belonging to different alliances, the new tie-up will deepen their relationship. Code-sharing lets each company sell some of the other's seats as their own, but revenue still goes to the operating airline, with the partner only getting a sales commission.

The joint venture, however, will let each airline receive a predetermined portion of seat sales. They will therefore be more proactive in promoting and selling tickets for seats on the other airline, maximizing earnings.

The airlines are also considering adjusting flight schedules to better complement each other. Travel to over 80 Chinese cities and more than 50 Japanese cities will be made easier by bundling tickets, a strategy aimed at business passengers headed for regional areas of either country.

"Joint ventures generally increase revenue from relevant routes as much as 5%," said JAL Chairman Yoshiharu Ueki.

China Eastern President Ma Xulun, left, and Japan Airlines Chairman Yoshiharu Ueki in Shanghai on Thursday. (Photo by Yusho Cho)

The presence of LCCs and carriers unaffiliated with the world's three major alliances, such as Dubai-based Emirates Airline, is growing every year. LCCs control 60% of the Southeast Asian market and about half of Europe's.

Their share in Northeast Asia is smaller, believed to be just 10% for domestic flights and about 14% for international ones. Still, they are gradually increasing their footprint. It is especially easy for budget carriers, which often have small planes, to compete with larger peers on relatively short flights between Japan and China, for example.

"We cannot underestimate new entrants," said the head of a European airline. "Flagship airlines must respond swiftly."

The JAL-China Eastern tie-up also reflects the changing demand in the airline industry. Airplane use is rising in China, home to the world's largest population and a growing economy. The International Air Transport Association predicts that Chinese ridership will increase to 1.5 billion passengers in 2036, up 921 million from 2016. The impact is especially large for Japan, a quarter of whose visitors come from China.

No Chinese airline, excluding Hong Kong-based Cathay Pacific, is in the Oneworld alliance with JAL, and no Japanese carrier belongs to SkyTeam with China Eastern. Now, however, carriers are chasing demand that cannot be captured within their alliances.

The role of airline alliances has also changed. The era of creating route networks to connect the world is over, said Star Alliance CEO Jeffrey Goh.

Key long-distance routes connecting Asia, Europe and North America have already been established. The focus now is on medium-haul flights connecting second-tier cities. Many airlines are tapping into this demand by partnering outside their alliance.

Not only is JAL expected to launch a joint venture with unaffiliated Hawaiian Airlines, but it also decided to team up with SkyTeam members like Aeromexico and Russia's Aeroflot. Star Alliance member All Nippon Airways, a unit of ANA Holdings, has also tied up with SkyTeam's Alitalia and Vietnam Airlines.

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