Troubled airline industry faces further threats to profitability
Toh Han Shih 26 October 2009
China’s high-speed rail network will overtake Europe as the world’s biggest by 2012, posing a threat to the country’s troubled airline industry.
The cheaper tickets and often quicker journeys to be offered by high-speed trains are expected to substantially cut the market share of domestic carriers that already face bruising competition from airline rivals.
Although still in its infancy, the mainland’s high-speed rail system will account for most of the world’s fast tracks by 2020 as Beijing accelerates a mammoth transport infrastructure programme.
“By track mileage, the mainland will be the world’s biggest in high-speed rail by 2012,” said David Shipley, the managing director of CSRE, a British firm that supports Chinese train companies that want to enter the European market.
Germany, France and Spain have dominated high-speed rail use over the past 20 years, during which time the continent’s airlines have seen their market share shrink.
Chinese carriers are already struggling. The global economic downturn pushed the country’s top three airlines, including Air China and China Eastern Airlines Corp, into a combined loss of more than US$4 billion last year, forcing them to slash capital expenditures.
By 2020, the length of China’s network used by trains with speeds of 200km/h or more is expected to exceed 18,000 kilometres. That would account for most of the world’s high-speed rail network, said Weng Zhensong, a researcher at the Ministry of Railways.
Services in the pipeline included a 350km/h route from Shanghai to Kunming, the capital of Yunnan province in the south, and a 350km/h connection to Urumqi, the capital of Xinjiang in the northwest, Weng said.
“The Yangtze River Delta, the Pearl River Delta, northeast China will all have it,” he said.
The growth of the network is phenomenal. China’s high-speed rail (including non-operating lines) totalled only 1,109 kilometres in 2007. That was projected to grow to 7,000 kilometres by next year and 13,000 kilometres in 2012, said Helen Gui, a project manager at Fiducia Management Consultants, a consultancy that works with the ministry.
There were 105 high-speed train units in 2007 and this was projected to grow to 700 next year and 800 by 2012, Gui said.
Yet construction of the mainland’s network has only just started. The country’s first operational service between Beijing and Tianjin started operations in August last year.
The 1,069-kilometre Wuhan-Guangzhou service was scheduled to start operation later this year, said Jerry Liu, a railway manager associate at engineering firm Arup.
The train, which is part of a longer service connecting Beijing to Guangzhou and Hong Kong, will reduce travel time between Wuhan in central China and Guangzhou, the capital of Guangdong province, from more than 10 hours to three hours.
In 2012, the 1,318-kilometre Beijing-Shanghai service will cut travel time from 12 hours to four. That will make it quicker than air travel factoring in check-in and transit time.
Building the line will require an investment of 220.9 billion yuan (HK$250.7 billion), making it the most expensive construction project in Chinese history, according to the central government website.
The ticket for an economy class rail seat on the Beijing-Shanghai route will cost 500 yuan, according to China Daily. By comparison, a one-way economy air ticket between Beijing and Shanghai typically costs 1,258 yuan.
“Within 1,000 kilometres, high-speed rail will have an advantage over air travel, provided that the train ticket price is no more than 80 per cent of the air ticket,” Weng said. “With a travel distance of 1,000 kilometres or less, travel will be less than four-and-a-half hours and will have a big impact on airlines.”
Mainland airlines are increasingly nervous when they look at what high-speed rail did to their European counterparts. According to the International Union of Railways, the market share of rail increases the shorter the travel time.
For example, on the two-hour Paris-Lyon route in France, rail has about 90 per cent of the market. By contrast, on the Rome-Milan route, where rail travel takes four-and-a-half hours, air travel commands the majority share while rail has about 30 per cent.
“In every country, the introduction of high-speed rail has led to an increase in rail’s market share, sometimes dramatically,” said Damien Navizet, a deputy representative of Agence Francaise de Developpement, a development finance arm of the French government.
He noted that on the Paris-Marseilles route, the faster trains raised the market share of trains from 22 per cent to 85 per cent at the expense of air travel. For the Paris-Brussels route, it holds 52 per cent of market share and air travel had virtually disappeared, he said.
In Taiwan, passengers using high-speed rail doubled to 3.06 million last year, while the number of passengers on domestic flights dropped 22.5 per cent, according to government data.
Previously, mainland railways had been losing market share as road building was faster than rail and air travel gained traction, Navizet said.
From 1997 to 2007, the length of mainland rail lines grew 18 per cent while road mileage soared 192 per cent. Last year, in terms of passenger-kilometres, rail accounted for 33 per cent of transport, road held 53 per cent and air travel 13 per cent, he said.
When the railways ministry first drew up its transport projections for 2020 six years ago, it assumed the market share of railway would decrease, said Navizet. Last year, the ministry revised its plan with railway expected to have 40 per cent of the market by 2020 from 33 per cent in 2008, he added.
According to the ministry’s 2003 plan, China was expected to have 100,000 kilometres of rail (including normal and high-speed) by 2020. Under the revised plan, that increased to 120,000 kilometres by 2020.
“The key to China’s success is the ticket price,” said one analyst. “The Beijing-Shanghai line has a good chance of breaking even and can be strong competition for airlines.
“The Beijing-Shanghai corridor is one of the world’s most heavily travelled business routes, so potential users of this high-speed service will have high affordability.”
However, the analyst cautioned that with China building so many of the lines, there were doubts whether all could be successful. For example, the Beijing-Tianjin service charged only 50 yuan to 70 yuan per ticket, not enough to make it profitable, added the analyst.
The challenge for the mainland sector was how to reform the pricing structure, said Gui. Train fares now are mostly set by Beijing rather than by market forces. To succeed, high-speed rail would need to have flexible pricing for different circumstances such as off-peak seasons, she said.
“The Hong Kong-Guangzhou high-speed rail should do better because it will be operated by Guangshen Railway, which, as a Hong Kong-listed company, will be more market-oriented.”
The Hong Kong-Guangzhou line, of which the Hong Kong section is expected to cost HK$65.2 billion, is scheduled to start operation in 2015.
Other challenges included bottlenecks for contractors and train suppliers over the large amounts of equipment that would be needed in the coming years, added Gui.
Another challenge was the short experience of manufacturers such as China South Locomotive & Rolling Stock Corp and China CNR Corp, which started producing high-speed trains about five years ago, she said.
3 comments:
China high-speed rail to take global lead by 2012
Troubled airline industry faces further threats to profitability
Toh Han Shih
26 October 2009
China’s high-speed rail network will overtake Europe as the world’s biggest by 2012, posing a threat to the country’s troubled airline industry.
The cheaper tickets and often quicker journeys to be offered by high-speed trains are expected to substantially cut the market share of domestic carriers that already face bruising competition from airline rivals.
Although still in its infancy, the mainland’s high-speed rail system will account for most of the world’s fast tracks by 2020 as Beijing accelerates a mammoth transport infrastructure programme.
“By track mileage, the mainland will be the world’s biggest in high-speed rail by 2012,” said David Shipley, the managing director of CSRE, a British firm that supports Chinese train companies that want to enter the European market.
Germany, France and Spain have dominated high-speed rail use over the past 20 years, during which time the continent’s airlines have seen their market share shrink.
Chinese carriers are already struggling. The global economic downturn pushed the country’s top three airlines, including Air China and China Eastern Airlines Corp, into a combined loss of more than US$4 billion last year, forcing them to slash capital expenditures.
By 2020, the length of China’s network used by trains with speeds of 200km/h or more is expected to exceed 18,000 kilometres. That would account for most of the world’s high-speed rail network, said Weng Zhensong, a researcher at the Ministry of Railways.
Services in the pipeline included a 350km/h route from Shanghai to Kunming, the capital of Yunnan province in the south, and a 350km/h connection to Urumqi, the capital of Xinjiang in the northwest, Weng said.
“The Yangtze River Delta, the Pearl River Delta, northeast China will all have it,” he said.
The growth of the network is phenomenal. China’s high-speed rail (including non-operating lines) totalled only 1,109 kilometres in 2007. That was projected to grow to 7,000 kilometres by next year and 13,000 kilometres in 2012, said Helen Gui, a project manager at Fiducia Management Consultants, a consultancy that works with the ministry.
There were 105 high-speed train units in 2007 and this was projected to grow to 700 next year and 800 by 2012, Gui said.
Yet construction of the mainland’s network has only just started. The country’s first operational service between Beijing and Tianjin started operations in August last year.
The 1,069-kilometre Wuhan-Guangzhou service was scheduled to start operation later this year, said Jerry Liu, a railway manager associate at engineering firm Arup.
The train, which is part of a longer service connecting Beijing to Guangzhou and Hong Kong, will reduce travel time between Wuhan in central China and Guangzhou, the capital of Guangdong province, from more than 10 hours to three hours.
In 2012, the 1,318-kilometre Beijing-Shanghai service will cut travel time from 12 hours to four. That will make it quicker than air travel factoring in check-in and transit time.
Building the line will require an investment of 220.9 billion yuan (HK$250.7 billion), making it the most expensive construction project in Chinese history, according to the central government website.
The ticket for an economy class rail seat on the Beijing-Shanghai route will cost 500 yuan, according to China Daily. By comparison, a one-way economy air ticket between Beijing and Shanghai typically costs 1,258 yuan.
“Within 1,000 kilometres, high-speed rail will have an advantage over air travel, provided that the train ticket price is no more than 80 per cent of the air ticket,” Weng said. “With a travel distance of 1,000 kilometres or less, travel will be less than four-and-a-half hours and will have a big impact on airlines.”
Mainland airlines are increasingly nervous when they look at what high-speed rail did to their European counterparts. According to the International Union of Railways, the market share of rail increases the shorter the travel time.
For example, on the two-hour Paris-Lyon route in France, rail has about 90 per cent of the market. By contrast, on the Rome-Milan route, where rail travel takes four-and-a-half hours, air travel commands the majority share while rail has about 30 per cent.
“In every country, the introduction of high-speed rail has led to an increase in rail’s market share, sometimes dramatically,” said Damien Navizet, a deputy representative of Agence Francaise de Developpement, a development finance arm of the French government.
He noted that on the Paris-Marseilles route, the faster trains raised the market share of trains from 22 per cent to 85 per cent at the expense of air travel. For the Paris-Brussels route, it holds 52 per cent of market share and air travel had virtually disappeared, he said.
In Taiwan, passengers using high-speed rail doubled to 3.06 million last year, while the number of passengers on domestic flights dropped 22.5 per cent, according to government data.
Previously, mainland railways had been losing market share as road building was faster than rail and air travel gained traction, Navizet said.
From 1997 to 2007, the length of mainland rail lines grew 18 per cent while road mileage soared 192 per cent. Last year, in terms of passenger-kilometres, rail accounted for 33 per cent of transport, road held 53 per cent and air travel 13 per cent, he said.
When the railways ministry first drew up its transport projections for 2020 six years ago, it assumed the market share of railway would decrease, said Navizet. Last year, the ministry revised its plan with railway expected to have 40 per cent of the market by 2020 from 33 per cent in 2008, he added.
According to the ministry’s 2003 plan, China was expected to have 100,000 kilometres of rail (including normal and high-speed) by 2020. Under the revised plan, that increased to 120,000 kilometres by 2020.
“The key to China’s success is the ticket price,” said one analyst. “The Beijing-Shanghai line has a good chance of breaking even and can be strong competition for airlines.
“The Beijing-Shanghai corridor is one of the world’s most heavily travelled business routes, so potential users of this high-speed service will have high affordability.”
However, the analyst cautioned that with China building so many of the lines, there were doubts whether all could be successful. For example, the Beijing-Tianjin service charged only 50 yuan to 70 yuan per ticket, not enough to make it profitable, added the analyst.
The challenge for the mainland sector was how to reform the pricing structure, said Gui. Train fares now are mostly set by Beijing rather than by market forces. To succeed, high-speed rail would need to have flexible pricing for different circumstances such as off-peak seasons, she said.
“The Hong Kong-Guangzhou high-speed rail should do better because it will be operated by Guangshen Railway, which, as a Hong Kong-listed company, will be more market-oriented.”
The Hong Kong-Guangzhou line, of which the Hong Kong section is expected to cost HK$65.2 billion, is scheduled to start operation in 2015.
Other challenges included bottlenecks for contractors and train suppliers over the large amounts of equipment that would be needed in the coming years, added Gui.
Another challenge was the short experience of manufacturers such as China South Locomotive & Rolling Stock Corp and China CNR Corp, which started producing high-speed trains about five years ago, she said.
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