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Budget airlines rev up to take off
in China
By David
Fullbrook
SHANGHAI - Last year saw a flurry
of low-cost carriers entering Southeast Asia and
India, with more coming. This year, however, will
be China's. There are at least seven new airlines
on the drawing board. Those that make it through
the regulatory maze could do very well if they can
withstand the Big Three airlines breathing down
their necks.
Tianjin-based Okay Airlines,
subsidiary of that city's biggest logistics
player, is trying to start operations early this
year. Chengdu-based United Eagle Airlines, backed
by a Guangdong-based software tycoon, is probably
next in the queue, followed by China United
Airlines, a mothballed military airline Shanghai
Airlines is resurrecting.
Each has talked
of starting with two to three leased Boeing 737s.
Other specifics are sparse. They are reluctant to
talk because their applications come before the
Civil Aviation Administration of China's (CAAC)
new regulations that are expected later this year
for managing the entry of new airlines. "Generally
speaking, the policy will loosen gradually but I
cannot say more," says Lu Jianheng, a CAAC
strategic planner.
CAAC is conservative,
greatly concerned about safety. It is also worried
that new players could sap profits of the Big
Three - Air China, China Eastern and China
Southern - all partially listed overseas,
particularly when they are still flabby after
being forced to swallow seven regional airlines in
2002. "The theme in China for the last few years
has been structured market competition that
doesn't jeopardize the medium-to-long-term
profitability of the major carriers," says Peter
Hilton, a Credit Suisse First Boston transport
analyst watching China.
Applications will
likely be smoother and faster once the pioneers
have settled down and new rules are in place.
Aspirants may gain from biding their time. They
include: Spring Air, airline arm of Spring Travel,
Shanghai's largest travel agent; an unnamed
carrier based in Guangdong, with Singaporean firms
holding minority interests; and another,
apparently CAAC-approved, for Chongqing, China's
Chicago.
Japan Airlines is also apparently
eyeing a joint venture, with long-term aims of
cargo and international services to complement
domestic flights. Other foreign carriers eyeing
China include AirAsia, Orient Thai and Virgin.
"One of the classical constraints on low-cost
airlines is the need for additional bases. The
only way they can go is by expanding
internationally," says Peter Harbison, Center for
Asia Pacific Aviation's managing director.
But whether any of these new airlines are
true-blue low-cost carriers is highly
questionable. "They are looking at a new entrant
that is not a pure Ryanair or Easyjet model, but
adapted to the conditions in China," says
Harbison. Such are the reams of red tape that a
Western low-cost clone simply would not work.
"It's maybe a little difficult for airlines in
China to be low-cost carriers. First, the fuel
cost is very high. Second, route charges and
airport charges are high. Third, most important,
the price of the aircraft is high, taxes are high.
Labor costs are much lower though," says Zheng
Chang Jin, Okay's strategic planning manager.
That said, some of these costs are not
expensive in global terms. However, in a few years
as red tape is rolled back, the costs of fuel,
services and taxes are likely to fall while
salaries could rise, given that 100-odd aircraft
could be added for the next few decades, probably
outstripping the labor supply. "At present,
personnel training, infrastructure and management
cannot match the fast growth of air transport, and
this problem is becoming more and more serious,"
according to Gao Hongfeng, CAAC vice minister.
Skewed operating costs are not all that
the new airlines face. Credit cards are uncommon.
Debit cards are starting to appear, but it will be
a few years before they are in enough purses and
wallets to make a big difference. Without plastic,
selling tickets online is hard. Which means new
airlines, whose rationale should be low costs,
will be stuck with high travel agency commissions.
Perhaps even higher than the Big Three, whose size
gives them more muscle to negotiate lower
commissions. "The faster the big carriers can do
that, the harder it will be for the low-cost
carriers," says Bob Char, an aviation lawyer in
Beijing.
That's not all. Fat routes, like
Beijing-Shanghai, are also less open to new
players. Few Chinese cities have secondary
airports, a key factor in low-cost carriers'
growth in the West. However, neighboring cities'
airports are often not far away. Improving roads
and railways will cut journey times and speed
connections, allowing airports to reach further
into each other's backyards if they cut fees to
attract airlines. The interests or agenda of
ground-handling firms, often associated with the
big carrier dominating an airport, may not tee
with "time-is-money" start-up airlines. "The main
place you could reduce costs is on turnaround,
which involves issues that are beyond the control
of the airlines," says Hilton.
For new
Chinese carriers, gaining a foothold will be like
running a long-distance hurdles race. Some will
surely succeed given that new carriers are finding
a place in Southeast Asia, riddled with the
inconveniences of national borders. "I think there
is a niche for low-cost carriers. The first person
to solve these problems will win. I think there is
a need, a need for a non-traditional airline,"
says Char.
Even if all seven do make it
finally, it might be a while before they start
running into each other as there are so many
potential routes in China. "There's no doubt that
China is a natural market for this: airspace the
size of the United States with over a billion
people not earning that much, very price
sensitive," says Hilton.
Before that day
comes, they may find themselves running into new
carriers hatched by the Big Three, who will have
aircraft to spare as they trim the flab. "They
probably won't need special authorization because
they're already amalgams of airlines," says
Harbison. However, even with the Big Three turning
the screws and increasing competition among
themselves, there is certainly room for a handful,
maybe more, new airlines. "Until a few years ago,
almost all travel was paid for by employers. We're
now seeing a massive growth in private travel,"
says Harbison.
Driving that is fast-rising
incomes, especially along the booming east coast,
leaving people with spare change for holidays or
visits home for better-paid migrant, white-collar
workers. In 2004, passengers increased 38%, with
120 million trips taken, while cargo shipping
increased 29%. Air cargo is very underdeveloped,
potentially creating opportunities for new
airlines that were not available or viable for
low-cost carriers in the West. China is also one
of the world's fastest growing international
tourism destinations. Flying is the only option
for many visitors, who have bulging wallets and
always an eye on the watch.
Still, in the
short-term, uncertainty is perhaps the only
certainty. "The jury is still out as to whether
any of these airlines will come to fruition,
there's a long way to go," says Char. But despite
the hurdles, the prospects a few years hence look
bright as long as the economy continues working
overtime. "I view low-cost carriers as more
complementary rather than competition to the
traditional carriers, at least in the initial
stage. Eventually it may evolve into a US-like
situation," he adds.
(Copyright 2005 Asia
Times Online Ltd. All rights reserved. Please
contact us for information on sales, syndication and republishing.) |
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