Agreement on China-Europe Routes Singed Between Lufthansa and Air China

Deutsche Lufthansa AG and Air China Ltd. will be able to boost their earnings aided by the additional capacity that these Star Alliance members will have to complete with the rival Skyteam partnership on China-Europe routes. The two Star Alliance members signed a cooperation agreement to this extent recently.

Air China Chairman Cai Jianjiang said at a signing ceremony in Beijing Tuesday that when the venture takes off next year, the flag carriers of Germany and China would be able to expand code-sharing on China-Europe flights and increase coordination on flight schedules. Under restrictions on foreign control of Chinese airlines, the venture is the closest the two carriers can get even as the venture awaits regulatory approval in Europe and China.

Both Lufthansa and Air China are trying to get a better grip on China-Europe routes to expand their market leads on these destinations and the agreement follows two years of negotiations between et he two. The China Eastern Airlines Corp. and the China Southern Airlines Co. — the biggest Asian airline by passengers have struck agreement earlier with Air France-KLM Group where the airlines harmonize their timetables and share cost and revenue on some routes under separate joint ventures with the rival Skyteam alliance partners from China.

“We expect our combined market share will expand as our capacity increases and thus we will see revenue increasing. We made the decision to team up with Lufthansa given that we face the same threats,” Air China Board Secretary Rao Xinyu told reporters after the ceremony.

According to Rao, with 17 percent market share, Lufthansa is e second largest carrier on China-Europe routes while Air China is the no. 1 carrier on the routes with a market share 22 percent. Northern Europe and Russia are excluded from the partnership signed on Tuesday and the market share figures, she said.

For Air China, the domestic market accounts for more than 60 percent of revenue and the deal will help the airline reduce its reliance on the domestic market. Lufthansa would be allowed to extend its reach in a country poised to overtake the U.S. as the world’s largest air-travel market by the partnership whose preliminary agreement was announced in 2014.

And as Lufthansa seeks to fend off threats including from Gulf carriers such as Emirates and Qatar Airways, the agreement also adds to Lufthansa’s network of revenue-sharing agreements for major markets.

The German carrier already has other network partners including United Airlines, Air Canada and Japan’s ANA Holdings Inc. and last year struck a similar revenue-sharing pact with Singapore Airlines Ltd.

As of 10:55 a.m. in Frankfurt trading, Lufthansa fell 1.7 percent to 10.285 euros. Shares of Air China traded in Hong Kong fell 0.9 percent to close at HK$5.47.

According to CAPA Centre for Aviation in London, close to half of Lufthansa’s long-haul
capacity would be covered by commercial joint ventures after the Air China agreement.

Lufthansa and Air China also jointly own Ameco Beihing, an aircraft maintenance company they established in 1989 that employs more than 11,000 people in addition to operating passenger flights under code-share agreements.

(Adapted Bloomberg)

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