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STAR-BULLETIN / 2003 Hawaiian Airlines is among 13 U.S. carriers competing for 26 new weekly round-trip flights to China that will be awarded by the U.S. Department of Transportation to up to seven airlines as soon as this week. The flights are being added under a 1980 aviation agreement that the two nations updated in July.

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Knockin’ on
China’s door

Air traffic between the
United States and China is
about to increase significantly

Lorance Hockert, a New York lawyer, flies to Beijing three times a year on Air China Ltd. Until now, he's had no other choice for the 13 1/2-hour direct flight.

"I'd rather take a domestic carrier," says Hockert, 66, a founding partner at Hockert, Warnock & Donnelly who helps U.S. companies set up in China.

He said he would consider switching to Continental Airlines Inc. if the Houston-based carrier wins the right to start direct New York-Beijing flights.

Hawaiian Holdings Inc., parent of Hawaiian Airlines; Continental; AMR Corp.'s American Airlines and 10 other U.S. carriers are battling for new flights to China as they aim to tap rising demand for travel to the world's fastest-growing major economy.

The U.S. Transportation Department will award 26 new weekly round-trip flights to as many as seven airlines as soon as this week, with service starting this year and in 2006. Hawaiian Air has applied to provide service four times a week beginning next year.

Growth on routes to China may be a bright spot for U.S. airlines as they struggle to survive. The industry recorded $33 billion in losses between 2001, the year of the Sept. 11 terrorist attacks, and 2004, as fuel prices rose and growing domestic competition forced down fares. China's air traffic probably grew 32 percent in 2004, more than double the global average, according to the Montreal-based International Air Transport Association.

"The fastest-growing market in the world right now is China," says Bill Hochmuth, 38, senior research analyst at Minneapolis-based Thrivent Financial for Lutherans. "For the airlines that can funnel passengers either into or out of China, it would be a huge coup."

Thrivent Financial holds secured bonds -- for which the issuer sets aside assets or collateral to ensure timely interest and principal payments --for most U.S. carriers.

Only 2 offer flights now

Only two U.S. airlines now offer passenger flights to mainland China: UAL Corp.'s United Airlines, which operates daily direct flights to Beijing and Shanghai from Chicago and San Francisco; and Northwest Airlines Corp., which flies daily from eight U.S. cities to Beijing and Shanghai and six times weekly to Guangzhou, all via Tokyo.

By contrast, eight U.S. carriers operated 315 weekly flights to Japan as of August 2004, according to the U.S. Transportation Department.

The U.S. is adding flights to mainland China under a 1980 aviation agreement that the two nations updated in July. Flights to Hong Kong are governed by a separate agreement.

Fort Worth, Texas-based American Airlines, the world's largest carrier, proposes to start a 14 1/2-hour direct Chicago- Shanghai flight as more Americans travel to the fastest-growing U.S. export market. China's economy expanded 9.5 percent last year, more than twice the pace of the U.S.

"You've had tremendous growth in the demand for air travel to China and not much growth in supply," says Henry Joyner, 50, senior vice president of planning at American Airlines, which doesn't currently fly to China. "We've been pushing very hard to get our foot in the door."

Growth is something American Airlines needs after reporting losses totaling $7.26 billion since the start of 2001. AMR's fourth-quarter loss more than tripled to $387 million, and the company hasn't said when it expects to return to a full-year profit. Chief Executive Officer Gerard Arpey, 46, said on a Jan. 20 conference call that the carrier's fuel bill was $1.1 billion higher in 2004 than in 2003, denting earnings.

To stem losses, American Airlines has cut $4 billion in annual costs by eliminating 38,000 jobs, cutting wages, reducing the carrier's fleet by 167 planes and introducing austerity measures such as removing pillows from most planes.

Continental, the fifth-largest U.S. carrier, had daily losses of $1.5 million in January. It said in a Jan. 6 filing to the Securities and Exchange Commission in Washington that it would lose hundreds of millions of dollars in 2005 unless it could cut annual labor costs by $500 million.

While Continental has been forced to cut domestic airfares, international ticket revenue hasn't faced the same pressure, says Jim Compton, 49, the airline's executive vice president of marketing.

"Traffic has grown between the United States and China," Compton says. "We clearly want to be part of that."

U.S. domestic yields, or average fares per mile, fell 4 percent in 2004, according to the Washington-based Air Transport Association, the U.S. airline industry trade group. Yields on international routes to the Pacific grew 12 percent last year, the group says.

More flights to China will help underpin growth in the U.S., where corporate profits and economic growth are increasingly dependent on trade with China, says Charles Hunnicutt, 54, who was assistant transportation secretary under President Bill Clinton.

'China is the future'

"China is the future in terms of the engine for economic growth," says Hunnicutt, who is now a lawyer at Robins, Kaplan, Miller & Ciresi LLP in Washington. "It's not just the airlines and not just the large companies. Whole communities have an interest in this."

U.S. companies sold a record $35 billion in goods and services to China in 2004 -- a 26 percent increase from the previous year and more than double the 2000 figure, according to the National Association of Manufacturers, a Washington-based trade group.

Chicago-based United and St. Paul, Minnesota-based Northwest are both competing for the new routes. United proposes to add passenger services between San Francisco and Guangzhou, initially via Tokyo, and Northwest is applying to connect its cargo routes to Guangzhou and Xiamen, according to documents the carriers filed with the Transportation Department.

New contenders

New contenders for passenger flights include American Airlines; Continental, which proposes routes from Newark to Beijing and Shanghai; Atlanta-based Delta Air Lines Inc., which aims to serve Beijing from its Atlanta base; Hawaiian Airlines, which is offering San Diego-Shanghai flights via its Honolulu base; and North American Airlines, applying to fly from Oakland, California, to Shanghai and Guangzhou via Honolulu.

Cargo carriers competing for flights include Memphis-based FedEx Corp.; Atlanta-based United Parcel Service Inc.; Peachtree City, Georgia-based World Airways Inc.; Gemini Air Cargo; Evergreen International Aviation Inc.; and Polar Air, a unit of Atlas Air Worldwide Holdings Inc.

Higher profits on routes to China would offer U.S. airlines a reprieve from money-losing routes at home.

In it for the long haul

American Airlines' proposed seven weekly Chicago-Shanghai flights would carry an estimated 136,552 passengers in their first year, the carrier said in its application to the Department of Transportation -- 78 percent in economy class, 15 percent in business class and 7 percent in first class.

That would generate an estimated $215 million in annual ticket sales, based on fares United charged on Feb. 16 for Chicago- Shanghai flights departing Feb. 18 and March 9 and returning a week later. While that's a tiny share of American's $18.6 billion in total 2004 revenue, long-haul international flights are more profitable than domestic routes.

Flying larger planes across longer distances creates economies of scale: It's more cost-effective to fly a Boeing Co. 777 wide-body plane between San Francisco and Tokyo than to fly a small regional plane from Cleveland to Atlanta, according to John Ash, president of Intervistas-ga2, a Washington-based aviation consulting firm.

International flights also carry a bigger share of business travelers willing to pay more, American's Joyner says.

"Generally, international markets have exhibited stronger profit growth and better average fares over the last few years than domestic," Joyner says.

American would fill 79 percent of seats on its nonstop Chicago-Shanghai flight, according to the company's application to the Transportation Department.

That compares with a U.S. industry average of 75 percent of seats filled on domestic flights and 79 percent on international routes in 2004, according to the Air Transport Association.

Airlines and their allies

U.S. airlines' lobbying efforts as they compete for China routes underscore the market's importance.

AMR has won the support of Wal-Mart Stores Inc., the world's biggest retailer, which said in an Oct. 8 letter to Transportation Secretary Norman Mineta that it backed American's planned Chicago- Shanghai flight over competing options. Deere & Co. and Chicago- based Boeing have also supported American's bid, according to letters the companies submitted to the department.

Delta has received supporting letters from executives at BellSouth Corp. and Coca-Cola Co., both based in Atlanta. The third-largest U.S. airline is looking to China for growth after posting a $2.2 billion loss in the fourth quarter, the industry's worst for any quarter.

Flights restricted

U.S.-China routes are especially valuable because the governments restrict flights between their countries, says Scott Yohe, Delta's senior vice president of government affairs.

The 26 new flights being awarded will take the number of weekly U.S.-China flights to 133, still less than half the number to Japan. Another 116 will be added by 2010 under the July agreement.

"There are only so many opportunities to fly to China from the United States," says Yohe, 52. "There is a scarcity there that translates into an asset that has value."

Continental has received letters of support from Intel Corp., ConocoPhillips and Cigna Corp. for its proposal to link Newark Liberty International Airport -- which serves New York City -- to Beijing and Shanghai.

Hockert, the New York lawyer, would welcome the choice of flying to Beijing on Continental instead of Air China. He's twice failed to get on the Air China flight he wanted because it was full, and he finds U.S. carriers more trustworthy than Chinese ones.

"If the prices were competitive, I think I would prefer that," he says.