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Air China – Interview with Chairman Wang Changshun

How would you characterize Air China?

Air China is among the most profitable airlines in the world and for the past three or four years we have had the highest market capitalization. We have good management practices and high international exposure. Air China is not merely a national carrier and a state-owned company.

Aside from participating in Star Alliance and working with the Star Alliance partners, Air China has a shareholding in Cathay Pacific. Under the umbrella of the group, we have Shandong Airlines, in which we have close to 50% of the shares, Air Macau (67% of the shares), Beijing Airlines, Dalian Airlines, and Tibet Airlines. The airlines within the group are all positioned differently, so we hope to generate significant synergies for the group as a whole.

We hope to continue to strengthen our services so that when travelers from other countries travel to China, they will not just think of using foreign carriers, but will also consider experiencing the service of Air China.

Are you confident that aviation growth in China will continue to be strong?

On the domestic front, China’s passenger market has been steadily increasing. This is related to China’s GDP growth of 8–9% in the past couple of years, which has led to high domestic traffic demand. Also, the average GDP per capita of the Chinese has exceeded $3,000, which is a crucial tipping point. It means disposable income has increased enough for the domestic market to receive an extra boost.

This has provided the base for good profits for the mainland carriers. About 65% of Air China’s revenue comes from domestic travel and 35% from international.  In the past, when international business conditions were better, 40–45% of income came from overseas routes.

Aviation is very closely linked to the global economic situation. In the past two years, since the 2008 global economic crisis, there has been a degree of recovery, but there has been instability too, such as the eurozone debt crisis. This has added to the risks in our international business. And because of the situation in the international market, the Chinese domestic market has become increasingly attractive to foreign and Chinese carriers alike.

The Chinese market has three main airlines—Air China, China Eastern and China Southern, and Hainan Airlines. But there are more than 40 domestic carriers, so competition among airlines in China is intensifying.

There is also competition from the other modes of transport. There has been a lot of road construction over the past two years, and the high-speed rail has started operation. So this has an impact on the airline business.

External factors also play a part. Last year fuel accounted for about 38% of costs. This year, in January and February, this percentage has increased due to the oil price rise, adding to the pressure on our costs. The exchange rate between the renminbi and the dollar has switched as well. It was in our favor, but we have seen exchange rates soften in the past year or so. This really hurts us as close to 75% of our liabilities are in US dollars.

Overall, we are quite cautious about the growth potential in the year ahead.

With so much potential, will low-cost carriers (LCCS) be a threat to the major carriers in China, much as they have been in other markets?

A few airlines have tried the LCC model in China, but they weren’t very successful.

The external conditions are very tough. For example, fixed costs, including fuel, are about 70% of total expenditure. Just because you are an LCC, it doesn’t mean manufacturers will sell an aircraft to you for a lower price. Furthermore, the government tax rate for purchasing aircraft is the same regardless of the business model. Landing fees is another area that doesn’t discriminate. 

And although China has big infrastructure plans, it is an enormous country, covered by about 150 airports. In the United States and Europe there are 10 times more gateways. There are limited slots in China and there are no dedicated airports for low-cost carriers.

On top of this, the penetration rate for air transport is still low. On average, not more than 3% of China’s population travels by air in a year. People in the east travel more by air, but the majority of the western region has not yet started using air transport.

What are your views on the government’s ambitious infrastructure plans?

Beijing and Shanghai remain our most important gateways and we are planning, together with Beijing Capital International Airport (BCIA), the next phase of Air China’s expansion. We deployed 173 aircraft in Beijing in 2011—more than half our fleet—and there is also a sizable ground-handling team to maintain our services.

But Beijing Airport is near capacity and the government is considering a new facility. The biggest problem is slot constraint. Over the past two years, there have been two increases in slots. Air China was able to obtain more than half of the new slots, but it isn’t enough. By Revenue Passenger Kilometers (RPK) market share, Air China is more than 50% of BCIA, but we still have less than 50% of slots.

Shanghai is important as an international gateway for Air China. We hope to be able to operate more international flights from Shanghai in the future. Currently, from Pudong Airport, we have a lot of flights to northeast Asia and Europe. The aim is to operate more domestic flights to Shanghai so as to feed passengers to the international flights, but, of course, the main problem is the city has two airports.

What impact is all this having on Air China’s development strategy?

The current Air China was formed in 2002 through a major consolidation with China Southwest Airlines and China National Aviation Company.

As a result of the merger, Air China’s assets and fleet increased substantially. Now, as a major network carrier, we have some clear objectives. We are focusing on our hub strategy, and the passenger and cargo businesses. Customer service is clearly important for the future, as is cost control. Also, we are very aware of our role in Star Alliance and the need for international cooperation.

We will keep on working in these areas in the years ahead. Our goal is to be among the top airlines in the world, not just in terms of profit, but in other areas such as management capability and customer service. To help achieve these goals, we’ve benchmarked ourselves against other leading carriers such as Cathay Pacific, Singapore Airlines, and Lufthansa.

A particular focus of mine since taking over has been the use of Information Technology. I think it can give us better operating control and help improve key performance indicators.

Will your cargo strategy enable the airline to deal with the challenges in air freight?

The cargo business is facing challenges. Last year we established a cargo joint venture with Cathay Pacific to tap the market after it recovers.

Around 80% of the cargo exported from China originates from the Yangtze River (Changjiang) Delta. We have a big cargo terminal in Shanghai and our next step is to set up a ground handling company in Shanghai with Cathay Pacific and the local airport company. We have already relocated about 10 freighter aircraft from Beijing to Shanghai to help with the enormous cargo market there. From Beijing and Chengdu, we are now shipping cargo via the belly of passenger aircraft.

How critical is Star Alliance to Air China’s progress?

We have extended our network via the Star Alliance network. The number of our frequent flyers also increased as a result of joining. Overall, Star Alliance has brought us new products and standards that benefit our customers.

What steps can Air China take to further improve its customer service?

Service is a way to attract customers and maintain profitability, and so it has a high priority. We have benchmarked our service with more than 10 airlines, including other Star Alliance members. 

We recognize we have to create a service mentality among staff. We do a lot of training and include service in the performance review so as to raise staff awareness. We’ve also centralized our structure so products and services now come under one department. We want passengers to have a better travel experience. It complements our hub strategy and the desire to grow our international business. 

There have been some very specific developments too. Last year, we renovated our lounges in Beijing, Chengdu, Shanghai, and Chongqing. We also introduced dedicated check-in areas for premium passengers. We have invested in our catering, increasing our spending by 30%. This has allowed greater choice in the menu and beverages, and we refresh the menu more frequently.

Inflight entertainment has been improved as well. In our new aircraft we will have individual entertainment facilities. We will update content more regularly. And on older aircraft we have been introducing carry-on entertainment facilities that customers can use and return at the end of the flight. 

Is Self-Service growing in China?

Three years ago, only 2–3% of our revenue was via the call center and web. It is now 13%. Self-service is part of our strategy. Among the Chinese carriers, we have done a lot. But, compared to the best international airlines, there is more we could do. Still, for the majority of domestic flights, passengers can check-in online, print boarding passes at home or have them on their mobile phones. At the airport, there are various self-service options, including self-tagging of luggage. Air China has implemented all Fast Travel solutions.

What are your views on the European Union’s Emissions Trading Scheme (ETS)?

The EU ETS is being studied by the Chinese government. We have to follow the guidelines given by the government on how to handle this. The views of the Chinese, Indians, and Russians on the EU ETS have been well documented.

We agree that the aviation industry needs to reduce its emissions. In the past 10 years, Air China has improved its fuel efficiency by 18.6%. We have introduced computerized route planning, optimized the selection of our alternate airports for different aircraft types, and balanced the payload of the aircraft. Air China was the first Chinese airline to have an Environment department under its Strategic Planning Division. Besides operating efficiently, we will also continue to renew our fleet.

Will  biofuels play a big part in aviaiton’s environmental efforts?

Biofuels is an area that the industry needs to move toward. We recognize it is a substitute for jet fuel, especially as oil prices increase, but it is not a solution in the short term. In 2010, we operated green flights under a sustainable concept and in 2011 we worked with Boeing and Honeywell to operate a biofuels test flight.

How have you improved safety standards at the airline?

Air China is among the safest airlines in the world. We have a good safety system and we strictly adhere to the standards and requirements of the regulators.

Safety involves many areas—pilots, maintenance, and ground operations, for example—so a safety management system is crucial. We place a lot of emphasis on training and we have refined technical areas such as aircraft repair. It is also about installing a safety culture in the airline and we have a management framework in place to do that.

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