HONG KONG - If China's aviation sector is
likened to an aircraft, that plane reached
cruising altitude in 2004-5. All parts of the
aviation sector - airlines and manufacturing - are
both gathering pace from, and adding further
momentum to, China's US$2 trillion economy,
helping to transform it into an aviation
powerhouse.
The 120 million passengers
carried in 2004 reflected a 38% growth from the
SARS-hit 2003, matched by a 24.5% growth in cargo
at 2.73 million tons. The year 2005 registered an
overall growth of 20%. This year will witness a
15% rise in passenger
traffic and a 10% increase in
cargo volumes at 3.36 million tons. The global
overall growth forecast is only 6-7%.
Historically, the aviation sector has
advanced in lockstep with the overall economy.
China's need for air services is becoming ever
greater given the country's trade and
manufacturing-oriented economy with its immense
cargo requirements, and the stupendous rise in
leisure and business travel.
The World
Tourism Organization estimates China will be the
fourth-largest international source of leisure
travelers by 2020, predicting 100 million
international Chinese tourists that year. Inbound
tourism projections are comparably steep: the same
organization anticipates the country to become the
world's topmost inbound tourist destination in
2020.
Big-picture
developments The growth figures are indeed
riveting, and inevitably creating a buzz of
activity worldwide and within China. Amid high
fuel costs, the sheer volatility of the global
aviation industry and competitive pressure from
low-cost carriers, China has become the golden
goose after which everyone is scrambling.
As if the pressures of go-go growth were
not enough, China's aviation sector needs to
prepare for the 2008 Beijing Olympics and the
2010 Shanghai World
Exposition, align with World Trade Organization
policies by 2006, and flaunt its superpower
status.
A 2002 policy review effectively
consolidated 10 smaller airlines into three giant
groups - Air China, China Southern and China
Eastern - now known as the "big three".
Subsequently, the control of the country's
airports (operation, development, finance) was
reverted from national to provincial or local
authorities. Overall, key features of China's
aviation outlook include nationally regulated
liberalization and restructuring; capacity
enhancement; and business and infrastructure
development at a cautious and gradual pace.
Proliferating routes China is
taking the lead in opening new bilateral air links
at the international and regional level. In 2002,
China opened 1,176 routes, including 1,015
domestic and 161 international. The number rose to
1,279 domestic and 244 international routes,
serving 75 new destinations, in 2005.
The
country signed 96 bilateral aviation agreements in
2004 with countries including Singapore,
Australia, the Philippines, South Korea, Malaysia,
India, Indonesia, Thailand and even Hong Kong. Foreign
carriers can now access China's western and
northwestern regions and enjoy third, fourth and
fifth freedom rights on flights through the island
province of Hainan.
(In
aviation, "Third freedom" means the right to carry
passengers or cargo from one's own country to
another; "Fourth freedom" is the right to carry
passengers or cargo from another country to one's
own; and "Fifth freedom" is the right to carry
passengers from one's own country to a second
country, and from that country to a third country.
Third and fourth freedom rights are almost always
granted simultaneously in bilateral agreements
between countries.)
The landmark China-US
bilateral agreement enabled a radical expansion of
cargo and passenger capacity, and allowed carriers
from the two sides to build cargo hubs in each
other's territory with unrestricted domestic
access. By 2010, the US and China can each have up
to 249 weekly flights to the other country, with
five additional carriers for both sides permitted
to participate.
Under the UK-China pact,
both sides can have 30 weekly flights by 2006.
EU-China air traffic is estimated to grow at 7%
per year for the next 15 years. Chinese tour
groups now travel freely to EU member states -
except for Britain, Denmark and Ireland - under an
Approved Destination Status (ADS) accord. While
Paris tops the destination list, Germany has the
largest share of EU-China traffic at almost 38%,
with France attracting 23% and the UK 9%. For the
future, China has said that it wants bilateral
agreements with individual EU countries - similar
to its present agreement with the UK - rather than
an umbrella China-EU agreement.
Cross-strait aviation ties are on the rise
as well. Taiwanese carriers like China Airlines
(not to be confused with mainland carrier Air
China) and EVA Airways are cleared to use Chinese
airspace en route to Europe. In 2006, Lunar New
Year charter flights carried more than 72,000
passengers over a 19-day period, up 151% from last
year.
China Airlines has also made some
cargo-based investments on the mainland, including
purchasing a 25% stake in regional and domestic
air cargo carrier Yangtze River Express. Hong Kong
still serves as the primary transit point for
cross-strait passengers and cargo.
Between
China and India, allowable weekly flight
frequencies will go up to 42 weekly for both sides
in 2006. Growing trade links may also lead to an
"open cargo policy" with unlimited cargo capacity
permitted.
The world's airlines face
intense competition in China's skies. Despite the
lucrative growth figures, hitting the pot of gold
is not easy. Cargo infrastructure and second-tier
airports are still underdeveloped. Risks of
overcapacity and logistics lapses are likely even
on the golden Beijing-Shanghai-Guangzhou
triangle.
The airline
business (Click here for ATol's
comprehensive listing of Chinese airlines, with
links.)
Overall, intensified competition
in passenger aviation is leading to three Cs -
Capacity enhancement, Consolidation and
Cooperation. Mainland carriers are briskly
ordering new aircraft, entering into code-shares
and alliances, supporting airport development,
building hubs and market strength, and entering
into joint ventures with overseas and local
partners for logistics support and business
expansion.
American Airlines (the world's
largest airline) will commence Chicago-Shanghai
flights in April. The carrier will offer domestic
connections from Shanghai through a code-sharing
arrangement with China Eastern Airlines. For its
part, "big three" member CEA claims 38-40% of the
Shanghai market, one of the country's key aviation
hubs. Focusing chiefly on the domestic market, CEA
intends to develop Kunming, Xian, Ningbo, Hanzhou,
Nanning, Qingdao, Jinan and Beijing as hubs.
Hainan Airlines, the mainland's
fourth-largest carrier, has stakes in Sanya
Phoenix International Airport and Haikou Meilan
Airport in Hainan province, and in airports in Shanxi and Xinjiang.
Air
China wants to develop Shanghai as a cargo center,
invest in its existing Beijing hub and promote
Chengdu as a regional hub. Cathay Pacific (CX) has
owned a 9.9% stake in Air China since 2004, and
supports management and crew training while
sharing a close working relationship with the
mainland carrier.
Cathay itself offers 14
weekly flights to Beijing, three weekly to Xiamen
and 12 weekly cargo flights to Shanghai. The Hong
Kong-based airline, long considered one of the
world's best in terms of passenger satisfaction,
is facing pressure from high fuel costs and Hong
Kong Airport's liberal outlook towards overseas
and low-cost carriers. China is now a prime focus
of Cathay's future business expansion; it recently
placed the single largest aircraft order in its
history, for 16 Boeing 777-300ERs.
Lastly,
a new trend in the past few years has been the
appearance of small budget and private airlines on
the mainland market. The low-cost carriers have
struggled for reasons including fuel costs of
20-30% above international rates, high landing
charges, aircraft import levies, a shortage of
pilots and secondhand planes. Domestic discount
carriers like Okay Airways have to fill up their
tanks inland at state-regulated prices, unlike
airlines operating international routes. Besides,
while they do appreciate lower fares, Chinese
customers do not seem to particularly favor a
no-frills in-flight experience.
Newly
permitted private carriers have found the market
hard slogging, often because they have started off
as low-cost carriers and face the set of problems
described above. One such case, Spring Airlines,
has abandoned the low-cost model. Still, private
carriers continue to emerge, such as China's first
fully privately owned carrier, United Eagle
Airlines (UEA). UEA may soon serve the
Beijing-Shanghai-Guangzhou triangle route, and
aims to cover 20 domestic routes by 2007 with
three Airbus A319s and six A320s.
China
and the aircraft industry China's
commercial aircraft fleet is expected to grow from
863 to 1,600 by 2010, and to 4,000 by 2020,
expanding at the rate of 100 aircraft per year.
Last year was an all-time record for Chinese
aircraft orders as the airlines bulked up for
future growth.
One of the biggest recent
aircraft sales to China was an order of 150
single-aisle Airbus A320 jets worth US$10 billion.
Airbus parts sales within China may fetch $60
million in 2007, $120 million by 2010. In order to
expand its 30% market share in the country, well
behind Boeing's 70%, Airbus also has announced
plans to set up an assembly line in China.
Boeing has done equally well in the
current seller's market. China ordered 70 Boeing
B737-700/800s, to be delivered over 2006-2008 for
carriers including Air China, China Southern
Airlines, China Eastern Airlines, Shanghai
Airlines, Xiamen Airlines, Shandong Airlines,
Hainan Airlines and Shenzhen Airlines.
Over the long term, manufacturing its own
long-range passenger aircraft for both civilian
and military purposes is listed in China's Science
and Technology Development needs.
China
currently produces the ERJ-145 (a small regional
jet produced under license from Brazil's Embraer)
and the ARJ21 (a fully domestically designed
80-seat regional jet designed to withstand the
high altitude and temperature conditions in
western China, and scheduled to enter service in
late 2006). The China Aviation Industry
Corporation (CAIC) delivered 144 aircraft to its
domestic and overseas clients in 2005, including a
deal to export 67 aircraft to Pakistan and Egypt.
Growing personal wealth has also led to
demands for private jets among entrepreneurs and
political leaders. Raytheon, Dussault, Bombardier
and Gulfstream now seek mainland clients at air
shows and aviation conferences.
With only
100 helicopters to its credit, China is a
lucrative opportunity for helicopter makers like
Bell and Eurocopters. In a joint venture, Bell has
sub-contracted with Harbin Aircraft industry
(HAIG) to manufacture and supply the M-430
helicopter body to the international market.
Eurocopter believes that the 2008 Olympics
will stimulate the helicopter market due to
increased transport demand from the military,
police and other public agencies. However, before
the orders come in, the firm will have to set up
maintenance and staff-training bases, train pilots
and procure a variety of operating licenses.
With aspirations to industrialize and
market space technology internationally, China is
making headway in aerospace as well. Chinese
people all over the world were jubilant when China
sent its second manned mission into space in 2005,
on a Shenzhou VI spacecraft launched from the
Jiuquan Satellite Launch Center. With a lunar
probe program under way, China plans to develop
navigation, broadcasting and telecommunications
satellite systems and eventually establish a
manned space station.
Foreign
investment in airports, airport services A
2002 policy review allowed foreign operators and
investors wider market access through stock
purchases or joint ventures in airlines, airports,
or ancillary businesses, with a 49% foreign
ownership cap. Investments in cargo storage,
ground services, food catering and parking lots
are exempt from the 49% cap. Red tape and overseas
skepticism have led to slower progress. Aviation
joint ventures are nevertheless necessary to
increasing market internationalization.
Air catering is a fine example. LSG Sky
Chefs, owned by Lufthansa Service Holdings, is
running joint ventures in eight mainland cities,
including Beijing, Shanghai, Chengdu, Sanya and
Guangzhou. Its Asia-Pacific chief executive
pointed out, "International flights make more
money, and joint ventures are about overseas
funding, specialized technical and management
support, and local knowledge." LSG wants to
further expand its market share through joint
ventures at China's 30 busiest airports. Another
catering venture is Beijing Air Catering Co Ltd, a
venture between Air China and Hong Kong Air
Catering Co.
Airports are also getting
into partnerships with the likes of Boeing, Airbus
and engine manufacturer Pratt & Whitney to
develop aircraft maintenance, repair and overhaul
(MRO) facilities. Boeing may invest over US$100
million for a 50% stake in a MRO base in Shanghai
this year.
Shanghai Airlines and the
Shanghai Airport Authority will hold the remaining
shares. On account of 20% lower operational costs
compared to typical developed-country sites, such
facilities present substantial cost-saving
opportunities for overseas airlines like Qantas,
while assisting airports in revenue generation.
Many more are needed all over China for varying
aircraft types.
Given its geographical
dimensions, slow land connections and vastly
improving international links, there is clearly
potential for China's airports to make money. But
according to the Center for Asia-Pacific Aviation
(CAPA), just 10-15 airports may be profitable
currently, while China has 142 certified civilian
airports and will have 186 by 2010.
Several of these are at a nascent stage,
reeling under their local authorities' sheer
inexperience at airport management. David Dodwell
at public relations firm Golin Harris noted that a
great deal of China's airspace, air routes, flight
path and airports were still under military
control, and this would have to change soon for
smooth civilian operations.
China's air
traffic control services also require drastic
service, equipment and personnel improvement, but
this is beyond the scope of private intervention
and investment other than equipment supply and
staff training.
To meet 14% domestic
growth forecasts, China will spend 140 billion
yuan (US$17.4 billion)in the next five years on
airport infrastructure development with a focus on
less-developed areas. But even the most profitable
airports, like Guangzhou's new Baiyun Airport,
have passengers complain of high prices for food
and retail, lack of proper and English sign
boards, long immigration queues, poor staff
communication and service skills, and baggage
delays.
Guangzhou will have to tackle
these before it realizes its Top 20 ambition. The
airport authority plans to invest 11.4 billion
yuan for expansion, service improvement and an
exclusive FedEx terminal. In Beijing, traffic
at Beijing Capital International Airport (PEK) is
expected to rise to 60 million passengers by 2015.
A total of 66 airlines at this writing, of which
only 11 are domestic, now offer 5000 scheduled
flights to 88 mainland and 69 foreign cities.
The airport's Terminal 2, which opened in
late 1999, can annually handle 26,500,000
passengers and 9,210 passengers per hour at peak
hours. French operator Aeroports de Paris owns a
9.9% stake in the facility, which is now adding a
third runway for the Olympics. The construction of
a new Beijing airport, with passenger-handling
capacity of 50 million a year, may start in 2010.
In the south, Hong Kong benefits from the
good reputation of Hong Kong International
Airport, which has been considered one of the
world's best since opening in 1998. The airport is
trying to maintain its "gateway to China" branding
while competition from airports in Guangzhou, Macau and Singapore.
Cathay Pacific Airlines and Hong Kong share a
mutually reinforcing relationship, which includes
playing a strong role in mainland aviation
affairs.
Meanwhile, Macau is attempting to
reinvent itself as an alternative gateway to China
by virtue of its gambling industry, low operating
costs, low-cost carriers and an influx of mainland
tourists. Although this scenario has been
underplayed in the aviation media, China and its
Special Administrative Regions (SARs) do represent
an aviation bloc viewed collectively, and may
eventually develop a unique consolidated role in
the Asia-Pacific region.
Analysts,
however, warn against overinvestment, which can
cause excess maintenance burdens later. An
aviation expert said, "A realistic prognosis is
essential; the modern, expensive, but hardly used
loss-making Zhuhai airport (in Guangdong province near
Macau) is a fine example of overestimating your
market potential." Private capital and control
may intensify inter-airport competition to attract
airlines, thus lowering landing costs, airport
charges and making the domestic environment more
suited to low-cost carriers. Eventually, airport
authorities may be able to lead further
deregulation, influence decisions pertaining to
air routes, establish their own hub brands, and
promote joint ventures.
Mani
Goel is a Hong Kong-based aviation analyst and
freelance writer.
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