Are there are more concerns than benefits to corporate travellers from China Eastern and Japan Airlines’ new JV?

China Eastern Airlines and Japan Airlines plan to apply for a JV covering Japan-China flights, to be implemented in Apr-2019. It is the first JV between the two countries and one of the industry’s few short-haul JVs. Japan Airlines is a member of oneworld while China Eastern is in SkyTeam, but the two have been partners for a long time.


Summary:

  • China Eastern Airlines and Japan Airlines plan to apply for a JV covering Japan-China flights, to be implemented in Apr-2019;
  • This will be the first JV between the two countries and one of the industry’s few such short-haul JV partnerships;
  • The two airlines have been codesharing on Japan-China flights with supplementary frequent flyer and lounge benefits, so the big question is what new benefits will be offered to corporate travellers?;
  • This JV will surely be followed by others – Air China-ANA is a logical tie-up, but there are also others around the region.

The JV does not bring JAL and China Eastern together for the first time as the two have been codesharing on every Japan-China flight they operate, with supplementary frequent flyer and lounge benefits. So the question is what corporate travellers will receive from the JV that they do not already receive from their current partnership.

There may be more codesharing on each other’s domestic networks, but most corporate traffic is heavily concentrated on major routes, notably the trunk routes of Tokyo-Shanghai and Beijing-Tokyo, plus some smaller routes with disproportionately high corporate traffic (such as Nagoya due to its industrial companies).

JVs usually mean the parties can, for the first time, jointly plan their combined business (Japan-China flying) and coordinate activity. Yet a press release from Japan Airlines indicates they have been coordinating for some time.

Might there be new routes from the JV? It is possible, but city-pairs were surely likely to grow anyway as China Eastern expands Japan-China flying, mostly on the back of outbound Chinese tourism and on city-pairs with limited corporate traffic.

JAL-China Eastern JV certainly needs more Tokyo-Beijing flying to be competitive

Most beneficial would be more flights between Beijing and Tokyo. China Eastern does not operate the city-pair since it appears Beijing-based Air China has been able to prevent local competitors from flying. JAL operates three times a day between Beijing and Tokyo. In comparison, JAL operates five times a day to Shanghai while China Eastern operates nearly 7.5 flights a day (52 weekly, including China Eastern’s wholly-owned unit Shanghai Airlines).

China Eastern may be able to help JAL secure slots at constrained Beijing Capital airport, a slot swap other (but not all) partnerships have been able to do. More realistically, the JV is not due to commence until Apr-2019, and by late 2019 the new Beijing airport at Daxing will open and usher in growth at that facility as well as at Beijing Capital as airlines move flights from Capital to Daxing and free-up Capital slots.

Although China Eastern does not fly Tokyo-Beijing, Air China does fly to Tokyo from China Eastern’s home base of Shanghai. Air China flies three times a day, but only from Shanghai Pudong to Tokyo Narita and not one (or both) of the more high-yielding downtown airports: Shanghai Hongqiao and Tokyo Haneda.

Will the JV face restrictions on Tokyo-Shanghai, where they dominate capacity?

Perhaps the biggest concern for corporate passengers should be the future of the Tokyo-Shanghai route. China Eastern and Shanghai Airlines hold 35% of seat capacity between the two cities while JAL holds 19%, giving them a majority – 54% – of the market. China Eastern and Shanghai Airlines are the single largest entity followed by ANA (24%) and then JAL and Air China.

CHART – China Eastern and Shanghai Airlines hold 35% of seat capacity between Shanghai and Tokyo while JAL holds 19%, giving them a majority – 54% – of the marketSource: The Blue Swan Daily and OAG

Regulators in other jurisdictions have expressed concern about a JV holding a high percentage of capacity and passengers flown, although there is no set or universal threshold. Concern increases when looking at the corporate-heavy Shanghai Hongqiao-Tokyo Haneda route, where the proposed JV parties will hold 78% of capacity. Including all Shanghai airports to Tokyo Haneda, the JV share is 62%.

Are heading down the road to more JVs between China and Japan?

This will be one of the few short-haul JVs in the industry. China already has some regulatory experience, having approved an Air China-Cathay Pacific short-haul JV that gave the two majority control on trunk routes, including Beijing-Hong Kong.

It should be watched how the regulators respond to the JV application and if they require slot divesting or for new/smaller entrants to grow. This may be further complicated by Tokyo Haneda’s own international slot expansion programme, which could see slots allocated in a competitive manner to this JV.

This JV will surely be followed by others. Air China-ANA is a logical tie-up, but there are also others around the region. Competition is intensifying but airlines are also becoming more sophisticated in their ability to implement and run a JV. This is a delayed action from the trans-Atlantic and US-Japan JVs – and could provoke a delayed reaction from travellers.