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Spring Airlines' Airbus A320 aircraft at Shanghai's Hongqiao Airport   © Reuters

China's Spring Airlines rides high on overseas travel boom

Low-cost carrier finds success, but it now faces challenges from rivals

SHANGHAI -- Wang Zhenghua's instincts on China's travel industry have proven visionary.

As China's middle class began to develop more than three decades ago, the businessman founded a travel agency with a focus on individual tourists rather than group travel. He followed that by launching China's first budget carrier, Spring Airlines.

Now his company is expanding into hotels, with locations in Japan and other parts of Asia.

In a candid moment of self-assessment last year, Wang told the Nikkei Asian Review that he is a cautious businessman, a modest but truthful admission.

Wang said he decided to open a hotel chain after a friend joked that Spring Airlines was sending vigorous-spending Chinese travelers overseas, helping foreign businesses make money.

The company has already opened one hotel near Nagoya in Japan's Aichi Prefecture, and it plans to expand the chain to 15 to 20 locations over the next three to five years. It is also eyeing the South Korean and Thai markets.

A Spring Airlines crew member sells food onboard an Airbus A320.   © Reuters

The 73-year-old Wang, who guided Spring Airlines into China's largest low-cost carrier, is a popular figure in the Chinese media and business community.

In the early 1980s, while working as a civil servant in a small district in Shanghai, Wang made a bold move: Anticipating that individual travel would become popular among Chinese, he founded the Shanghai Spring Tour travel agency, concentrating on individual travelers rather than group tours.

His hunch proved right.

As China opened up under government reforms, peoples' incomes grew -- along with their impatience with group travel and tour guides.

They rushed to Shanghai Spring Tour, where they could reserve individual tickets and hotels in Beijing, Xian, Shanghai and elsewhere. It eventually became China's largest private-sector travel agency.

Shifts in customers' habits

Then came Wang's second bold move: entering the aviation industry. He founded Spring Airlines in 2004 when the Chinese government was opening the sector to private businesses.

He counted on what turned out to be two important changes in travelers' habits -- that the country's primary means of transportation was shifting from rail to air, and that people would start to travel abroad in addition to domestic destinations.

Travelers flocked to Spring Airlines.

"It's cheap, so I always choose Spring Airlines when my flight is within four hours," said Li Xian, a 28-year-old from Shanghai who takes the airline for her twice-a-year trips to Bangkok.

A roundtrip flight between Shanghai and Bangkok costs about 2,600 yuan ($400) on state-owned China Eastern Airlines; 2,500 yuan on Thai Airways; and 1,700 on Spring Airlines, according to Ctrip, a flight-reservation website popular among young Chinese.

Considering that the average monthly income in China is 5,000 yuan and 8,000 yuan in Shanghai and other urban areas, the price disparity makes a big difference, even taking into account some inconveniences.

"I had to wait for more than five hours in the plane once, but it can happen to any airline," Li said. "Spring Airlines is cost effective, and I'm satisfied with it."

Spring Airlines began operations when just 30 million Chinese people -- primarily affluent and traveling in package tours -- traveled overseas a year, and when China's gross domestic product was only one-sixth the size of the United States and half that of Japan.

But 12 years later, in 2016, the number of annual overseas-bound travelers had ballooned to 120 million, and individuals known as fully independent travelers, or FITs -- those who travel outside of package tours -- account for many of them.

While state-owned airlines concentrated on protecting their dual vested interests of package tours for wealthy travelers and profitable domestic flight routes, Spring Airlines opened overseas routes to Japan, South Korea and countries in Southeast Asia.

In 2010, the carrier launched a direct flight between Shanghai and Ibaraki Airport, about 100 kilometers from Tokyo -- obscure even among Japanese. By the end of last year, 70 of its 164 routes connected mainland Chinese cities with overseas destinations -- including Hong Kong and Taiwan.

That international strategy helped spearhead China's overseas travel boom and has shielded the company from domestic constraints. 

Many Chinese companies -- both major state-owned firms and private businesses -- have firmly tied their fate to the country's economy and domestic regulations.

For example, Sany Heavy Industry, a maker of construction machinery that was once hailed as the pinnacle of the private sector, suffered after the Chinese government curbed its infrastructure investment a few years ago.

Search-engine giant Baidu, meanwhile, enjoys a huge market share in China, in part because of the government's "great firewall," which prevents Google and others from entering the market. But Baidu is not competitive outside the country.

Both Baidu and Sany remain dependent on government policies, which can put them at a disadvantage.

Increasing competition

Spring Airlines' sales stood at 8.4 billion yuan ($1.28 billion) in 2016, up 50% from 2012, and it plans to nearly double its current fleet of 74 aircraft by purchasing or leasing 68 more jets, mainly Airbus's midsize A320, over the next five years.

Another aim of opening hotels overseas is to prevent a decline in the airline's passenger traffic. By providing accommodations in Japan, which is facing hotel-room shortages and rising prices due to an influx of foreign tourists, the airline hopes to keep seats on its planes full.

But Spring Airlines is still facing some headwinds. Wang's projection that the number of fully independent travelers will surge has been proven correct, but that has drawn competition as many state-owned airlines and foreign low-cost carriers have entered the Chinese market.

Spring Airlines' net profit fell 25.2% in the first half of 2017 to 554.0 million yuan compared with 740.1 million yuan in the same period a year earlier. Its net for the full year of 2016 fell 28.4% from the previous year to 950 million yuan, marking the first full-year profit decline since 2011, when the carrier began disclosing its earnings as a Shanghai-listed company.

Low-cost carriers stay profitable by maintaining high passenger-load factors, which make up for their inexpensive ticket prices. Spring Airlines' load factor for domestic routes stood at 94% last year, but the figure for overseas routes fell to 87% due to increasing competition.

In March, Wang handed over the post of chairman to his eldest son, Wang Yu. The elder Wang will continue to preside over the group's management but is expecting a smooth transfer as his son takes charge of the airline, the group's core unit. (Wang Zhenghua currently is the chairman of Shanghai Spring Tour, which owns a roughly 63% stake in Spring Airlines in its role as a holding company.)

Wang Yu, 46, who earned his MBA from Southern Illinois University and previously worked at Roland Berger, a strategy-consultant firm, joined Spring Airlines in 2008 as vice president.

The soft-spoken and mild-mannered younger Wang is eager to transform the company, saying that Spring Airlines is showing signs of bureaucratization in the 13 years since it began operations.

He also characterizes the carrier as an IT company and aims to speed up digitization of its operations, such as using data to analyze passengers' preferences and proposing customized travel plans. A younger digital-savvy generation is making up a larger portion of China's middle class.

Growing travel spending

Personal consumption in China continues to expand, and spending on overseas travel is projected to grow from $59.8 billion in 2011 to nearly $200 billion in 2030, according to figures cited recently by the Thai Chamber of Commerce. 

That growth bodes well for China's airline industry.

Zhang Xiaoyun, an analyst at Chinese brokerage firm Industrial Securities, wrote in a report this month that Chinese citizens travel by air 0.26 times a year, only one-tenth that of Americans.

With the number of price-conscious individual travelers expected to rise, Zhang said low-cost carriers will be the biggest beneficiary. He also expects that Spring Airlines' net profit will post year-on-year growth of 26.7% in 2017, 31% in 2018 and 36.9% in 2019.

Wang Yu, chairman of Spring Airlines (Photo by Nozomu Ogawa)

Despite the positive forecast, the airline is facing fierce competition. Malaysian discount carrier AirAsia announced in May that it will establish a budget airline in China jointly with state-run conglomerate China Everbright Group, and Japanese rivals such as Jetstar Japan and Peach Aviation are expanding routes between the two countries.

But low prices are no longer enough to attract customers.

"Competition is good for customers, not only in China but elsewhere," Wang Yu told the Nikkei Asian Review in a recent interview. "On the other hand, we have to work harder [to maintain] our competitive advantage."

"Budget air is the future of the short-haul market," he said. "Today, no-frills carriers [in China] only occupy about 8% of the market, compared with 50% in Southeast Asia. There is huge potential."

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