Choppy air for China's private
airlines By Chen Qing
NANJING - On April 27, the Civil
Aviation Administration of China (CAAC) gave the
green light to two more privately owned
airline companies. This brought China's total number
of private airlines to five, including those
being set up that have not yet commenced operations. But
a rosy future is not guaranteed for the apparently
blossoming non-state airline sector, considering
the problems posed by high fuel prices, escalating
competition for domestic flights, and challenges
from emerging low-cost airlines.
Chinese
airlines in general have faced a struggle to
maintain profitability in recent months. Among
China's three airline giants, China Southern Air
reported a loss of 285 million yuan (about US$34.4
million) in the first quarter of 2005, a drastic
slump from last spring, when the company reaped a
net profit of 196 million yuan. That is because of
the 90% increase in oil prices since the first
quarter of 2004, China Southern Air explained.
Worldwide, the aviation industry suffered
a total loss of $46 billion last year, as its
annual fuel tab soared from $44 billion to $63
billion; the deficit in 2005 is expected to top
$55 billion, if oil prices average $43 per barrel,
according to an April 30 report of the
Singapore-based Lianhe Morning Post. In fact, oil
prices are currently hovering above US$50 a
barrel, making a bad situation even worse.
Escalating competition Peak
tourist seasons have become a battlefield for
China's civilian airlines, which have engaged in
vicious fare-cutting campaigns to win market
share. Air China, another huge state-owned
airline, proffered a 60-70% discount during the
recently ended weeklong Labor Day holiday for
major flights from Beijing to Guangzhou, Shenzhen,
Wuhan, Chengdu, and other destinations. After the
holiday, China Southern Air began selling
discounted tickets covering flights from Beijing
to 22 mainland destinations.
The new
airlines must surmount three hurdles in rapid
succession: initial takeoff, early survival, and
route expansion. Many observers feel the
fledglings are too financially vulnerable to
survive the second of these phases. But the new
players hope that a market orientation coupled
with a proper marketing strategy targeted at a
specific passenger group may hopefully break
through the barriers presented by their giant
counterparts.
In Shanghai, the
civilian flight market is dominated by Air China,
China Eastern Airlines and Shanghai
Airlines. Undoubtedly, the trio presents an
overwhelming challenge to East China Express, one of
the authorized private-airline companies that plans to
be based in the Shanghai airport. Spring Airlines,
another privately funded company set to
begin flights in August, is sitting pretty by
comparison; it has taken full advantage of its
mature reservation service and has completed
marketing plans as well as building a route
network.
Not Okay Tianjin-based
Okay Airways, the first privately run airline in
China, made its debut flight in March, driving
other investors onto the bandwagon of private
investment in civil aviation. However, the
epoch-making company has shown signs of high
operating costs and shrinking profit margins.
Okay only uses one passenger aircraft, a
Boeing 737-900 leased from Korean Air Lines, which
shuttles between Tianjin and Kunming via Changsha.
The flights seem to be on the right track
commercially, since the seat occupancy rate hovers
between 70% and 80%, even though peak-time airfare
discounts over the big carriers have been reduced
from 60% to only 20%. But the aircraft is flying
only four times a day, leaving six potential
flights unused (the 737-900 has a capacity of 10
flights/day) and the airline unable to properly
cover the fixed costs of its aircrew and staff.
Before its debut flight, Okay Airways had applied
to the Civil Aviation Administration of China for
opening more than 10 air routes, but none has been
permitted yet. Furthermore, two months after the
company's inception, its booking information is
still unavailable on the national civil air ticket
reservation system, costing it many potential
customers.
"Policy bottlenecks are our
major headache. Without favorable policies, we
have had lots of difficulties developing our own
markets and adding more [flights]. What's more,
our huge investment has only produced a little
profit," a senior official from Okay Airways was
quoted by the Beijing Daily as saying on April 27.
Indeed, Okay Airways has invested around 80
million yuan since its foundation, but with only
one route and one plane, the company can barely
make ends meet.
When China opened its
domestic aviation market to the private sector,
passengers had high hopes that the new players
would offer better service and lower fares.
However, the development of the four private
airlines operating thus far - namely Okay Airways,
United Eagle Airlines, Spring International
Airlines and Huaxia Airlines - has failed to live
up to the expectations of the public, especially
since it became apparent that their operating
costs are in fact higher than their state
counterparts.
For example, human resources
cost these private companies much more than their
state-run peers because the former have to compete
with the latter, and even overseas airlines, for
talent. Again taking Okay as an example, the
airline's 60-plus flight crew was intended to man
six airplanes, but the airline still owns only
one, leaving the crew heavily redundant. Worse
still, the company is unlikely to get the six
planes it wants and develop its freight services
before the end of 2005 due to sluggish government
auditing.
Meanwhile, Okay must pay a
monthly deposit of as much as 1 million yuan to
its fuel supplier, a discriminatory measure
imposed only on private companies. With spiraling
oil prices, the company's fuel expenditures have
hit a record high, accounting for 30% of operating
costs. In addition, existing policies do not allow
the airline to rent all six airplanes as it plans,
another factor contributing to high costs, because
the lease rate per aircraft for six planes would
be much lower than the rate for one.
Okay
once optimistically predicted that it would be
profitable as soon as it could have its planned
six planes. But observers have poured cold water
on this claim, noting that even if profit margins
hit 5%, the private airlines cannot break even
unless their annual turnover exceeds 600 million
yuan, considering that they must invest 12 million
yuan on fixed assets annually.
The
low-cost threat Another looming
threat for China's private airlines is the
potential market entry of low-cost operators following
the business model of Southwest Airlines in the US
and Ryanair in the European Union. In those
markets, low-cost operators have been steadily
nibbling away traditional airlines' market share for many
years, and some have even forecast that
the large, full-service airlines may not survive in the
long term. In Asia, there are currently
over 20 low-cost airlines, including the famous Virgin
Blue and AirAsia. AirAsia kicked off a route from Bangkok
to Xiamen in southeast China on April 1, and
will begin flights from Bangkok to Kunming in
southwest China on July 1, and from Bangkok to Haikou
on south China's Hainan Island on August 1.
These routes make AirAsia the first overseas low-cost
airline to tap the Chinese market, creating an
even more competitive environment for the new
private airlines.
Make no mistake, the
huge growth of air travel in China offers
opportunities for the new private-sector players.
But to prosper, they must survive first, in a
market where the law of the jungle increasingly
rules.
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