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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.

(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)


Dec 3, 2004
Asia Times Online Community



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