United Continental Holdings: A must-know company overview (Part 4 of 14)
Growth potential in China
China’s outbound tourism has grown at a compound annual growth rate (or CAGR) of 18.7% between 2000 and 2013. According to the IATA (International Air Transport Association), while an average person in the U.S. travels by air 1.8 times a year, in China, the average is just 0.2 times a year. With such a low penetration rate and a growing economy stimulating outbound tourism, China’s airline industry is a market to look for potential high growth.
Rising competition from Chinese players
According to PWC, the total capacity between the U.S. and China increased 20% in 2013. U.S. airlines still dominate the market, with a 57% market share. However, the U.S. market share has reduced to 57% from 59% in 2012, as airline companies in China increased capacity by four times the rate of their U.S. competitors. Capacity offered by China-based carriers increased 38%, from 227.8 million in 2012 to 314.3 million in 2013, and the ASMs offered by U.S.-based carriers increased only 7.7% from 331.6 million in 2012 to 357.4 million in 2013.
United (UAL) won “Best American Airline Serving China” for the ninth consecutive year in the 2013 Business Traveller China Awards. It’s the first U.S. carrier with non-stop service to China beyond Beijing and Shanghai and it has single-stop connectivity from China to more than 130 U.S. destinations. It connects to over 90 Chinese cities through Star Alliance partner Air China. However, it’s facing stiff competition from Chinese airlines. To remain competitive, United has increased its capacity between theU.S. and China more than 30% since 2012 and is expected to increase by 20% year-over-year in the second quarter of 2014. United also plans to launch a non-stop service between San Francisco and Chengdu (the fourth-largest city in China) as it increases its focus on secondary cities in Asia.
These challenges in China, along with the depreciation of the yen, led to a 12% decrease in revenue in the Pacific region in 2013, as yield reduced by 3.7% and capacity decreased by 1.1%.
Delta Air Lines’ (DAL) and American Airlines’ (AAL) revenue in the Pacific region declined by 2.7% and 1.6%, respectively. Southwest’s (LUV) and JetBlue’s (JBLU) operations are mainly in the U.S.
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