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Air China Cancelling Beijing-Honolulu Service Is Healthy

This article is more than 4 years old.

Air China's announcement Tuesday that it's cancelling its thrice-weekly Beijing-Honolulu route from August 27 came after a sharp escalation in U.S.-China trade tensions, with the U.S. adding a 10% tariff on certain Chinese goods and China banning the import of U.S. agricultural products. U.S. and Chinese airlines have decreased service between the two countries before, such as American Airlines exiting the Chicago-China market, but this cancellation could be perceived as carrying more weight since Air China is the flag carrier.

But Air China’s Honolulu cancellation is less likely the latest trade war salvo and more likely a victim of bad timing. Underlying the cancellation are signs of strength, including Chinese airlines becoming more disciplined in capacity management. Elsewhere in the sector, former China Eastern president Ma Xulun is now the president of China Southern and improving that airline’s network. A shortage of US-China traffic rights could see the two negotiate an increase and later an open skies agreement, which would have global ramifications.

Air China’s Honolulu flight under-performed with a 66% load factor in 2018, according to U.S. DOT data. This was well below other Air China routes, including an 83% load factor for Beijing-Los Angeles and 81% for Beijing-New York JFK. Air China’s system-wide international load factor was 78%. Air China in June previously planned to suspend Honolulu service from August 26 to October 28.

© 2015 Bloomberg Finance LP

The Honolulu flight squandered a valuable resource: a traffic right. The U.S. and China limit the number of flights airlines from each nation can fly between the two countries, unlike the U.S.-Japan or China-Australia open sky arrangements where airlines can fly as much as they like.

Chinese airlines for a while have utilized their allocation to the U.S. from primary Chinese cities, including Beijing. There is a separate allocation for flights from secondary Chinese cities, which is how flights have been added, such as next month’s planned Chengdu-Chicago launch from Hainan Airlines.

Ending Honolulu should allow Air China to use the traffic right allocation, and Beijing Capital slot, for another U.S. flight. Air China has not yet announced further plans. Earlier this decade, Chinese airlines intentionally over-expanded to utilize limited traffic rights.

Whereas secondary Chinese cities provide handsome subsidies for long-haul flights, primary airports like Beijing are congested and do not need to incentivise flights to the same extent. So while a Hainan Airlines Chongqing-New York flight can be under-written by Chongqing, Air China largely needed to make Honolulu work on its own without financial help from Beijing.

There are hurdles for Chinese visitors to Hawaii. They need U.S. visas and the state is further and more expensive than alternative leisure markets. Honolulu is an eleven hour flight from Beijing, but Bangkok is only five hours and Bali eight hours. Hawaiian Airlines discontinued its Honolulu-Beijing flight in 2018, although perhaps it found Air China was too much competitive pressure. Other US territory islands, Guam and Saipan, have also seen decreased flights to China.

Aside from Japan and Korea, Hawaii garners limited interest around Asia. That precludes Air China from supplementing Beijing-Honolulu traffic with connections from elsewhere in Asia. Chinese airlines have growing sixth-freedom connecting networks, although their strong local demand means transfer traffic is not as important as at EVA Air or Cathay Pacific, where upwards of half of trans-pacific passengers are connecting in Taipei or Hong Kong rather than starting or ending their journey there.

Below the passenger cabin, freight would not have been strong between Beijing and Honolulu, the way it is for most trans-Pacific flights. Hawaii is a limited market with expensive onward shipping, unlike flying freight into San Francisco or Houston and then using ground transport to reach other markets.

The business case for freight is typically built on the outbound Asia sector, where demand is larger and rates are higher. The backhaul segment to Asia sees companies take what they can, but it is the lower-performing flight. Air freight demand for agricultural products, like cherries from Oregon, is relatively recent. China’s agricultural ban does not help, but it does not totally shut down freight lanes. The ban applies to state-owned companies and not private importers. Air China and other cargo heavyweights can re-position to carry U.S. agricultural products to other Asian markets, albeit perhaps not as high-yielding.