SHENZHEN AIRLINES PLANS TO SOAR

UNCLAS SECTION 01 OF 04 GUANGZHOU 016330

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STATE FOR EAP/CM AND EBA/TRA/AN ENGLE, DEMARS
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E.O. 12958: N/A
TAGS: EAIR ECON KTIA CH
SUBJECT: SHENZHEN AIRLINES PLANS TO SOAR


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(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY.


1. (SBU) Summary. During a recent meeting, Shenzhen
Airlines Vice President Zhang Pei laid out the airline's
ambitious expansion strategy. Operating mostly Boeing
aircraft, Shenzhen Air runs an efficient operation that has
made it China's most profitable airline after flag carrier
Air China. However, its route network is relatively small
and focused largely on South China. Nonetheless, in ten
years' time, Shenzhen Air plans to be operating a fleet of
more than 150 aircraft across an extensive route network
that will include numerous international routes, all while
retaining the reputation for good service that has earned it
top spot in passenger satisfaction surveys for the past
eight years. End summary.

Company Profile
--------------


2. (U) During a recent meeting with Consulate officials,
Shenzhen Airlines Vice President Zhang Pei discussed the
airline's expansion plans, and shared his views on the
future of aviation in Shenzhen and the Pearl River Delta
(PRD). Shenzhen Air was founded in 1992 and its maiden
flight took off on September 17, 1993. Since then, the
airline's fleet has grown from two to 35 aircraft, the vast
majority of which (32) belong to the Boeing 737 family (300,
700, 800 and 900 series). The remaining three aircraft are
Airbus planes: one A320 and two A319. Shenzhen Air plans to
add 13 new aircraft (seven Boeings and six Airbuses) to the
fleet by the end of 2006, bringing the total to 48.
According to passenger satisfaction surveys, Shenzhen Air
has been the preferred airline in China during the last
eight years.

A Local Company
--------------


3. (U) Shenzhen Air prides itself in its origins as a "local
company" (`difang gongsi'),organized and funded largely by
the Shenzhen government and local enterprises. The airline
then underwent ownership reform, and Guangdong Development
Bank (GDB) acquired a controlling 65% interest. In 2005,
GDB auctioned off its shares to two private companies,
Huirun Investment and Yiyang (Bright Ocean) Group, for RMB
2.72 billion (USD 328 million). Air China (25%) and the
Shenzhen government (10%) hold the remaining shares.

A Young Company As Well
--------------


4. (U) Shenzhen Air employs more than 5,000 employees, about
2,000 of them in its core business. The remaining 3,000
work in its upstream and downstream businesses, which
include a catering service, travel agencies, and a hotel in
downtown Shenzhen. The average age of a Shenzhen Air
employee is 27, and the airline has no more than 20
employees over the age of 50.

Not Just Shenzhen's Hometown Airline
--------------


5. (SBU) Shenzhen Air currently operates more than 80
routes, the vast majority of them domestic. As one would
guess, the airline's main hub is in Shenzhen. From the
city's Bao'an International Airport, Shenzhen Air flies to
over 45 domestic destinations. Internationally, the airline
has flown from Shenzhen to Kuala Lumpur and Seoul, but those
flights are currently suspended. It also plans to begin
flights to Ho Chi Minh City in August. (Note: The
suspensions were not mentioned during the meeting, and
neither was the fact that the Ho Chi Minh flights were still

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in the planning stage. We found out these facts after
calling the airline's hotline to ask why the Ho Chi Minh and
Seoul flights -- but not the ones to Kuala Lumpur -- were
omitted from the airline's online flight schedule. End
note.)


6. (U) The airline also has operational bases in Guangzhou,
Nanning (Guangxi),Wuxi (Jiangsu),and Shenyang (Liaoning),
and plans to open one in Zhengzhou (Henan) this summer.
These are all modest affairs, but the airline plans to use
some of the new aircraft it will receive later this year to
bolster these regional bases.

Go West (And North And Abroad),Young Airline
--------------


7. (SBU) Meanwhile, the recent opening of a base in Shenyang
highlights Shenzhen Air's intention of expanding its
operations in China's northeast. The airline hopes to open
up new bases in the west of the country within the next
three years.

Shanghai, Here We Come
--------------


8. (SBU) Although South China will remain the airline's core
area of operations, Shenzhen Air is poised to significantly
"penetrate" the booming Yangtze River Delta (YRD),centered
around Shanghai. The airline recognizes that Shanghai's own
two airports, Pudong and Hongqiao, are tough, saturated nuts
to crack, and plans instead to aim at nearby airports, a
strategy that has proved successful for low-cost carriers
(LCC) in Europe and the United States. To this end, the
airline has acquired the airports in Nantong (Jiangsu) and
Changzhou (Jiangsu),cities 60 and 100 miles away from
Shanghai, respectively. Meanwhile, its existing base in
Wuxi is 80 miles away, and the airline plans to buy that
airport as well.

In Three Years, The Chinese LCC
--------------


9. (SBU) Turning to the airline's long-term plans, Vice
President Pei explained that, under the leadership of
President Li Kun (a former vice president at rival China
Southern Airlines),Shenzhen Air set what is known as the 3-
6-9 Strategy for expansion, marked by three-, six- and nine-
year plans. The three-year plan calls for an expanded fleet
of 60-70 narrow-body planes, e.g., 737s, with a route
network that would continue to focus on domestic
destinations, plus those in nearby countries. In Pei's
words, the airline does not aspire to become China's "number
one" during this period, but instead wishes to establish
itself as the "LCC with Chinese characteristics."

In Six, A Globally Known Brand
--------------


10. (SBU) Looking ahead to the six-year mark, Shenzhen Air's
plans take a decided turn for the ambitious. By that time,
it not only plans to be an intercontinental airline, flying
to Europe and North America, but it plans to do so as a
respected, well-known brand (`mingpai'),ostensibly moving
away from the LCC tag.

In Nine, First Choice In Air Travel
--------------


11. (SBU) Finally, in nine years, Shenzhen Air hopes to have
a "global presence" and be passengers' "first choice,"
operating a fleet of 150-160 planes. At that time, it plans
to operate more than ten hubs in China, including one in
Beijing, where it would focus its international operations.

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Profiteers
--------------


12. (U) Shenzhen Air embarks on its path to glory from solid
ground. In the first quarter of 2006, Shenzhen Air's
business revenue was the second-highest among Chinese
airlines, after Air China. This is not a small feat given
Shenzhen Air's relatively low number of flights and its lack
of profitable long-haul international routes. With profits
before tax of RMB 120 million (USD 14.94 million) in the
first quarter, the airline is set to surpass its target of
RMB 200 million (USD 24.9 million) for the whole year in
less than half that time.

The Secret Of Their Success
--------------


13. (U) Rising fuel prices are the bane of Chinese airlines'
existence, but in spite of that situation, Shenzhen Air has
managed to keep its costs low and, in turn, its profits
high. Vice President Pei attributes the airline's success
in this regard to two key factors: One, the airline pays
much more attention to effective flight planning than its
domestic rivals. While some companies establish flight
routings and fuel loads only twice a year, at Shenzhen Air
every flight is routed individually, taking into account its
particular payload, as well as the current weather and the
type of aircraft operated. This gives the airline the
opportunity to save at least some fuel on each flight.
Meanwhile, personnel -- pilots, flight planners and
dispatchers -- are given bonuses for saving fuel. It is
also standard company policy to tow aircraft while on land,
rather than letting them taxi on their own power.

Safety Is Tops
--------------


14. (U) Despite the vital efforts to save fuel, Vice
President Pei reiterated that there was no penalty imposed
for a failure to save fuel or use more than was planned, in
the interest of safety. The airline is proud of its strong
security record, and its incident rate stands at a low 0.2
per million hours. In its 13 years of operations, the
airline has not suffered a single crash, and not one life
has been lost during the course of its operations.

Pilot Shortage
--------------


15. (SBU) Shenzhen Air's preferred source for incoming
pilots is the military, but in recent years the number of
available flyboys has decreased, while competition for them
has increased. The airline also takes fresh graduates from
flying school, often sending them on to more training, but
at times this has not been enough to cover its demands, and
it has resorted to hiring foreign pilots. At the height of
this practice, it had in its payroll 60 pilots from 16
countries, but now the number is down to 19. Intriguingly,
Shenzhen Air's leading source for foreign pilots is Brazil.
(Note: This would make more sense if Shenzhen Air operated
any Brazilian-made Embraer aircraft, but it does not. End
note.)

Visa Woes
--------------


16. (SBU) Vice President Pei took advantage of the
opportunity to comment on problem his company has allegedly
faced because of current U.S. visa policies. Pei claimed
that many of his pilots bound for training in the United
States have had their applications held up because of the
need for further processing, causing grave inconveniences

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for the airline, as the pilots must sometimes wait months
for the next course to start. Quick off the mark, the
Canadian consul general in Hong Kong has made strong
overtures to the airline, highlighting both the caliber of
Canadian aviation academies and the relative ease of
obtaining a Canadian visa. (Note: Our consular section
notes that, since the beginning of 2005, it has issued visas
to 18 Shenzhen Air pilots. With two SAO-related exceptions
at the beginning of 2005, all were issued within two or
three days of the interview. This appears to be yet another
example of public perceptions that are not in line with
actual practices. End note.)

Delta Force
--------------


17. (SBU) Turning to a discussion on the future of air
travel in Shenzhen, Pei opined that Bao'an Airport had very
limited potential as an international gateway for
passengers. Hong Kong International Airport (HKIA),with
its array of flights to every corner of the world, is easily
accessible from Shenzhen and neighboring cities, and special
arrangements in place obviate the need for passengers
incoming from China and Macau to clear Hong Kong entry
formalities before boarding a flight at HKIA. Meanwhile,
Guangzhou's Baiyun Airport still has formidable potential
for growth in terms of handling capacity. (Note: In a
later meeting with EconOffs (septel),Shenzhen Metro
officials mentioned that future plans call for switching
most of HKIA's China-bound flights to Shenzhen, allowing
HKIA to focus on international flights solidifying
Shenzhen's role as Hong Kong's aerial gateway to China. End
note.)


18. (SBU) While turning the international passengers over to
Hong Kong and Guangzhou, Shenzhen seeks to carve a niche as
an international air cargo hub for the PRD. Doing its part
to help, Shenzhen Air is the majority shareholder (51%) in
Jade Cargo International, a joint venture with Lufthansa and
other German concerns, which is the first cargo airline in
China with any foreign ownership. Jade is set to being
operations in July with two 747-400s, and it plans to bring
the size of its fleet up to six by the end of 2007.

Comment: Staying Aloft
--------------


19. (SBU) The projected growth of the Chinese aviation
market reaches such heights that Shenzhen Air may well be
operating 160 planes across a worldwide network by 2016, at
the same time its rivals that survive consolidation
experience comparable growth. To accomplish this, however,
the airline must continue of its path away from its roots as
a strictly local airline. The airline's expansion in the
booming YRD and up-and-coming Sichuan will be key.
Meanwhile, even if the plans prove a tad too ambitious for
what is still one of China's second-tier airlines, its roots
in the still-growing PRD and its reputation for good service
should ensure that it remains a profitable, albeit
relatively small, carrier.

DONG