Lufthansa's Air China Joint Venture Aims to Draw More Chinese Travelers to Europe

German Lufthansa and Chinese Air China finalized an agreement on Tuesday that seeks to deepen cooperation between the two flag carriers. The agreement has been in the works since 2014 when a memorandum of understanding was put in place, and was finalized during a signing ceremony in Beijing. The cooperation agreement covers Air China, the leading carrier for flights between China and Europe, and the Lufthansa group, which includes Lufthansa subsidiaries Austrian Airlines and Swiss International Air Lines—bringing the flag carriers of German-speaking Europe and China together. The agreement will lead to Air China and Lufthansa entering a joint venture that expands existing code-sharing practices, and will in theory improve connections between China and European routes operated by Lufthansa and its subsidiaries. Further, the two carriers will take on a greater deal of cost- and revenue-sharing, as well as attempt to offer common fares for mutually operated routes. If successfully carried out, the joint venture is likely to make European travel less of a hassle with shorter connections for Chinese travelers—and vice versa. Europe has become one of the hottest destinations for Chinese travelers and saw 12.5 million Chinese visitors in 2015 according to the European Travel Commission (ETC). The number of Chinese visits to the continent is expected to grow by another 7.4 percent in 2016, and China has become the key source of tourism growth for European destinations. Keen on taking the opportunity to visit more than one European country during their travels, affordable and straightforward code-sharing between Chinese and European carriers can make intra-European air travel a competitive alternative for Chinese travelers in a market mostly dominated by buses and trains. Deepened cooperation between Air China and Lufthansa may not only strengthen respective airline's position in intercontinental travel, but also Germany's position as an important hub for Chinese travel throughout Europe. The Air China-Lufthansa joint venture is also poised to further incentivize business travel with the joint venture carriers through better integration of corporate programs and possible frequent flyer incentives for passengers using the venture’s Chinese and European routes. The joint venture between Air China and Lufthansa is in part a result of the stiffening competition on routes between Asia and Europe where large Middle Eastern carriers such as Emirates, Etihad Airways, and Qatar Airways have been making inroads. Similarly to the situation in the United States, Gulf carriers are under fire in Europe for what some allege are illegal government subsidies that give them an unfair cost advantage in comparison to European airlines. The European Commission announced a plan to challenge unfair competition in the European aviation industry in December 2016, with large Gulf carriers among the implied targets. In the United States, American Airlines, United, and Delta have been lobbying Washington to take action against the very same carriers, but their efforts have so far been unsuccessful. In light of this challenging competitive environment, many European airlines have been aggressive in their efforts to drive down costs on intercontinental flights—the joint venture between Air China and Lufthansa perhaps the most aggressive move yet. Lufthansa is not only in competition with Gulf carriers, but also other major European carriers that have been making similar moves. For example, Air France-KLM have already established joint ventures with both China Southern Airlines and China Eastern Airlines. Joint ventures and deepened cooperation with Chinese airlines are of particular interest since China is the fastest growing aviation market in the world. However, cooperation efforts with Chinese carriers are currently unlikely to move beyond joint ventures as China’s foreign ownership laws make acquisitions of Chinese carriers by foreign airlines impossible. For the very same reasons, it is unlikely that an international carrier merges with a Chinese airline as it would involve too many foreign-held shares for the Chinese government’s liking. So far, Chinese airlines have been cautious in acquiring foreign airlines, with government ownership of the main carriers leading to a higher level of oversight and restrictions than for other entities in the tourism industry. HNA Group, the largest privately-owned player in the Chinese aviation industry, is more aggressive in acquiring foreign entities, but yet without any high-level acquisition of a foreign airline. Its acquisitions and acquisition attempts within the aviation industry have so far mostly been limited to aircraft catering companies, airports, and logistics companies. It also bought a 13 percent stake in Virgin Australia earlier this year. Until the regulatory framework in China changes, it is unlikely that cooperation between Chinese and foreign airlines will go further than the type of joint venture now formed by Air China and Lufthansa. The Air China-Lufthansa joint venture will formally begin with the summer 2017 flight schedule.

Sectors

Insights

Company

Lufthansa's Air China Joint Venture Aims to Draw More Chinese Travelers to Europe