With a tentative decision, the U.S. Department of Transportation this week all but granted to United Airlines highly coveted authority for a single new route between China and the United States. Already offering the most frequencies between the two economic powers, Chicago-based United plans to add "capital to capital" nonstop service between Beijing and its hub at Washington Dulles.
Travel management company and corporate travel executives said they could not overstate the anticipated demand for more service between the two countries.
"We book two or three people to Beijing every day," said Ray Pierce, chairman and CEO of Washington-based Executive Travel Associates. "Going through Chicago, it's often difficult to get into business or first [class], so I think that capital-to-capital angle could not be overlooked. A couple premium-class trips over there, and maybe another indirect flight into Asia, and the business traveler is deep into United's frequent flyer program."
United's rivals know that well, which is part of the reason three of them encouraged customers to help lobby for approvals of their respective applications for China service. American sought approval to operate Dallas/Ft. Worth-Beijing, Continental lobbied for rights to fly Newark-Shanghai and Northwest pursued Detroit-Shanghai authority.
DOT's decision stemmed from a July 2004 agreement between the United States and China that mapped out a five-fold increase in air services between the two countries by the end of the decade. Shortly after signing the deal, DOT authorized United and Northwest to increase passenger services to China. In early 2005, DOT chose Continental and American as new entrants in the U.S.-China market.
According to DOT's 9 Jan filing, United currently leads in the country-to-country market with 28 weekly frequencies (on routes between both Chicago and San Francisco and Beijing and Shanghai), followed by Northwest Airlines (21 weekly frequencies), Air China (19), China Eastern (13), American (7), Continental (7) and China Southern (5).
"I am not sure that one flight will have that much of an impact, on an aggregate level," said Mitch Cwanger, senior practice manager for air in American Express Business Travel, Advisory Services. "For companies that are in the Washington, D.C. area, or even on the East Coast, that do have significant traffic into China, it probably does have an impact. But there are several other airlines that can get you to China."
Even so, the decision is a boon for United, which already claims to be the largest transpacific passenger carrier and, like many of its U.S. peers, is focusing most new growth on overseas routes. "We believe this route could produce an incremental $250 to $300 million in revenue annually," according to a research note issued by Calyon Securities analyst Ray Neidl.
Other than Hong Kong's Cathay Pacific, no Chinese carrier participates in a global alliance, though Air China and Shanghai Airlines--both United codeshare partners--have been invited to join Star Alliance, and China Southern has been invited to join SkyTeam. United said it can offer connecting service on 16 Chinese routes thanks to its partnerships.
Such alliance ties, and general interest in the region by U.S. carriers, is a product of the booming Chinese economy and robust traffic growth to and from the country. In a speech last year, International Air Transport Association director general Giovanni Bisignani noted that China's economy--"now the world's fourth largest"--is growing by as much as 10 percent each year. The World Tourism Organization said the number of outbound Chinese travelers grew to 31 million in 2005 from 20 million in 2003, and projected a jump to 100 million by 2020.
DOT through 23 Jan will accept objections to its tentative selection of United's Washington-Beijing service--and responses to those objections for another seven days--before finalizing a decision.
According to airline industry pundit Terry Trippler, DOT should have awarded rights to Northwest for Detroit-Shanghai flights. "Beijing is the capital of China but Shanghai is where it’s happening. Shanghai is the industrial, technological, and financial capital of China as well as its largest city," Trippler wrote in a media note. "The U.S. auto industry (along with all of its vendors in the industrial heartland) could use a boost and a nonstop Detroit-Shanghai may be just the boost it needs."
In December, Business Travel Coalition chairman Kevin Mitchell wrote a letter to DOT Secretary Mary Peters in which he requested an extension of the government's review, given the potential for a merger between United and Continental. He said such an outcome, combined with DOT awarding China rights to either, would give the merged entity 42 weekly U.S.-China frequencies and hurt the business travel community through higher fares and fewer options.
"In the regrettable possibility that DOT's analysis is that these merger discussions and regulatory processes will take too long to forestall a China case decision, BTC urges DOT to require the frequencies that would be awarded in this case to either United or Continental be returned for immediate reallocation in the event the two applicants announce a merger agreement," Mitchell wrote.
The final decision, expected in February, will almost certainly be in United's favor. The airline said it would launch the new service using a Boeing 747-400, with 347 seats in a three-class configuration, within 90 days of DOT's final order.
The next set of U.S.-China flight rights to be awarded by DOT becomes available on 25 March 2008, and likely will be preceded by another intense lobbying campaign by interested competitors.