The American/China Southern and Delta/Korean Deals Carve Up the Future in Asia

Today I want to talk about a very important topic. Asia.

Oh, shoot. In the heat of the moment I picked the wrong image. Of course, I’m really writing today about air service between the US and the continent of Asia. Last week there were a couple of big developments. American bought a small chunk of China Southern that should finally give it a foothold in China. And Delta and Korean Air finally kissed and made up, announcing plans for a joint venture. This is going to result in some big changes.

Delta and Korean and the Impending Death of Narita
Let’s start with Delta and Korean, because this is likely a bigger move with a larger impact in the short term.

For years, Delta and Korean had been unable to come to terms over a joint venture across the Pacific. Instead, relations soured with Delta cutting back on codesharing and restricting mileage earning opportunities on Korean flights. What seemed to everyone an obvious partnering was anything but.

Once Richard Anderson retired from Delta as CEO, Ed Bastian stepped up and the tone shifted dramatically. Delta and Korean first increased codesharing and worked together on new Atlanta-Seoul flights. (Even though they couldn’t agree on a joint venture, they already had anti-trust immunity.)

And now, the airlines are moving forward toward a joint venture. To be fair, this is only an MOU right now, so it’s a lot of fluff with no substance. But presumably this will solidify into a joint venture sooner rather than later.

Practically this means big things. Of course there’s the obvious improvement in mileage earning benefits that will make Korean an instant option for Delta SkyMiles junkies. But more importantly, this is probably the death of Delta’s Tokyo hub.

Delta’s Narita Tokyo hub dates back to World War II when Northwest won the right to do what it wanted in Narita Tokyo. Call it the spoils of war. In recent years, the hub has been shrinking. Delta has begun overflying Narita into Asia directly from its US hubs. Further, the opening of Haneda has seen traffic shift away from Narita. With Delta now able to connect to far more destinations via Seoul/Incheon in a joint venture where it has the incentive to do so, the remainder of the Narita hub is likely gone.

Assuming this joint venture goes through, Delta will undoubtedly cut the rest of its intra-Asia flying from Tokyo. (Sure, it could keep flights to beach destinations like Guam, Honolulu, Palau, etc, but I’m not sure if that’s worth it.) Then flights from the US will be pared down to serve the local market. I’d think markets like Portland will see a shift from having a Tokyo flight to having an Incheon one instead.

This may be sad for those who liked having elevated service to Tokyo, but the vast majority of people, this new Korean relationship will be far more valuable. At the same time, Delta can continue to develop its relationship with China Eastern to further penetrate the Chinese market. China will likely become the most important air market in the world over time. While there are joint venture issues since the US and China don’t have open skies yet, Delta is now incredibly well positioned with both Korean and China Eastern offering tremendous penetration. Meanwhile, for American, China has been one of the most vexing problems, so it decided to do something about it.

American Buys Its Way Into China… Southern
American has been boxed out of the Chinese market for years. United and Air China have been tied up for a long time. And Delta had snared both China Eastern and China Southern into SkyTeam. But when Delta invested in China Eastern and started focusing its efforts on Shanghai as its future connecting point, China Southern had to feel left out.

Now, American is putting money into China Southern, and presumably we’ll see the airline back away from SkyTeam and pivot toward oneworld. On the surface, this doesn’t seem very appealing. China Southern is a giant in China (the biggest airline, actually), but its network leaves something to be desired. Its primary hub to serve the US is Guangzhou, a city near Hong Kong that no US airline has ever been able to make work. (Even United has prioritized cities like X’ian, Chengdu, and Hangzhou over Guangzhou.)

The good news for American is that China Southern does have a regional hub in Beijing with more than 200 flights a day. It also has a minor hub in Shanghai. So American will be able to feed people from its own flights into those cities. But really, this is just setting up for the future.

China is enormous, but as mentioned earlier there is a highly-restrictive bilateral agreement between the country and the US. On the Chinese side, only one airline is allowed on each route to the US. That’s why you see Chinese airlines doing all kinds of routes that will in no way be financially successful. It’s just a land grab. On the US side, that rule doesn’t exist but the number of flights is restricted overall. And the desirable airports make it nearly impossible to obtain slots. (Just ask American which has been unable to get anything in Beijing for its newly-awarded LA flight.)

One day, hopefully, there will be open skies in place, and the airlines can really ramp up their cooperation. When that day comes, the US airlines will have long ago lined up their partners. The plans can finally go into place.

One remaining question surrounds Cathay Pacific. American’s current “partner” in Hong Kong isn’t much of a partner at all. They’ve never really been able to put together any cooperation above basic oneworld protocol. But Cathay Pacific and Air China have been getting closer with equity swaps and rumored mergers. Cathay Pacific just recently also tied up with Lufthansa in Europe. A switch to Star Alliance and its partners seems highly likely in time.

So the uncertainty about how US carriers would plot their strategy in Asia seems to have become more solid almost overnight with each US carriers having two focuses. American can focus on its joint venture with JAL along with its new China Southern partnership. Delta can walk away from Japan and concentrate on Korean and China Eastern. Then United can continue with ANA and Air China (which may eventually include a merged Cathay Pacific). As traffic continues to grow and agreements (hopefully) liberalize, the path forward has crystallized.

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37 Comments on "The American/China Southern and Delta/Korean Deals Carve Up the Future in Asia"

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Itami
Guest
A good write-up, Cranky. While the writing has been on the wall for NRT as a hub for some time regardless of the state of the DL/KE relationship, I don’t see the Japanese beach flying going away so long as it contributes from a P/L standpoint. More than AA or UA, I think DL has generally been willing to fly more opportunistic routes if they can make money doing it. And with the capacity situation in Europe, the opportunity cost for keeping those planes in the Pacific probably isn’t that high as well. Re: CZ, I do question why the… Read more »
Zee
Member
Hi Itami, I think CAN grouped with PVG and PEK because Guangzhou is typically considered as one of the Tier 1 cities in Mainland China (others include Beijing, Shanghai, and arguably Shenzhen), and it’s geographically separated from the other two. Also, I’m almost certain that when the last agreement was signed in 2007, Chinese officials wanted to protect the “Big 3” legacy airlines (CA, MU, CZ) from competition over transpacific markets. Even though CZ hoped but hasn’t been able to open a single transpacific route in Beijing (this might change when the second Beijing Airport starts to operate in 2020),… Read more »
Marcia Goldman
Member

What’s an MOU???

A
Guest

I don’t know about the rest of you but I’d rather listen to Asia the band than try to figure out what airlines are bedfellows this week in the orient.

Joel
Guest

Brett – why did you forego using the map of the Tokyo airports – you know, the one that shows Godzilla’s home? :-(

Oliver
Guest

Will Godzilla make the move to ICN?

GringoLoco
Member

Only Time Will Tell with all this Asia stuff. Certain there won’t be a Sole Survivor.

David SF eastbay
Member

Typical AA/DL/UA must do what the other two do, so no one will win and they will fight it out and each lose money and gain nothing.

Brian
Member

Good morning

Cathay has dumped WestJet in favour of Air Canada for codesharing in Canada. I agree a jump to Star Alliance is a possibility

Brian

Oliver
Guest

Wonder if SQ will like (and agree to) that. I recall reading somewhere a long time ago that founding Star Alliance members have veto rights over new members?

Jason H
Guest

SQ was not a founding star alliance member (TG was). I don’t think that they have veto power but all members probably vote on it or something

Oliver
Guest

You are right; not sure why I thought SQ was a founding member.

Zee
Member
Also, I remember that Star Alliance changed their policy somewhere during the last two years. Before, the voting power was linked with the membership fee paid, so members who were not so important but certainly contributed a lot membership fees (like SQ) could have more voice in the alliance. After the reform, voting power is no longer related to the membership fee, but passengers carried, so SQ wouldn’t be as important as they used to be in the alliance. However, I feel like if Star accepts Cathay, Singapore will certainly leave the league (although they already have a pair of… Read more »
DesertGhost
Guest

One would think that American’s investment in China Southern should help it procure better slots in PEK.

ChuckMO
Guest

You are correct Ghost.

02nz
Guest

“Delta’s Narita hub dates back to World War II when Northwest won the right to do what it wanted in Narita. Call it the spoils of war.” Not quite. World War II ended in 1945. Narita opened in 1978. Yes the Tokyo hub does date all the way back to the aftermath of the war, but at that time there was only Haneda and Northwest most definitely didn’t win the right to do anything in Narita.

hsano
Member

I was wondering about the 20+ year gap between the end of WW II and NRT’s opening too. Since NRT planning didn’t start until the mid-1960s, NW must’ve been operating its hub in HND after WW II.

Eric A.
Member

A decade ago, when I was with NWA, the beach flying was profitable thanks to lucrative agreements with tour operators and consolidators. I have no idea of that is the situation today.

My only concern about using ICN as the prefered gateway is more geopolitical than economic. If the cold stalemate gets hot, and China dosent find common interests with the US,Japan and the ROK, then DL is putting it’s eggs in a hornets nest.

Oliver
Guest

I was thinking about the potential impact of North Korea, but came to the conclusion that if they “blow up” (whatever that means) Japan isn’t exactly out of range and business and tourism in that entire area would probably be impacted.

dan tana
Guest

do you remember the fugu bank? I have a picture of it…20 Northwest 747’s at narita all departing in a span of 2 hours…basically my opinion is swaping narita for ICN may be good for somepeople but no matter how you slice it…just cannot come close to the market share NWA had in the pacific in years past.

Tim Dunn
Member
internet pundits have been predicting the death of Delta’s hub in Tokyo for years and somehow think that DAL has been sitting around flying money-losing routes just because they didn’t have a partner in Asia who would do it for them. It should be pretty clear that Delta doesn’t fly routes that don’t make money. The routes that DL continues to operate have profit-contributing potential tomorrow and in the foreseeable future and that includes the NRT beach market flights. DL is no less handicapped by having to operate beach market flights from NRT than JL or NH. Remember that JL… Read more »
Kit Reyes
Guest

As far as I know, transiting passengers through Incheon do not have to go through x-rays and security, unlike Narita. I wonder if this will still be the case once the Korean-Delta partnership is solidified. Many times I would deboard the plane in Narita, go through security, and then board the SAME PLANE afterwards, which was a waste of time in my opinion.

TC
Guest
I have transited both in Korea (only on KE) and Narita on both NW and DL after the merger. Everyone in both places go through Security including the machines for both hand carry and people. These countries’ immigration and customs must also clear the plane so everyone has to get off and take all their belongings with them. We may think it should be the same as if we travel domestically here in the US, but we are international passengers. At least we don’t have to have visas to transit the airport like people transiting the USA to other foreign… Read more »
stvr
Guest

Cranky… any opinion as to how Hainan fits into this puzzle?

MK03
Guest
I wonder if Tokyo-Manila is dropped, that could mean a direct flight from the US. It’s not exactly out of reach with today’s aircraft, and PAL has been happily doing it for decades. MNL-SEA has been rumored for a while for both PAL and Delta given the growing Filipino community in Washington. Interesting anecdote: I flew with Delta to Tokyo two years ago, and the 747s were full (albeit most passengers went on to the US and only a few of us disembarked at Tokyo), and their load factors were actually better than PAL’s, from experience. If anything, I think… Read more »
Zee
Member

“That’s why you see Chinese airlines doing all kinds of routes that will in no way be financially successful. It’s just a land grab.”

Local officials also offer astronomical subsidy to attract airlines to operate these “financially unviable” flights, as they believe these routes boost the cities’ global impact, as well as their resumes.

Kevin West
Guest

Delta’s exit from Narita is an opportunity for others, especially ANA who is more focused on Non Japan Asia-US market, to build up Narita hub. Part of Delta’s failure in Narita market was their poor service, both on the ground and in-flight, that disattracted Japanese passengers. Passenger traffic to/from Japan has been showing strong growth in the last three years, especially inbound. Delta has been a major loser there there, however.

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