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Beijing 2008: US Airlines Look To Land Of Opportunity

U.S airlines are hungering to provide more service to the booming Chinese market and their role in successfully serving tourists during the Olympic games may be a factor in whether China’s decides to fully liberalize its aviation market.

“Being 2008 is only going to drawer further attention to the leisure side,” says Webster O’Brien, a VP with airline consultant SH&E. “Word of mouth is very important, particularly with a long-haul destination….”

If travel to the games is a positive experience – from the flights themselves to the new airport terminal with its state-of-the-art baggage system and direct rail link to the city – then China will become a more attractive and popular destination for American tourists.

O’Brien says the new terminal at Beijing’s airport will “make a significant difference to travelers – both business and leisure”

About 1.7 million Americans visited China in 2006, up 10% from the previous year. A little less than two-thirds were classified as leisure/sightseeing by the China National Tourist Office.

Fab Four

Right now, Continental Airlines, Northwest Airlines and UAL'sUnited Airlines have service from several U.S. airports to Beijing. AMR's American Airlines serves Shanghai and has a code sharing agreement for service to Beijing. United and Air China also have a code sharing agreement that includes frequent flyer programs. U.S. airlines are also allowed to fly into Guangzhou, about 100 miles from Hong Kong Not all the flights are direct.

"Capacity is a problem,” says Blake Fleetwood, Cook American Express, which has five offices in the New York area and specializes in business travel to China

More choice is on the way this year and next. The U.S. and Chinese governments in May agreed to add more one daily flight this year and next as well as allow three new carriers to provide service in the next three years as part of a larger aviation agreement.

Asia is the “last untapped market” for U.S. carries, says Roger King, an airline analyst with CreditSights, an independent fixed income research company. “It’s hard to get over there nonstop.”

The 2007 agreement allows US carriers to add 13 new daily flights over the next five years, more than doubling the exciting total to 23. The countries plan to resume talks in 2010 to discuss a so-called “Open Skies” agreement.

New entries US Airwaysand Delta are the most desperate to win the rights for the 2007 slot -- which like the other route rights in the past will be awarded by the Dept. of Transportation -- offering service from Philadelphia and Atlanta, respectively. If approved, both would start service in March 2008 – well in time for the games.

American, Continental and Northwest are also seeking rights to the 2007 route.

“It’s tough because every airline can use one, “ says King. “All these airline just grovel,” in the hope of winning the rights.“

US. carriers also have service to Hong Kong, part of the People's Republic of China since 1997, but that is covered by a separate air agreement with the United States

Chasing China

Prior to the incremental approach of the past decade, air service to China was sporadic and rare. After the restoration of diplomatic relations between the two countries, Pan Am began flying to China in 1981. (Pan Am later sold its Pacific routes to United, before it went out of business) In 1991, Northwest Airlines made the first non-stop flight between the US. (Detroit) and China (Beijing).

Competition for routes to China is heated and for good reason. The routes are extremely lucrative and irresistible for U.S carriers, which until 2006 hadn’t had a profitable year this century. Profit margins are also higher on international rights.

The Chinese market’s “importance has grown so significantly,” says O’Brien.

King estimates that a single route could generate more than $100 million in revenue a year on coach fares alone.

The Air Transport Association, the U.S. airline industry trade group, has estimated that international passenger air traffic into China will post average annual growth of about 10% from 2005-2009.

"While there remain controlled airspace, slot and congestion issues in China, the 2008 Olympics will provide an opportunity for enhanced air service between the United States and China,” ATA Executive Vice President John Meenan told CNBC.com. "We look forward to the future and the opportunities that will come with it."

Boeing no doubt also sees great opportunity. Its forthcoming 787 Dreamliner jetliner is a long haul, fuel-efficient plane with a moderate number of seats.

“The 787 is perfectly designed “for the Chinese market, says King.

Boeing, by the way estimates passenger traffic is expected to surge after the 2008 Olympic games and grow fivefold after that through 2026.

King says if US airlines provide good service to China during the Olympics and thus help the event go well as Beijing so dearly wants, it “males all the sense in the world” for Washington to use that as a bargaining chip in gaining more routes with or without a full open skies agreement.