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

American, China Southern, Delta, Korean Air

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

  1. 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 bilateral groups CAN with PVG and PEK in terms of the Zone 1 frequency pool. I’m sure it’s great for CAN’s self esteem, but the actual dynamics of US-China demand mean that it’ll lose out in terms of actually getting flights if airlines have to choose between a CAN-US flight and a PVG/PEK-US flight. It’s just poorly positioned compared to the other two in terms of cost (distance) and revenue (demand and intra-China connectivity).

    1. 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), their second largest hub thus far, the “one carrier one route” policy imposed on Chinese carriers certainly helped them to maintain a monopoly on the Sino-US market in Guangzhou, a market not so attractive to US carriers under current conditions, but certainly the most wanted one after PEK and PVG for Chinese carriers (like HU, and HO in the near future) who want to join the market.

    1. Marcia – It’s a “memorandum of understanding” meaning it’s an agreement to agree on a joint venture, but it’s not the joint venture itself.

  2. 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.

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

    1. Joel – Well, I save that map for highlighting the benefits of Haneda vs Narita. Since this post didn’t touch on that, I thought it would be a little out of place!

  4. 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


    1. 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?

      1. 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

      2. 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 weaker competitors in the Central America), which would be a considerable impact on their reputation.

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

  6. “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.

    1. 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.

  7. 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.

    1. 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.

  8. 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.

  9. 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 just made the choice – which DL clearly expected to give up its HND-HNL route so it could gain JFK-HND. There is still plenty of capacity at HND. yes, there will be nonstop markets added from the US instead of via NRT but the notion that DL will simply walk away from a dozen aircraft’s worth of flying because they now have (or will have a JV) is childishly simplistic.

    And it should be clear after 2 rounds of the Japanese gov’ts attempts to monkey with the Tokyo market that the DOJ will continue to give DL and HA preferred treatment at HND over AA and UA. Thus, if AA and UA want to have any presence of their own in Japan, the Japanese gov’t needs to provide meaningful access to HND. On the current track, NRT as a hub – not just for DL but also for JL and NH – is leaking enormous revenue and is not sustainable. DL’s development of a JV with KE only increases the pressure on the Japanese gov’t to admit they royally screwed up not only with trying to operate two int’l airports in Tokyo but w/ their gradual transition plan that will force more and more int’l connecting traffic to other hubs including ICN.

    The real loser in both AA and DL’s buildup is UA which now will have viable JV competitors plus local competition in multiple markets where they have long had a virtual single carrier/alliance advantage.

    1. Well I may be “childishly simplistic” in my analysis, but I still think it’s right. So let’s bulk this up and look at it in greater detail if that’s of interest. I’m leaving Haneda out of the equation since those flights don’t matter for the hub.

      There are three components to the hub today. There’s the Transpacific flying which is only Detroit, Atlanta, Seattle, and Portland. The first three make sense, because those are Delta hubs that need access to Tokyo. If they could get Haneda slots, then I assume they’d move quickly. But until then, Narita it is. I think of Portland as more marginal, but since they can run it with a 767, it’s not as risky. Plus, that aircraft appears to be used to route into the Asian system, today’s Portland flight goes on to Manila. The question is, how much traffic is there from Portland to Tokyo? Is it enough to sustain? Or does it make more sense to route traffic through Seoul where Delta can gain a ton more destinations? Maybe Nike is single-handedly keeping this route flying. I don’t know. But you’d think this would make a more compelling case for Seoul.

      Then you have intra-Asia flights. That’s only Manila, Shanghai, and Singapore now. Singapore is a high dollar destination that Delta wants to keep in its network, but why does that matter anymore if it has a joint venture with Korean? It can serve that via Seoul just as easily. I assume Shanghai is there as a way to hold on to a slot. Or do they do maintenance there? That one has always seemed odd. Lastly there’s Manila, which acts more like a beach market. Delta was happily filling 747s on this for years, but now it’s down to a 767. I have to wonder about the economics of that when you can serve your US-based customers via Seoul. I’m sure it’s popular with the Japanese, but it’s a low fare market in general.

      Lastly you have the beach markets which are Guam, Honolulu, Palau, and Saipan. These serve the Japanese market almost entirely, and as I said, they could keep them around. I’d bet they make money today or they wouldn’t still be flying, but is it worth keeping a subfleet of 757s in Japan just for these markets (except Honolulu which is larger)?

      The question isn’t whether these are profitable. It’s whether there are more profitable places to put those airplanes. In the past, the Narita hub was the best way to serve multiple markets, so Delta would focus on on optimizing that hub to meet its needs. But now that everything (except for the Japan-Beach markets) can be served better elsewhere, is this really the best use of an asset?

      1. Could Delta fly SEA – SIN with its new A350s? it’s slightly shorter than SFO – SIN.

        1. Southbay – Probably. I’m not sure if that market is big enough to justify it, but if Delta really wanted to make it happen…

      2. thanks for your reply. I wasn’t referring to you as childish or simple but that the same theme runs over and over in discussions about DL’s NRT hub and the continued mindset seems to be that DAL will just roll up the carpet and die because it can’t move its hub to HND. You are correct regarding the 3 components of the hub but the only part of the hub that is likely to end is the intra-Asia business destinations. There is no reason whatsoever to think that Delta will walk away from the beach markets; they are not dependent on the transpacific flights now and won’t be in the future. There simply aren’t enough slots at HND for anyone to move all of those flights over to NRT and I’m not sure that is what the Japanese government wants anyway. I’m also not sure why people don’t talk about UAL ending its Tokyo beach market flights because they are either going to end up moving their transpac Japan flights to HND or they will underperform. Fleet is the least of the reasons for why the beach market flights will last or not – just as is true for United.
        Yes, some destinations might be served by KE as part of the JV but the whole stated reason why DAL was not willing to do a JV with KE before was because KE wanted to do all of the transpac flying itself and then have DL just feed flights in the US. I don’t for a minute believe that DL is going to shrink its Japan operation to a few flights with no beach market, half a handful of flights to ICN with KE flying everything beyond, and DL having only PEK and PVG left since it is not part of potential KE JV.
        Delta has very successful joint ventures in Europe and they are both the largest and most profitable US airline over the Atlantic. Delta realizes its needs to grow its Pacific operation and a JV is being done not to give away Delta’s market to other carriers but to allow DL to be able to grow its own presence.
        We’ll get more insight in a few months, I am sure, but I think you will find your view of DL’s future in Asia will be a lot different than you see it.

        1. Tim – If the intra-Asia destinations go away, then the hub is dead. There won’t be much connectivity left there. Beach destinations can stay…
          fine. But there’s just not much left at Narita at all as it stands anyway. It’s very different than United which has its historical (via Continental) Air Micronesia operation which fits more into a network.
          Delta’s are more standalone. As I said originally, maybe the beach markets stay. But it’s not really relevant to whether Narita remains a hub or not.

          1. I’m sorry but you can’t say that United’s beach market flights “fit more into a network” but Delta’s flights from Tokyo are standalone and at risk. Delta and United both operate and likely will continue to operate at both HND and NRT and both will either continue to see value in operating beach market flights from NRT or neither will. There simply is no logic in saying that UA can support point to point routes in East Asia but Delta cannot.
            And I’m sure you are aware that United is ending its NRT-ICN tag ending their last (I believe) intra-Asia (non-beach flight from Japan.

            There is no doubt that DL is moving rapidly toward ending beyond NRT flights to business destinations but I don’t think that says anything about whether DL will serve the same destinations from the US or whether the beach market flights will continue.

            If those markets don’t make money now, DL would be ending them. The fact that the present allocation of slots at HND is insufficient for any US airline to move all of the flights they want to operate even to the US says that the demise of NRT is not in sight.

            If the Japanese government opens up enough slots so that DL can operate all of the transpacific flights it wants – including HNL – then perhaps it won’t be worth keeping GUM, SPN, ROR etc – but that hasn’t happened yet and there are no indications that they are willing to do that.

            As such, there is no reason to think that DL can’t sustain transpacific and beach market flights at NRT just as UA is doing and will do.

  10. 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.

    1. 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 countries do.

      The other difference I have seen in these countries is that the International Airports are separate from the domestic airports (or terminals), so that if you want to leave an international airport or terminal, you must pass through immigration as well.

    1. Stvr – That’s a great question. They kind of march to the beat of their own drummer, don’t they? There are a lot of sister companies around the world that their parent owns a piece of, so they seem to be really pursuing the Etihad-style of alliance. But who knows, they could fit in some time.

  11. 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 the downgrade to the 767 has more to do with the impending retirement of the 747s than being solely due to a decline in passenger numbers.

  12. “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.

  13. 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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