By James Pomfret and Jamie Freed
SHENZHEN, China/HONG KONG (Reuters) - Shenzhen, which has morphed from a low-cost manufacturing centre into a booming 'Chinese Silicon Valley' technology hub, is a rising threat to Hong Kong's regional domination in international air travel.
Shenzhen's airport has long been a busy domestic hub, with 38 million passengers flying within China last year, but moved fewer than 3 million on international flights.
Now, operator Shenzhen Airport Co Ltd (SZ:000089) says it aims to grow international air traffic to 15 million passengers by 2025 - a fifth of its total.
For sure, that's still below the 82 million passengers that Hong Kong will have by then, according to IATA Consulting projections - around 80 percent of whom will fly to and from destinations outside mainland China, if today's traffic trends analysed by air travel data group OAG are maintained.
But Chinese airlines' cheaper labour costs, and better road and rail links mean Shenzhen could wrest some of the growth from Hong Kong in the years ahead.
Guangzhou, the capital of Guangdong province, which also includes Shenzhen, had 13.5 million international passengers last year.
Shenzhen's growth comes after the Chinese government upgraded it to an "international aviation hub" under its five-year plan in 2016, matching the status of Beijing, Shanghai and Guangzhou. Nearby Zhuhai and Macao airports were not upgraded.
Some analysts predict Shenzhen's gross domestic product will overtake Hong Kong's next year.
HEDGING BETS
The rise of Shenzhen has posed something of a dilemma for Air China Ltd (SS:601111), majority owner of Shenzhen Airlines, but which also has a 30 percent stake in Hong Kong's Cathay Pacific Airways Ltd (HK:0293).
Air China has been wary of adding long-haul flights out of Shenzhen that could challenge Cathay, said three aviation industry sources who declined to be named as they are not authorised to speak publicly about the matter.
But the airline is concerned that rivals China Southern Airlines Co (SS:600029) and Hainan Airlines Holding Co (SS:600221) are stepping in to add international flights which the local government is encouraging to boost the economy.
China Southern now flies to Sydney, Melbourne and Moscow, while Hainan has added a Brisbane service from Shenzhen, where a new modernist terminal boasts a roof dome that floods the building with natural light.
"The airport here is new and looks good," said Zhao Jingqiang, an import/export businessman who was checking in for a domestic flight with Shenzhen Airlines. "They just have too few international routes."
For its part, Air China has added flights from Shenzhen to Frankfurt and Los Angeles in what it calls "the first step of our international long-distance network coverage from South China".
Air China and Shenzhen Airlines did not reply to requests for further comment.
Sun Yu, Air China's deputy general manager of strategy and development, said earlier this year the airline will heed Beijing's plan to integrate Shenzhen, Hong Kong and other parts of southern China, and will discuss with its subsidiaries on how to cooperate.
A spokesman for Shenzhen Airport said shifting to an international hub would "help attract more international organizations, corporate headquarters and financial institutions to settle in Shenzhen."
CHALLENGING HONG KONG
With lower carrier costs and improved land connections with Hong Kong, Shenzhen is well placed to take some of the traffic growth that would otherwise be at Hong Kong, which is constrained by a lack of slots until a third runway fully opens in 2024.
Shenzhen Airport reported a 24 percent increase in international traffic in the first nine months of this year.
"The challenge now is to make sure Hong Kong can continue to grow," Cathay CEO Rupert Hogg told an industry conference in Taipei last week. He said Cathay would boost traffic before the new runway opens by using larger aircraft and adding new long-haul flights when slots are available.
Jeremy Tam, a Hong Kong pilot-turned-lawmaker, said many Hong Kong residents already catch cheaper domestic flights from Shenzhen, and that could increase when a high-speed rail line between the cities opens next year, and Shenzhen adds more international routes.
"Their labour costs are cheaper, overheads are a lot cheaper," he said of the mainland carriers. "It's cut-throat on some major routes like Shenzhen to Shanghai or Beijing."
TOURISM DRAW
Hong Kong, though, remains a bigger tourist draw than Shenzhen, giving HNA Group's Hong Kong Airlines the confidence to add new flights to Los Angeles that will compete against Cathay's flights from Hong Kong and Air China's from Shenzhen.
"There's the efficiency of Hong Kong as an airport, Hong Kong as a city, with its shopping, and the quality of service provided by Hong Kong-based airlines," Hong Kong Airlines vice chairman Tang King Shing said of the city's advantages.
Hong Kong is, though, likely to lose traffic from people living in Shenzhen and nearby Macao and Zhuhai who have previously travelled to Hong Kong to catch long-haul flights.
Hong Kong International Airport declined to comment beyond saying it was well established as a regional and international hub.
Deng Cangxin, a 23-year-old travelling domestically on Shenzhen Airlines, said many of his friends fly from Hong Kong on holiday because there are not yet any direct flights from Shenzhen to places like London and New York.
"People in Shenzhen have no choice but to go to Hong Kong because there are so few international flight options out of Shenzhen at the moment," said BNP Paribas (PA:BNPP) analyst James Teo.
"It's about taking back the traffic that belongs to (Shenzhen) originally. It just makes more sense to travel from your doorstep."