Wang Zhenghua of Spring Airlines: Making a Low-Cost Strategy Fly High

After its inaugural flight on July 18, 2005, Spring Airlines, China's first and only budget airline, now owns a fleet of 25 Airbus 320 planes and operates more than 50 domestic flights and four international flights. At a time with the global travel industry has been hit hard by sky-high fuel prices and slumping consumer demand, Spring Airlines recorded RMB 3.2 billion (US$501.5 million) of revenue last year and a net profit of RMB 470 million (a year-on-year increase of 240%), while its passenger-carrying capacity reached 95.4%.

Spring Airlines is not Wang Zhenghua's first start-up. An entrepreneur hailing from Shanghai, he founded Shanghai Spring Tour, the parent company of Spring Airlines in 1981, one of only a handful of private travel agencies. With annual revenue of RMB 5.2 billion last year and a network of offices and subsidiaries across the country, is one of the biggest travel agencies in China.

But at a time when airlines around the world are struggling and with the local market is dominated by state-owned heavyweights, how is Wang, who at 68 is now chairman of Spring Airlines, able to turn the budget airline model into a success as others fail? To find out more, China Knowledge@Wharton recently sat down with Wang, who also shared his views on his management philosophy, the key to Spring Airlines's success despite the financial crisis and the outlook for low cost budget airlines.

As the only budget airline in China, how does Spring Airlines differentiate itself from other major airlines?

Spring Airlines has aimed to offer low fares by operating efficiently and making flying more affordable for the average Chinese traveler.

Compared with other major airlines, we are different in three ways. First, price. Our price is on average 30% lower than our peers. At the same time, we have special promotions with one-way tickets selling at RMB 99 (US$15.54), RMB 199, RMB 299 and RMB 399 for every flight. Second, passengers. The majority of our passengers pay out of their own pockets [rather than, say, getting reimbursed by their employers] as leisure travelers or price-conscious business travelers. Third, sales channels. We don't use China Civil Aviation’s booking system [unlike all other airlines in the country] and we rely on our proprietary seats assignment and booking system. Direct sales, online or via call centers, account for 85% of our total revenue today. Fourth, in-flight service. Spring Airlines doesn’t offer extras -- beverages and food are sold separately, for example.

Why position Spring Airlines as a low-cost budget airline? Are the prospects for low-cost airlines that promising?

Low-cost travel is a global trend…. Today’s air travel isn't just for the "nobility" or wealthy like in the past; rather, it's a common form of transportation for the masses…. Today’s travelers are more price-sensitive than before. And as the economy grows, more people have the means and the need to travel. People are now more dispersed geographically and are more curious about the rest of the world.

Technology is also changing, making it safer and faster to fly. Today, you can fly to the other side of the globe in just 24 hours, which was unimaginable before….

Where do low-cost airlines have the most advantage in terms of routes?

For short flights of two to three hours in the U.S. and Europe, low-cost flying accounts for 70% of the market share. For long-distance routes, it is around 30%. In Asia … it comprises 70% of the short-haul market and 10% of the long-haul market. However, for long-haul flights of seven hours or more, low-cost flying might not offer much of an advantage. For trans-ocean flights, passengers are mostly upper class and are not pricesensitive….

Nowadays, people are much more enthusiastic. When I was in the travel business back in the 1980s, the Chinese did not fly for leisure and it was pretty common for people [to travel by] train for around 23 hours to reach Guilin [the famous travel destination in South China]….

Spring Airlines launched its first international flight, from Shanghai to Ibaraki Japan, last summer. What are your plans for international flights?

Flying in Japan is very expensive. My peers in Japan told me that 70% of people in the greater Tokyo areahave never travelled abroad, or have even flown in an plane. I was very surprised to hear that. They said it’s because the economy is not good and flights are outrageously expensive, so people usually try to find other ways to travel rather than fly -- they take the Shinkansen [high-speed rail].…

We tackled Japan first because we felt that low-cost flying is evitable and desirable in Japan. The lowest ticket price for our inaugural flight from Shanghai to Ibaraki was around RMB 300, which attracted the attention of Japan’s government and public at that time because they never know air could be so cheap. We are planning to launch more flight to other places in Japan and South-east Asia.

As the only airline in China that doesn’t use TravelSky, the state-owned monopoly, to sell tickets, how is your online booking service going?

Our web site has around 130 employees, which books tickets and does other travel agency business. For bookings, the higher end it is, the higher online activity. In previous years, online bookings only accounted for around 15% of all reservations on our travel products, but it has been growing fast in the past few years. Today, around 30% of online bookings are for our U.S.-Europe routes and over 60% are for bundled travel [with flights and hotels].

Who are your target customers?

It's the same as in other markets -- more than 70% of our passengers are cost-conscious business travelers. It could be that they are good at booking tickets online, and young, white-collar workers in China tend to be on the look out for high-quality and good-price deals. If they make RMB 100,000 a year, they might want to spend RMB 200,000 -- or at least enjoy the lifestyle [of that income level], so they prefer to take a high-quality but low-cost flight.

In March, we invited a dozen passengers who have been on around 100 of our flights to a meeting to evaluate our service. One of the things they recommended is that Spring Airlines focus more on business travelers, rather than promoting the RMB 99 tickets aimed at attracting new customers who have never flown before. We think that is right, since business travelers are a major customer segment.

Since March, we have been thinking about our market position. We have to think more about improving how we serve our major customers. So we launched a new business economy service, which charges a bit more but offers service like seat at the front of the aircraft, a special shuttle for boarding and good cuisine. Recent surveys showed that our customers like all this. In this environment, you have to pay attention to changes in the market all the time. There is no way to conquer the world by doing the same thing over and over because the market is always changing. So we have to understand what the changes are and react quickly….

Do you think private companies are stronger than their state-owned competitors?

In global aviation, private airlines are now the norm, with China being the exception. American airlines are private, and 80% to 90% of Europe's are private. In South-east Asia, more than 50% have been privatized, and the rest are restructuring. This summer, privately owned, low-cost carrier AirAsia has been taking part in the restructuring of its rival, state-owned carrier Malaysia Airline [agreeing to a share swap, among other things.] In Korea, Korean Air and Asiana Airlines are private, and 60% to 70% of Japan's airlines are private -- Japan Airlines is state-owned, and the Japanese government has to spend 300 billion yen (US$4 billion) annually to support it.

The nature of this industry is that the relationship between supply and demand is changing constantly and quickly. Demand fluctuates between high and low seasons, weekdays and weekends, and even morning and evening travel. So unlike with other goods and services, consumers’ demand for air tickets fluctuates greatly. At the same time, [a company's accountant] cannot book travel as inventory. And today’s consumers are generally paying for their flights themselves, and people are more cost-conscious. All of the above have contributed to the fact that airline industry needs a more flexible,open market approach to operate.

In 2008 when the financial crisis hit, major airlines in China booked huge losses. China Eastern Airlines, for example, recorded more than RMB 13 billion of losses (though it back in the black after just over a year).

The government at that time had injected huge amounts of capital into Eastern Airlines, but that was tax-payers’ money. Since then, most of China's state-owned airline companies are performing very well with Air China, Eastern Airlines and Southern Airlines now among the biggest in global aviation in terms of market value.

The current boom for the big three has happened several reasons. Most importantly is the general sentiment. Morale is high after the huge losses of 2008 and 2009, and they're now looking for ways to improve their performance. At the same time, they have changed their operating strategy. Furthermore, they have joined a global air union, which has a lot of experience that can help Chinese companies improve service.

Our performance is relatively stable. Being on a roller coaster has never been our style. Even in the financial crisis in 2008 when major airlines lost hundreds of millions of renminbi, we made a slight profit.

Five private airlines emerged several years ago in China are either closed or struggling. East Star went bankrupt, and the founder is now in prison, United Eagle Airlines almost went bankrupt in early 2009 and then was acquired by state-owned Sichuan Airlines, and Juneyao has been embroiled in air safety rows since August. Spring Airlines is the only private airline that appears stable. What’s your management philosophy?

My philosophy is, “Be cautious in boom times; face the challenges in the bear times.” The first part means don’t be fuzzy headed when the market is good, but be cautious and look out for where we might be encountering problems internally and not serving our market well.

Last year, our performance was quite good. But this summer, when we had our sixth anniversary, we didn't celebrate but instead held seminars to analyze our problems and the crisis. That included asking whether we are pushing our development too hard, whether staff morale is slipping, whether our strategy is still on track and whether our service is improving. Reflecting and asking these questions have to be a constant process. The regular passenger meetings I mentioned earlier is also part of that process.

The second part of my philosophy is to face the reality in bear times, but don’t be frightened. In 2008, when all the major airlines made huge losses and the market was full of pessimism, we invested the most money ever since our founding. The last payment of around US$20 million for our first aircraft needed to be paid in January 2009, and the down payment for eight new airbus 320 planes had to be paid at that time as well, which was a huge sum of money. But we decided to face it. And when we sent that message out, banks were surprisingly interested, which was very rare since they were generally tightening lending. Plus, the central bank in China had given orders to all banks not to lend to airlines, especially not to private airlines. We were nervous but the result was very good.

In 2008, we made our first loan agreement, with HSH Nordbank of Germany. Its Asia-Pacific president stated publicly that banks would always live off the interest they charge and banks should never stop lending. “We've been following Spring Air many years and we think they are reliable and promising, so we are willing to lend to them,” he said.

I have reached the conclusion that [the support of the banks] has to do with our reputation for making payments on time. Some companies actually consider delaying payments -- having a so-called “no interest loan” -- to be an operating strength. But we never do that because we believe our credibility is our life.

The payment for the eight new planes was provided by ICBC, the biggest state-owned bank in China. An ICBC executive in Shanghai, who had followed us when he had been at Citibank, persuaded his boss in Beijing to make the loan. So in tough times, you have to face the challenges and be courageous to do the right thing in order to keep growing.

Travel is a highly competitive market in China. How would you describe the Spring Tour strategy?

The price war in travel is horrible. Our strategy is to focus on high-end travel, to offer travelers a luxury experience. After 10 years, the U.S.-Europe route has been quite successful, and we are now launching high-end travel products for Asian destinations. Our outbound travel is already one of the biggest in Shanghai.

We do very little online marketing and have no large-scale promotions offline either. We mostly run half-page ads in newspapers and occasionally do a promotion if there is a special event. We believe in our brand and our people. Rather than spending heavily on ads, we focus on internal management, and carrying out strict evaluations of our suppliers and running internal training programs. To continue developing, we're looking to make small, stable steps rather dramatic ones.

Among private Chinese entrepreneurs, there aren't many in Shanghai. You are one of the few. Why do you think that is?

I am not doing anything special, but I'm just being diligent. It’s just focus and down-to-earth, hard-core efforts that have made us what we are today. Our company culture is that you have to be able to sustain hardship and sometimes unjustified criticism from others, like staff, regulators or customers.

Some complain that the government hasn't provided approval giving Spring Airlines good landing slots and routes. But we look at it differently. We've already been given all the good routes and schedules. I think one has to look at society, people and all these things with a grateful heart. You cannot look justice from just your own eyes. Sometimes you have to take an different perspective. If you are the person approving routes, you might not be able to make everyone happy. So you have to be grateful, and then you will work with pleasure.

And yes, compared with other regions, Shanghai doesn't have that many entrepreneurs. This might have something to do with the macro environment in Shanghai, where there's greater support for state-owned giants or foreign multinationals, and less attention is given to home-grown businesses. Of course, there are some political considerations, too. All these factors result in fewer Shanghai-developed companies. We have been in the travel business for two decades -- and except for the U.S., we have always been the last one to get an outbound travel license. But in the end, we are not performing worse than others who got there before us and we still win customers' recognition. In the end, if you have really good products and services, the market will be fair.

Knowledge@Wharton - CHINA