If geography was the only deciding factor in airline hub development, then Wuhan would almost certainly merit a top ranking in China given its location close to the centre of the country’s population distribution.
This is clearly not the case, however, and we only have to look to a developed air transport market, like the US, to see how other factors are hugely influential.
In the past, the fundamentals of building a hub were often less about geography and more to do with the vision of an airline – and often the associated airport – to outgrow their local market potential.
Dutch national flag carrier, KLM, and Amsterdam Airport Schipol provide a perfect example of this. For although Holland is a reasonable size country, it is surrounded by much larger markets and the provision of good products and services and a fully integrated banked airline network have made Amsterdam an amazing success story over the past 20 years.
Infrastructure is also a massive part of creating an efficient hub (Amsterdam has been very successful with its ‘all under one roof’ tag) and, the lack of it, is the main reason that neither London Heathrow nor New York JFK have a real hub, but rather a collection of services where connections can be made.
But as everyone is aware, the world is changing extremely quickly and the hub model is altering as the airline industry and its customers change. Whilst alliances and hubs try harder to keep customers entirely within their domain, more and more passengers are building their own itineraries based on their specific product and price mix. So what does this mean for an emerging air transport market like China?
The huge size of the country and its rugged terrain and massive population all mean that aviation will play a bigger role in its future development both from a passenger and freight viewpoint.
Although current GDP per capita is only about a quarter of US and European levels, the growth rate is phenomenal at 10.7% in 2006 and projected 9.6% for 2007. This compares with GDP per capita growth rates of around 2% in both the EU and US.
China is now the fourth biggest market in the world behind the US, Japan and Germany. The average GDP in a country as large as China also masks the huge differences that are found between provinces.
In the biggest centres, such as Beijing and Shanghai and the Pearl River Delta cities of Guangzhou, Shenzhen and Hong Kong, GDP per capita are anything up to three or four times higher than the country average.
Currently the top ten airlines in China have about 1,000 aircraft in service. The top ten in the US have around 4,000 with a population about one fifth the size. While not directly comparable, it is clear that the growth potential for aircraft sales in China is enormous – as Boeing and Airbus are only too aware.
One of the key questions in China today is whether the infrastructure can be stretched to manage the levels of projected future growth. In February it was announced that $65 billion will be spent on airport development over the next 12 years. This is likely to be only the beginning. Already the biggest airports are reaching saturation point so the ability to offer a real hub with flights organised around geographically based banks is almost impossible. This leaves significant opportunity for other airports to offer slick, efficient connecting products built around the new aviation model.
The number of possible future hubs in China is huge. There are currently over 60 cities in China with populations of one million or more, and although much will depend on the degree to which the state wishes to influence the future shape of aviation in China, there are some other critical factors which will affect which hubs grow first and fastest.
The cities where GDP is growing fastest, where local businesses are heavy users of air travel and where the airport infrastructure is capable of significant development, will have a massive advantage. If there are also airlines with strong local interest and the city is in an area where the geography will aid connecting flows then an even bigger opportunity exists.
It will be interesting to see whether the initial growth in new hubs comes from all segments of aviation or whether certain hubs show a high degree of specialisation – for instance, in the low-cost sector or the distribution chain.
Airports that adopt specialisation will be able to invest in only the products that are most suitable for core customers. Limiting infrastructure and costs to those aimed purely at the core segment ought to provide significant cost savings that can be passed on to the customer.
The key airports of Beijing, Shanghai and Guangzhou/Hong Kong will continue to be the key international gateways. Each is likely to serve all international geographical areas alongside a reasonable portfolio of the largest domestic markets, feeding both the base carrier and the alliance partners.
However they are each already near capacity and likely to look more like London Heathrow and New York JFK, rather than Amsterdam or Atlanta, in the future. With the size of the local population in each of these areas it would be unsurprising to see a number of secondary and tertiary airports being further developed nearby.
While it may be possible to increase the size of the primary airport in each major city, the economies of scale are increasingly undermined by the inability to offer efficient and simple processing. Cities like London show that customers can be influenced by different products, so that they choose different airports for different purposes.
The largest Chinese cities now have a great opportunity to pre-plan a segmented and diversified approach to new airport developments. In principle it can mean the creation of different types of hubs to suit different flows and, if the ground infrastructure can be adequately developed alongside it, then each airport can be linked to each other as well as the surrounding cities.
Other hubs that are strong contenders for development are along the natural divide of the Yangtse River between North and South. Chongqing, Hangzhou and Wuhan are all significantly sized cities in that area.
These hubs may best serve a linked domestic market based on the low-cost model or alternatively act as distribution bases similar to those used by FedEx, DHL and UPS in the USA.
A different type of hub development opportunity is Hainan Island. Although located in southern-most China, one of the airports there has the potential to be a ‘Chinese Miami’ – bringing tourists down from the north as well as providing onward flights into South East Asia. Similarly, Xiamen, could provide a hub opportunity for Taiwanese travellers visiting the mainland.
One of the more imaginative hub locations could be Urumqi in the far west of the country. There are a huge number of currently small markets between Chinese cities and the former Soviet Union and Eastern Europe. Very few are big enough for direct services on widebodied aircraft from the main Chinese cities. However, an Urumqi base may be able to use short-haul aircraft to link most of the main cities in China with a wide range of destinations to the West.
Hubs of the past tended to fit a very generic model built around an inefficient use of resources and a reliance on the muscle of frequent flyer marketing campaigns. In China there is a great opportunity to move the concept along using innovative and simplified approaches, which still provide the consumer with a wealth of additional connections and destinations.
It’s an exciting time in China especially for the airports and airlines that lead the way.
This article features in Routes News 2008 Issue 1