The Battle for China Service Heats Up

Airlines are gearing up their campaigns in an effort to convince the United States Department of Transportation (DOT) to allow them to fly to China. After ignoring the market for years, legacy carriers are fighting for the rights to serve China from the United States. Because of bilateral air travel agreements between the two nations, there are only a limited number of flights that can be operated between the two nations, and the slots need to be allocated between Chinese and American carriers. The Department of Transportation is set to announce allocation of one of these slots by the end of the year, and when it does, airlines want the DOT on their side. Four routes are being considered this time around, American Airlines between its Dallas/Fort Worth hub to Beijing, United Airlines between its Washington D.C. hub and Beijing, Northwest Airlines between its Detroit hub and Shanghai, and Continental Airlines between its Newark hub and Shanghai. Delta's proposed Atlanta to Beijing service has been knocked out of the running, but Delta will likely try to get the service approved in 2008, when the DOT will allocate another slot.

Every airline has its backers making their case, usually from the local economic authority, the local and state governments, and the airports that would welcome the new service. Officials from the unreliable and bombastic DFW airport in Fort Worth have said that American's proposed new service would generate $180 million for the Texas economy. United argues that nonstop service between the two capitals would strengthen political ties between the United States and China, and argues that the Washington D.C. metro area is the largest in the country without nonstop service to China. Northwest Airlines argues that nonstop service would strengthen the Midwest. Continental believes that the largest financial market in the United States could use additional flights to support growing trade with China.

Airlines are pouring hundreds of thousands of dollars into these campaigns for a number of reasons. First and foremost is that nonstop routes to China are profitable and will be profitable in the future. The second is that as China grows and the demand for air travel across the Pacific grows even further, airlines that already serve China from the United States might be in a preferential position to get new service. While no airlines are asking for nonstop flights to Guangzhou or Shenzhen this year, ten years down the line they definitely will be. Finally, because the routes to China are so tightly restricted, what one airline gets, another doesn't, and any sort of competitive advantage one airline can get over another to attract business travelers to the carrier is desperately needed. In order to get the DOT on their side, airlines are hoping that visitors to their Web sites will sign their electronic petitions to the DOT. To demonstrate the importance of this new service, both Continental and Northwest Airlines both have links from their home pages to their electronic petitions. American and United have even set up a dedicated Web sites in order to help them win the route authority. American's Fly to China on AA has collected over 82,000 signatures supporting American's bid. United's Capital-to-Capital Coalition seeks to promote United's proposed nonstop service between Washington D.C. and Beijing. Airlines are also enlisting their employees to help spread the word about competition for the new routes.

This blog believes that United's proposal makes the most sense. Even though the airline already has more service to China than any other US Airline aside from Northwest, United's proposed service links two capitals at a time when the United States needs to increasingly connect with China. The new service would be successful from a business standpoint and from a political standpoint. But most of all, it should be picked because the other three candidates don't make much sense.

American's proposed service from DFW could offer strong benefits for connecting passengers, but not for the Texas economy. I wish the DFW Airport would stop publishing such bloated figures of economic benefit to the state. $180 million a year is probably the amount of revenue each incoming flight would bring in. It's doubtful that the flight could bring in that much in economic benefits, particularly if most of the passengers are connecting. If you think about it, there are around 250 seats on one of American's 777 aircraft and if there are 365 flights a year, then each round-trip flight would have to bring in about half a million in revenue, or $250,000 for each flight between Dallas and Beijing. That means that each passenger, on average, will pay $1,000 each way and that doesn't include empty seats, frequent flyer redemptions, or employee travel. However, that figure also doesn't include cargo revenues which could be quite significant for this route. $180 million sounds like more of a rosy revenue figure for the flight itself rather than economic benefits for the state. Keep in mind, most of the passengers on the flight will be connecting to destinations in the South, the Midwest, or in particular, Latin America. This flight would be a great way for American to funnel traffic through its DFW hub between Asia and Latin America. American offers more service from the States to Latin America than any other airline, and the most route between China and South America passes very close to Dallas, making Dallas (or Houston for that matter) one of the best sites to enable passengers to connect between Asian and Latin American flights. The problem with all this is that the benefits for the State of Texas become marginalized. Sure there will be business persons who will use the flight to shuttle between Texas operations and China operations. But sadly, the Texas economy wouldn't get $180 million in benefits, certainly it will bring benefits and ties with China that might grow into future flights between Texas and China, but the time simply isn't right for these flights. American would love to get the route authority so it can bring benefits to Latin America and Asia, not Texas, and the DOT's job isn't to make American Airlines happy but to help the United States and this service doesn't cut it. In fact, American was awarded new nonstop service between Chicago and Shanghai when United was already on the route. Now that two US Airlines are on the route, two Chinese carriers are also there, Air China and Shanghai Airlines. Four flights are hardly necessary for Chicago, even if the American and United services are both designed to allow passengers to connect onto other flights. It's time to let another airline have a turn at this, and maybe this time, they will serve a new destination that people want to fly to, not just connect in.

Northwest's proposed service between Detroit and Shanghai would greatly augment Northwest's existing one-stop service between Detroit and Beijing. This proposed service would likely bring many more benefits for the surrounding area than the American proposal. Even though manufacturing in the Midwest is declining, many American companies are forging increasing ties in the China market. General Motors may be shutting plants in the States, but they are red-hot in Shanghai where the 2005 Shanghai Auto Show attracted over 500,000 visitors and more than 10,000 orders for new automobiles. It's not just the auto business either, many companies in other sectors like Proctor and Gamble in nearby Cincinnati could use the flight. The companies that are doing the most business in China these days aren't headquartered in New York City (or in Dallas for that matter), they are located in America's Heartland and this new flight would serve them well. Another good point about this proposal is that Northwest is already established in China, they have some loyalty over there and the same doesn't go for the newbies American and Continental. Northwest could effectively drive traffic both ways on the route because its brand is already established in China. But, even though this flight makes sense, it's really not needed. Northwest has historically had close ties to Asia, and even before the China craze, Northwest offered service to China. Today, passengers in Detroit can go to Beijing on one-stop service that connects in Tokyo, Northwest's Asian hub. Northwest service in Tokyo that links Northwest gateway cities in the States such as Minneapolis, Detroit, Los Angeles, San Francisco, Portland, Seattle/Tacoma, and Honolulu that have nonstop flights to Tokyo with cities in China including Beijing, Shanghai, and Guangzhou, as well as Hong Kong, Taipei, and several other Asian markets. Detroit already has nonstop service to Tokyo and the flight happens to continue onto Beijing (albeit on a different aircraft). Northwest has easy connections to Shanghai from Tokyo that are timed precisely so passengers from flights arriving from the United States can connect to them. Currently, the arrival of the Detroit flight and the departure of the Shanghai flight is separated by 55 minutes, just enough time to get to the gate and board at a mammoth airport like Narita. While it would be more convenient to have a nonstop flight to Shanghai, it's really not necessary given the easy access to Shanghai Detroit already is blessed with.

Finally, Continental is making the smart move by asking for nonstop service to Shanghai. While I don't think their proposal is nearly as beneficial to the air transportation system as United's, they have a strong case. Currently, China Eastern Airlines is scheduled to begin nonstop services between the two cities, but no American carrier serves the route. Given the importance of business traffic between New York and Shanghai, the time is ripe to offer service on an American carrier between the two cities. But Continental also has the largest hub on the East Coast in Newark, and while the route will certainly bring benefits to the New York City region, more so than the benefits that will be brought to North Texas if American's service gets approved, Continental's Newark hub will allow for connections to destinations along the Eastern Seaboard. With increasing business and financial ties between the United States and China, the time is ripe for this flight. I don't endorse this one, however, because another carrier, albeit a Chinese one, will serve the route, and also because there are many more connection opportunities for passengers from New York to Shanghai than from Washington D.C. to Shanghai. Also, demand on the route is such that in 2008 when the DOT conducts this process again, it will likely be time for a new flight, but until then, it's best to connect cities that have no nonstop service instead of limited connections. Hopefully the DOT will make the right choice, but it's hard to predict what they are thinking.