China's "Hawaii of Asia"

China Southern Airlines has announced plans to stimulate capacity to Hainan island in China. The tropical shores are its biggest draw -well-known to locals as the "Hawaii of Asia", but less discovered by international tourists. But that dynamic appears to be changing. The Hub reports on the airline's big plans for Hainan.

China Southern says it will operate a fleet of more than 50 all-A320 aircraft out of Hainan by 2015, connecting to international points in its first phase of expansion.

Hainan is China's southern island and is known to the locals as the "Hawaii of Asia". There are two main airports in the province: Haikou (the island's capital, with a population of over 600,000) and Sanya.

China Southern's Domestic Market Position

As the largest domestic operator, China Southern has a 27% market share of all scheduled flights, followed by Air China, which has a 19% share.

Based in Guangzhou- which accounts for 16% of China Southern's total network, the carrier currently has a strong existing operation, with 255 weekly flights from Haikou and Sanya, according to flightbase (14-20 June 2010).

The same data highlights that China Southern is the largest operator in Hainan with 32% of all flights. From Haikou, China Southern operates 122 weekly flights and serves 12 destinations, while from Sanya, it offers 133 flights to 9 destinations. It is the largest operator at both airports.

Guangzhou leads Hainan Market

Guangzhou is still the main gateway to the Hainan market with 49 weekly flights from Guangzhou to both Sanya and Haikou -operated by China Southern.

The top 5 carriers currently operating in Haikou and Sanya on the basis of weekly seat capacity are:

Source: Flightbase (14-20 June 2010)

There is little low-cost traffic in Hainan, with Tiger Airways Singapore and Jetstar competing from Singapore to Haikou (Tiger offers a daily service and Jetstar a four-weekly). AirAsia recently discontinued its four-times weekly service from Kuala Lumpur to Haikou due to the seasonality of the traffic.

Why serve Haikou?

As the Island's capital, China Southern may well focus its regional expansion in Haikou.

Hainan Airlines has gradually focused away from its operations in Haikou. It has geographically located its network planning team to Beijing and its long haul expansion is centered around Beijing, which is now its largest hub where it operates nearly a quarter of its network (24%).It now operates long-haul services to Europe and the US (all from Beijing), whereas from Haikou it now operates a purely domestic network.

This has left no dominant carrier in the Haikou market and with strong leisure demand to the destination, there is an opportunity for China Southern to become the dominant player in the market, certainly in terms of its international routes and also by adding more frequency and destinations within its domestic sector.

Expansion in Haikou will see a reduction on its Guangzhou service which is operated seven-times daily as traffic is less dependent on connecting through Guangzhou.

China Southern will likely view Hainan as being too close to its main base of Guangzhou to operate long-haul services, however with Hainan a popular leisure destination among locals, China Southern will possibly operate a regional operation into strong inbound markets such as Japan, Korea and Southeast Asia, using narrow-bodies such as its B737-300s or A320s.

Which routes might interest China Southern?

If China Southern is looking to open routes that are currently unserved from Haikou to the near international market it could look at the following markets, which currently have no non-stop service:

Tokyo Narita

IATA BSP data demonstrates that 84% of all traffic into Narita transits via Guangzhou, therefore China Southern will need to analyse if a new non-stop service would impact its daily service from Guangzhou. It may well decide that a low frequency service could be operated without impacting its Guangzhou flight.

It could also look to serve markets such as Hong Kong and Seoul Incheon, which are served from Sanya by other carriers. Dragon Air and Hong Kong Airlines, for example fly there from Hong Kong and China Eastern serves the route from Seoul Incheon.

And, China Southern may look to add frequency on existing routes that demonstrate leakage on the sectors. Domestic markets such as Harbin could be of interest, and Hainan Airlines and China Southern already serve the market. IATA BSP data (Airport IS) shows that 57,097 passengers flew the segment non-stop between Jan 09-10 (two-way traffic). Over 37,000 of them made a stopover en-route, leaving room for more capacity in the market.