China's regional airlines fail to take
off By David Fullbrook
JIUZHAIGOU,China - Despite China's scorching
economic growth, fast-rising incomes and slow, often
circuitous, land transport, its regional aviation
is not booming. Prices are high and services infrequent,
partly because of poor policy and inexperience in
running such airlines. China seeks too much inspiration
from the United States, when it really should examine
its own unique conditions against the advent of large,
long-range regional jets.
Per capita income is
projected to hit $3,000 by 2020, by which time, if
growth continues at its current pace, the economy will
be four times larger than it was in 2000 and 60% of
China's people will live in cities, whereas that number
now lives in rural areas.
China's airline fleet
reached 586 in 2003, increasing from 123 in 1990, but
regional aircraft comprised just 75, down from 79 in
1990. Regional fleets are dispersed and diverse,
numbering 10 types, plus the ARJ21, China's own
world-class regional jet due to enter service in 2008.
There were 69 airports in 2003, more than half
the total, with less than 0.1 million passengers
annually. These airports are unable to fill 70% of the
seats on at least two 100-seater aircraft daily, the
frequency required to offer convenient service that will
spur non-essential travel. Delays and cancellations
plague departures, punctuality is rare.
"Though
our regional aviation had developed to a certain extent,
its market occupation is relatively low and there exist
lots of problems in fleet, scheduled flights and
airports," Lu Jianheng, a Civil Aviation Administration
of China (CAAC) strategic planner, recently told the
China New Regional Aviation Forum here in Sichuan
province. Only 4.5% of regional routes have more than
one flight daily. "Most regional lines, with their
too-low flight frequency, cannot meet passengers'
demand. Especially for short-distance flights, there
should be at least three flights a day in order to meet
demand for business traveling," Lu said.
But
that looks impossible as things now stand. Lu draws
comparisons between China today and the US pre-1978
deregulation. "We conclude that in developing China's
regional aviation, we should learn from foreign
countries' advanced experience, recognize and follow the
development rules of regional air transport," he said.
Looking at the US and its giant carriers may
have encouraged the CAAC to force China's big three
state carriers - Air China, China Eastern and China
Southern - to swallow seven state-owned regional
airlines over the last two years. An anti-competitive
reversal of policy during the Deng Xiaoping era created
those regionals.
"There is not enough market
competition," said Lu. Change may come though. The
takeovers occurred when former president Jiang Zemin ran
China. His surprise retirement as military chief in
September appears to leave younger, reformist Hu Jintao
in full control - he is president, party chief and head
of the military. That raises the prospect for new
policies. Foreign ownership, capped at 49%, may not
last. "We are looking at the limit, it might be
[changed], upwards," Lu said in an interview.
Taking too many cues and applying "rules" from
US regional aviation's development may not help China
much, since the disparities seem greater than any
similarities. Regional aviation grew in the US, a
wealthy, developed country where great conurbations on
two coasts anchor airline routes, while inland cities
stand like islands amid fields and wilderness. Most US
regional airlines are really contractors, providing
contract feeder services to bankrupt network carriers.
JetBlue and Southwest lead the few notable exceptions.
China, though developing fast, remains poor and
has a long way to go. Around a billion people crowd
central and coastal provinces, threaded together by an
expanding railway web that will add Canadian, European
and Japanese high-speed trains over the next decade.
Sounds more like Europe. Business travelers are
concentrated in China's booming east, where per capita
gross domestic product (GDP) is 10 times higher than
poorer central and western areas. Tourists fill flights
in the picturesque southwest and center, while
government travelers dominate in Xinjiang in the far
west.
"Regional network expansion needs to go
eastward to prosper," Qiu Lianzhong, Air Canada's
strategic planning director and CAAC's civil aviation
chief researcher, told an audience of airline, airport,
and aerospace executives at the Sichuan conference. US
airline operations developed when there were no
long-range, large regional jets (RJs), building networks
and services to match aircraft like turboprops,
short-range RJs, 737s and 767s with six-hour east-west
coast-to-coast routes, plus plenty of neighborhood
routes.
"The Chinese domestic market is
concentrated on the north-south medium-haul route that
is less favorable to the hub-spoke model," said Qiu.
"The Chinese aviation market is dominated by
medium-range, medium-sized routes. To have profitable
point-to-point, high-frequency operation, Chinese
low-cost operators need a relatively smaller fleet than
their Western counterparts."
While Chinese air
travel has been growing around twice the rate of GDP
growth, if it pursued an Indonesian-style aggressive
deregulation that fostered 25% annual traffic growth
since 2000, hand in hand with major air traffic control
and airport expansion plus other measures to cut costs,
growth would almost certainly rise from 15% to 30%.
Systemic deficiencies are some of the concerns
behind CAAC's caution. "We cannot give up control
overnight. The air traffic control, the airports, and
the slot system are not ready," Lu said in an interview.
There have been significant reforms, such as CAAC
transferring (often debt-laden) airports to local
governments. But without further measures to attract
capital and expertise, the hub network will not mature,
leaving air transport inadequate, hampering the economy
and regional aviation's growth.
"The lack of a
mature hub network structure is one of the main reasons
for the slow development of China's regional airlines.
The existence and development of regional airlines
depends primarily on high-traffic hub-feed markets,"
said Lu Ni, GCW Consulting's chief representative.
In the final analysis, while there may be a few
lessons from Europe or the US, ultimately China is
different. Regional aviation will develop in its own
way, with a character unique to China, requiring
out-of-the-box thinking and attitudes to meet the local
market realities. CAAC knows it cannot follow the US
model slavishly, but getting the balance between US
lessons and new ideas will be tricky. "We should
carefully analyze our national as well as social and
economic situations, and explore a new road," said
CAAC's Lu.
Qiu, for one, believes he has an
answer. "The large-size regional jets will change the
landscape of the whole aviation market. The old boundary
between regional, mainline and low-cost airlines is
disappearing. Led by JetBlue, low-cost airlines have
opened a totally new dimension for the [low-cost
carrier] sector: medium-sized markets."
Stuck
with 737s/A320s or regional aircraft seating only 50,
Chinese carriers find steady profits hard to come by.
Sounds like the US. "Unless this gap is filled, high
cost resulting from inefficient operation of its
oversized fleet will continue to drag the growth pace of
China's domestic aviation market," said Qiu. Those
aircraft also crowd out regional jets. "If the
government wants to create regional networks, it needs
to develop policies to remove narrow-body aircraft -
737s and A320s - from these routes," said Li Wei,
Shenzhen Airlines deputy director of fleet planning.
That gap partly results in passengers complaining about
high fares and poor service while airlines grumble about
yields that barely cover costs. "Inefficient operation
of oversized fleet is definitely a major reason," said
Qiu.
CAAC's imposition of blanket airport
charges is a major bugbear with regional operators that
also stymies China's nascent no-frills carriers. "To
promote the low-cost carrier sector and regional
aviation in China, CAAC should change the airport fee
structure to one based on supply and demand. By doing
so, not only will China's airspace be more efficiently
used and current congestion at hubs be greatly relieved,
but it will also stimulate the low-cost sector," said
Qiu.
Though few cities have secondary airports,
similar to Southeast Asia, Chinese airlines can exploit
underused airports in nearby cities such as Tianjin for
Beijing and Zhuhai for Guangzhou. Airline and airport
representatives attribute their woes to many
restrictions, high fees and poor regulation. They want
change, fast. "What we need is less air regulation to a
certain extent, simplified approval procedures for
regional airlines, rationally designed regional flights,
greater flexibility in flight heights and as much
schedule choice as possible," said Duan Shenghu, vice
president of China Eastern Yunnan Airlines.
"Reduce various fees on regional flights,
including civil aviation fund, operation tax and various
service fees," recommended Wu Qi Guang, Xinjiang
Airlines international relations head.
Lu,
suggesting that CAAC is listening and that new policies
may be in in the worlds, recognized many of their
problems and recommendations. The question is, will a
policy shake-up be too little, too late? And when it
does come, will airlines either have the cash or be able
to borrow enough to exploit it? Lucky for them that
China's biggest banks remain blunt, state-owned tools
for supporting policy.
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