Government worries: Decision Logic behind local governments’ investment towards China Southern

Investments from municipal (Guangzhou City and Shenzhen City) and provincial (Guangdong Province) may promote China Southern on its further development into international market.

I would like to say that this article does raised my interest to write down a supplementary comment to facilitate English-speaking readers to understand the logic behind this investment and China better in the following paragraphs.

Where is Guangdong?

Despite the Cantonese restaurant over the world, Guangdong, especially the Pearl River Delta (PRD, now more commonly referred as “Guangdong-Hong Kong-Macau Greater Bay Area) where Guangzhou, Shenzhen, and Hong Kong are located, is still less known than Shanghai, Hong Kong, and Beijing for most English-speaking people. When being asked for my hometown, I will usually describe Guangzhou as a city that “100 kilometres north from Hong Kong”.

Yes, Hong Kong, immediately neighbouring Shenzhen, is the representative city of this richest region of China. Separated from Guangdong in 1840 due to Opium War, this former British Colony has its civil aviation industry, especially its local carrier Cathay Pacific and its hub Hong Kong International Airport, benefited from the boom of air-travel demands thanks to the strong growth of mid-classes in Southeast Asia and Greater China, during the past forty years of China’s “Reform and Opening-up” policy.

Conventionally, Hong Kong plays three roles: portal of Pearl River Delta, portal of China, and portal of Southeast Asia and Australasia.

The role as an entrance of Pearl River Delta starts naturally as an economic hub, since Hong Kong’s entrepreneurs have invested a lot in Mainland, making Hong Kong behaves as the “reception desk” of PRD’s industry.

Meanwhile, the “one country, two system” policy makes Hong Kong as an entrance of China, thus foreigners without China visa and Taiwan resident can fly to Hong Kong to apply for entry permission to mainland China.

Eventually, its geographical location determines its advantage as a relay on Kangaroo routes from Europe to Australasia and routes from Southeast Asia to North America. The long distance has made it hard to supply direct flights to most people for an affordable price (Singapore Airlines provides direct service to New York City, but the capacity is restricted; Qantas provides direct service to Perth from London, but Sydney and Melbourne is too distant for it),

All these factors have helped Hong Kong to be a strong airport in the PRD area. In 2018, 74 million of passengers travelled through HKG, while 70 million travelled through Guangzhou’s Baiyun (CAN/ZGGG) and 49 million travelled through Shenzhen’s Bao’an (SZX/ZGSZ).

Inferior environment for China Southern to run in PRD

Now let us talk about China Southern Airlines (CZ/CSN).

Despite its market advantage as the largest carrier in China, China Southern has most of its revenue (about three quarters) is coming from domestic (including Hong Kong, Macao and Taiwan) markets, with limited international development. Meanwhile, China Eastern has 69%, and Air China has 67%. (China Southern, also China Eastern, and Air China):


One of the reasons is that when working as a portal to China, Guangzhou is too south to attract customers when comparing to Beijing and Shanghai. As its name implies, China Southern Airlines puts its headquarter and largest hub in the southern city of Guangzhou. The location of Guangzhou makes it a good portal if flying from/to Southeast Asia and Australasia, but not from/to Europe and America: both Beijing (HQ of Air China) and Shanghai (HQ of China Eastern) are better when flights to northern hemisphere are involved.

Detour Rate (img) London New York Sydney
Chengdu, Sichuan Beijing: 17% Shanghai: 31% Guangzhou: 29% Beijing: 3.7% Shanghai: 11.9% Guangzhou: 16.4% Beijing: 20.6% Shanghai: 9.5% Guangzhou: 0.4%
Wuhan, Hubei Beijing: 3.8% Shanghai: 11.5% Guangzhou: 16.2% Beijing: 0.0% Shanghai: 4.4% Guangzhou: 13.7% Beijing: 22.5% Shanghai: 4.8% Guangzhou: 2.2%

On the other aspect when serving local customers, although Guangzhou and Shenzhen are among the richest four cities (with Beijing and Shanghai) with high demand for international travel, the proximity of Hong Kong has attracted local mid-classes to choose Hong Kong International Airport and Cathay Pacific when traveling intercontinentally. For local customers, both airlines have Cantonese-speaking flight attendants, satisfying the need of local Chinese dialect speaker; for foreign customers, Cathay Pacific has its internationalized flight attendants trained with better oral English, allowing easier onboard communication. The foreign customers' preference is reflected on Skytrax: Cathay Pacific is Skytrax 5 stars, while China Southern is Skytrax 4 stars.

When competing on long-term transit flights like the Kangaroo Route between Australasia and Europe and the route between North America and Southeast Asia, Cathay Pacific offers more flights and more destinations, with significant overlapped time slots with China Southern on their common destinations. Please look at the following illustration.







Even when serving Chinese passengers, the immigration control affects the competition and helps Cathay Pacific. The “one country, two systems” policy allows Hong Kong to have its own immigration control, making flights between Mainland China and Hong Kong depart from International zone with border control CIQ facilities. This allows a smoother International travel from / to Mainland China. Let us take example of a round trip from Chengdu, China to Sydney, Australia as example:


Thus, China Southern realized that it may need a better hub to achieve better business besides improving its service and transfer routine to direct compete with Cathay in Guangzhou.

Beijing Daxing: is it a paradise?

As what I have mentioned in the last chapter, Beijing is the best hub for gathering passengers all over China for intercontinental flights to Europe and America. Therefore, China Southern is actively looking for opportunities in Beijing.

Starting from 1996 with KLM’s partnership for European connection, China Southern has started its intercontinental flights from Beijing to Amsterdam. It is proven to be one of the most demanded intercontinental routes (the other one is between Guangzhou and Los Angeles, both operated with A380 with 506 seats) between China and Europe.

However, Beijing’s current airport, Beijing Capital (PEK/ZBAA), does not has capacity for China Southern’ ambitious expanding plan. Designed to be able to handle 76 million passengers annually after the construction of Terminal 3, Beijing Capital is now filled with more than 100 million passengers.

Thus, China Southern has determined to move to the new airport to double its ability. The new Daxing Airport (PKX/ZBAD), designed with four runways to handle 72 million passengers immediately at its opening in September 2019, is the best playground for China Southern. According to the agreement China Southern has reached with CAAC, China’s aviation authority, it will have around 40% of Daxing’s slots, allowing doubling of its capacity in Beijing from 13 million in Capital to 28 million in Daxing.

China Southern Airlines’ A380 taxiing in Daxing Airport (Copyright to China Southern Airlines).

Local Governments’ worries on coverage

However, China Southern do not have a fleet capable to conduct its ambition to become “China Northern”. Currently, most airplanes in China Southern Airlines’ fleet are either B737s (35%) or A320s (47%): only 14.5% of airplanes are wide-body aircrafts able to perform intercontinental flights.


This shortage of wide-body aircrafts introduced a layer of uncertainty on the international coverage of Guangzhou and Shenzhen from Guangdong’s provincial and municipal governments’ perspective. China Southern Airlines is the largest carrier in Guangzhou, offering 47.51% of seats, and the second largest carrier in Shenzhen, offering 24.33% of seats. Also, international, especially intercontinental routes, are mostly operated by China Southern Airlines.

Such worries are reflected in the agreement as China Southern Airline’s promise. In its announcement in Chinese, China Southern Air Holding Company promises that “the group will use the injected investment in its aviation transportation industry, support the civil aviation development of Guangzhou and Shenzhen, put more wide-body aircrafts in these airports, and expand the international route network constantly”.


That is the whole story explained. However, as Guangzhou and Shenzhen keep their fast economy growth, the aviation needs Pearl River Delta has reached its rapidest growth.

Pearl River Delta has become one of the most densely populated human habitats of 66 million peoples, pushing its sky (including five large airports: Guangzhou, Shenzhen, Hong Kong, Zhuhai and Macau) to be one of the busiest areas.

Thus, the civil aviation in Pearl River Delta area will be growing for quite a long time, as long as the capacity threshold is resolved by the new runways and terminals, which will be an opportunity for every participants, especially foreign carriers.