Hainan Airlines is Building an LCC Alliance in China, But is it a Game Changer?

Hainan Airlines, China's largest privately held airline, has announced a new low cost Chinese alliance, the first of its kind in the world. The U-FLY alliance features Hong Kong Express Airlines, Lucky Air, Urumqi Airlines, and West Air. Save for Hong Kong Express, all of the LCCs in the alliance are based in the mainland of China. However, all four low cost carriers are owned by HNA Group, the holding company of Hainan Airlines, though the alliance is trying to attract non-HNA owned carriers as well.  

Over the past several years, Chinese regulators have warmed to the idea of low cost carriers, praising the efficiency of the model. Previously, LCCs were frowned upon in China with the Civil Aviation Administration of China (CAAC) instituting policies such as the 2007 ban on new private carriers. The ban was lifted in 2013, leading to a flurry of new privately held airlines, including LCCs such as Qingdao Airlines and 9 Air. However, LCCs in China still face various regulatory hurdles. It's very difficult for new LCCs to acquire slots, especially for the most profitable routes dominated by the state run airlines. For Spring Air, China's largest low cost carrier, it took nearly five years for the airline to gain regulatory approval for the lucrative Shanghai-Taipei route. The head of the CAAC, Li Jiaxiang, has maintained the agency's support of the development of LCCs. Though how much of that is about supporting the state run carriers' low cost operations instead of the new private carriers has yet to be seen.  

For the HNA group, the relaxation on the formation of new private carriers was both a blessing and a curse. HNA Group only launched one LCC, Urumqi Air, after 2013. Most of HNA Group's other LCC subsidiaries were launched in 2004. For HNA Group, the lifting of the ban led to increased competition from new privately held LCCs and LCC subsidiaries of the traditional legacy carriers. Facing more pressure, HNA Group decided to launch U-FLY alliance to gain a leg up on its competition.  

The U-FLY Alliance is revolutionary in many aspects and could have vast implications for the Chinese airline industry. LCCs maintain low costs and high load factors by targeting specific routes and point to point traffic instead of the traditional hub and spoke system of the legacy carriers. Since they aren't designed for connecting traffic, passengers can't find flights for certain city pairs. For example, it's impossible to find a flight between Billings, Mt. And St. Petersburg, Fl. on Allegiant, an American low cost carrier, even though the airline serves both cities. The U-FLY Alliance fixes many of these problems by creating a system where passengers can seamlessly transfer from one LCC to the next. This maintains the cost advantage of the LCC while driving growth from markets that previously did not make sense financially or operationally for the individual LCCs.  

However, The U-FLY Alliance is not without its problems. From an IT standpoint, integrating the different carrier's reservation systems will be extremely difficult. U-FLY will also have to better align the airlines operationally, though many of the major alliances struggle with this. 

         For the HNA Group, its nascent U-FLY Alliance is a creative attempt at gaining a greater market share of the growing Chinese low cost market. If the U-FLY alliance works, many other LCCs around the world would be smart to follow suit.