Sino-German air agreement 'win-win' deal
By Wang Yu (China Business Weekly)
Updated: 2004-12-05 10:14

Rather than foisting greater pressure on local airliners, the newly implemented air agreement between Germany and China, which allows the nations' carriers to operate more flights between the countries, has proven itself to be a win-win deal.

And carriers, from home and abroad, are busily conceiving big initiatives aimed at embracing the new, golden market opportunities.

Germany-based aviation giant Deutsche Lufthansa AG (Lufthansa), one of the world's leading air carriers, is developing a bold, long-term business strategy to tap China's fledgling, but promising, market.

The newly implemented Sino-German aviation pact will make it easier for Lufthansa to put that strategy into practice, company executives said recently.

"We will boost our flight capacity to China by 50 per cent, from now to 2007, because of the new market-opening deal between China and Germany," Thierry Antinori, Lufthansa's executive vice-president in charge of marketing and sales, said during an exclusive interview.

However, he remained tight-lipped about specific details -- including to which destinations in China Lufthansa intends to fly.

"I'd better not give our opponents any clues about our good ideas," Antinori said.

A senior official with the Civil Aviation Administration of China (CAAC), the country's aviation watchdog, recently revealed, on condition of anonymity, that China and Germany had reached a more open aviation agreement.

That pact, the official added, will allow passenger and cargo carriers from both sides greater freedom to fly to each other's market.

"The new agreement is a good move, since it changes and strengthens the relationship between China and Germany. It is actually in line with the robust economic relationship between the two countries," Antinori said.

Despite its ambitious business-expansion plan, the German flagship carrier stated unequivocally it will gradually take advantage of the new market-opening aviation agreement.

That, company officials said, means the firm will not rush towards "instant money."

"We will take off step by step to grow in the new market. Once market growth is enhanced, we can embrace opportunities for further business expansion," said Wolfgang Mayrhuber, Lufthansa's chairman and chief executive officer.

"We will continue to maintain a gradual business-expansion strategy in China. If we dump capacity, ticket prices will come down and our business in China will not be profitable."

CAAC's official said negotiations, to reach similar pacts, with other European countries, including Spain, will begin by year's end.

That, the official added, could result in greater competition for Lufthansa.

"We are not afraid. We are open to competition, as long as the game is fair," Antinori said.

"In fact, we are not afraid of more competition, since we have established our position as a global carrier, and our hubs, Frankfurt and Munich, are located in the centre of Europe, which gives us an upper leg in international transfer flights.

"So, it is not bad news. Instead, it is good news for customers," Antinori added.

To cement its status as a global airliner, Lufthansa will offer its first-class passengers a new dimension in travel beginning on December 1.

That new dimension will include concierge services; limousine-transfer, direct to the aircraft; an exclusive ambience, with gourmet restaurant; and personal attention for guests, from arrival at the airport through to take-off.

The "exclusive services" will begin on the ground in Frankfurt, in either the newly built "first-class terminal" or the new "first-class lounges."

Lufthansa leads other European carriers in China, in terms of available flights. Lufthansa flies to Beijing, Shanghai and Hong Kong from both Frankfurt and Munich, and to Guangzhou from Munich, via Shanghai. The carrier also offers 41 weekly flights.

To strengthen its lead position in China, Lufthansa plans to launch a daily, non-stop flight to Guangzhou next year.

The increase in capacity is within the formal air agreement between China and Germany.

Antinori said Lufthansa is trying to determine whether the Guangzhou flight will connect with Frankfurt or Munich.

Lufthansa has been co-operating with Air China since October 2000. It flies to the Chinese mainland's major hubs -- Beijing, Shanghai and Guangzhou (via Shanghai) -- through code-sharing agreements with Air China.

Also, through recently expanded code-sharing, Lufthansa can reach second-tier cities such as Dalian, Chengdu, Hangzhou, Nanjing and Xi'an.

Lufthansa is a founding member of the Star Alliance. It has developed one of the industry's most comprehensive alliance networks.

Mayrhuber spoke positively when asked how Lufthansa will cope with intense competition from SkyTeam, Star Alliance's global arch-rival, given China Southern Airlines' decision, earlier this year, to link up with SkyTeam.

"Competition is important, and we are used to competition. In fact, we have already encountered heated competition in China," Mayrhuber said.

"We are very happy we have a code-sharing agreement with Air China ... which is very beneficial to both parties. We are also glad Air China has other code-shares with Star Alliance partners. So, our relationship is strengthening, and I think Air China will make its decision sooner or later about whether it will join Star Alliance.

"I will not be surprised, (if Air China chooses to join Star Alliance," Mayrhuber said.

When asked about the fact Air China said it had just one choice, Mayrhuber said, with a laugh, "Yes, but they will make the best choice."

SkyTeam is another global airline alliance that groups Aeromexico, Air France, Alitalia, CSA Czech Airlines, Delta Air Lines and Korean Air.

SkyTeam announced, earlier this year, the alliance had signed an agreement with China Southern Airlines, the largest carrier in China in terms of fleet size.

The agreement is a preliminary step in the new member process, and it outlines China Southern's intentions to undertake exclusive discussions to join SkyTeam, pending fulfillment of the alliance's membership requirements.

In Chinese carriers' eyes, the new Sino-German aviation pact will not place much pressure on them, unlike the pressure that has resulted from the Sino-US air deal, which was implemented earlier.

"I do not think the new Sino-German agreement will lock Chinese carriers in an underdog position, because, unlike the situation with the Sino-US air deal, the gap between German airliners and their Chinese counterparts is not so wide," said a deputy marketing director with Air China, who would only provide the surname Gu.

The Sino-US aviation agreement, which was reached in the middle of this year, generated a lot of controversy, and heated debate, within China's aviation circles. That pact granted fast, and wide, market access to the carriers in the United States and China to each other's market.

Although the pact appeared to be fair, it will present the US carriers -- given their size and strengths -- greater business opportunities.

"There is a large gap in the strength between major US airlines and their Chinese counterparts. That is why there has been so much controversy about the deal," the Air China official said.

"In Germany, there is only one major carrier, Lufthansa. The situation is much more favourable ... Therefore, the deal will turn out to be a mutually beneficial one."

To embrace the opportunities offered by the new pact, Air China is busy preparing to boost its Beijing-Munich flight capacity from the current three flights per week to almost daily by 2006.

Air China, the country's flagship carrier, will increase, in line with specific market demand, the frequency of flights to Frankfurt from both Shanghai and Beijing.

"If there is robust market demand, we will jack up the capacity from Beijing to Frankfurt, to twice a day, by 2006," Gu said.

"Of course, we will expand our business by flying to more German destinations, such as Berlin, after 2006, if there is still demand."

Of course, nothing is for certain, at least for the time being. The plan is still subject to changes, because the market is always changing, Gu said.

"We are conducting a lot of research and keeping a close eye on the market's reaction. But from the current economic relations between the two countries, and the development of European's tourism industry, we are confident about the Sino-German market."

Zhou Xiao'er, vice-president of Shanghai Airlines Co Ltd, told China Business Weekly last week that from a broader perspective, the influence of the new air agreement will be quite positive.

"It is good for the national economy, and will also prove to be a shot in the arm for China's aviation industry, although domestic airliners may feel the pain of harsher competition in the short run," Zhou said.

"Under the deal, if local carriers are short of capacity, to provide either passenger or cargo service on Sino-German route, foreign players can come in and fill in the blanks. It is surely a blessing for the market, and ordinary customers."

For individual airliners, who may suffer from the pact because of the more-intense competition from stronger foreign counterparts, Zhou said the new deal will push them to change and to identify new markets.

"Pressure is not a bad thing, especially for ever-progressing air firms like us. We will spot new opportunities," Zhou said.

Shanghai Airlines received approval, from CAAC officials, earlier this year to operate on the Sino-German route.

The carrier is now waiting for formal approval from Germany's air authority.

The Shanghai-based regional airliner sealed a bilateral code-sharing agreement with Lufthansa in April. That deal gives both sides a better chance to tap the growing Sino-German aviation market.

Under the deal, the German carrier and Shanghai Airlines will operate some of their routes, under code-sharing, and will work closely together on frequent-flyer programmes.

Lufthansa's customers will have greater opportunities to fly to more destinations in China from Shanghai under Lufthansa's flight numbers as a result of the partnership.

The co-operation will initially involve three of Shanghai Airlines' domestic flight routes -- Shanghai to Beijing, Shanghai to Shenzhen and Shanghai to Qingdao.

If Shanghai Airlines receives final approval from Germany's authorities, and formally launches its flights to German cities, then it will enjoy Lufthansa's networks on Sino-German routes, and also in Germany through the code-sharing deal.

"Being open is the trend. The further opening of the China-Germany aviation market, especially the air cargo market, will benefit the nation's overall economy," Liu Weimin, director of Aviation Laws Research Centre, affiliated with the Civil Aviation Management Institution of China, said last week.

"For local carriers, there is nothing to fear. Only by changing towards the right direction and learning from more powerful overseas counterparts can they save themselves," Liu stressed.

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