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.
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.