China's private airlines get off
the ground By Candy Zeng
SHENZHEN - To the surprise of analysts and
the dominant state-owned players, three privately
run Chinese airlines have announced profits. This
is yet another example of private firms being more
efficient and competitive than state-owned
enterprises, which are suffering huge losses.
On September 7, Shanghai-based privately
owned Spring Airlines, which owns only three
planes, announced a net profit of 10 million yuan
(about US$1.26 million). Then East Star Airlines
in Wuhan, capital of central China's Hubei
province, and Okay Airways in
Chengdu, provincial capital
of Sichuan, followed suit by saying they have
earned 2 million yuan and 5 million yuan
respectively.
They are three of four
private airlines to win the approval of China's
aviation authority as early as 2004 to start
operating, with their maiden flights taking off in
2005 and 2006 respectively. Cheered by their
success, another three new private airlines
launched maiden flights in Shanghai, Anhui and
Guizhou last month.
In contrast, their
state-owned counterparts issued deficit balance
sheets for the first half of 2006. It is estimated
that the total losses of the state-owned airline
sector amounts to 2.5 billion yuan for the
six-month period because of soaring oil prices.
The private airlines were also hit by high fuel
prices, but they still managed to offer low-cost
flights.
According to their interim
financial reports, China Eastern Airlines reported
a total loss of 1.46 billion yuan and China
Southern Airlines lost 835 million yuan, although
their performance in the third quarter is expected
to improve.
"I'm not afraid of
competition. The problem is the current
environment for competition is not fair enough,"
Okay president Liu Jieyin was quoted by a Chinese
newspaper as saying.
Just one month ago,
civil-aviation analysts were pessimistic about the
profitability of private airlines that have just
one or two aircraft.
"When I met people
from a private airline, I told them daringly that
it would be a miracle if they could survive for
five years and a victory for 10 years," said Xian
Feng, a retired senior engineer from the national
aviation administration.
According to
Chinese analysts, the private airlines are making
money because of their low prices and stringent
cost control.
Wan Yu, an aviation-industry
expert, was quoted by the Beijing Times as saying
that private Chinese airlines are emulating the
budget services offered by Ryanair in Ireland and
Malaysia's AirAsia.
Some domestic analysts
believe that about 80% of the total costs are
fixed and cannot be reduced: aircraft, airport
charges and fuel. Private airlines have to reduce
the remaining 20% to make a profit. To save
money, Spring locates its headquarters in a hotel
near Shanghai's Hongqiao Airport. The office of
its president, Wang Zhenghua, is described as
"simple and plain" by financial reporters. The
staff-to-aircraft ratio of Spring is 60:1 - half
that of its state-owned counterparts.
While the bigger market leaders are hiring
well-educated, pretty women at high prices, the
private airlines hire inexpensive but efficient
laborers who stay longer with the company.
Selling tickets cheap but in larger
numbers is what gives private airlines an edge.
From its maiden flight in July last year, the
average discount offered by Spring has been 62%,
while the state-owned airlines have been giving an
average discount of just 40%. Private airlines
Spring and East Star fill 90% of their seats, but
their state-owned peers average only 65%.
Private airlines also give themselves an
edge by servicing regional routes that their
bigger rivals do not.
Most large
state-owned companies are now listed at home or
abroad, which means they are better financed, yet
they still fail to outperform the new private
airlines, which has been attributed to poor
management.
Despite the financial
pressures caused by rising fuel prices, China
Southern Airlines, which is listed in Shanghai,
Hong Kong and New York, introduced new uniforms
for its 6,000 flight attendants in August, in a
bid to "offer first-class services to passengers".
The new suits were reportedly made of imported
materials and designed by foreign firms, costing
about 10,000 yuan (nearly $1,270) each set.
The decision to introduce expensive new
uniforms has raised concerns among experts about
whether the state-owned airlines are capable of
(or willing to) control their costs, or would
rather simply shift them to consumers.
To
cope with rising oil prices, they lobbied the
central authorities to allow them to increase the
surcharge on fuel dramatically from 30 yuan to 60
yuan for a flight within a distance of 800km and
from 60 yuan to 100 yuan for any longer distance
starting from September 1.
"The aviation
sector is almost the last industry to be opened to
private investment. The state-owned companies are
still very powerful and influential in central
decision-making," said Xian, who is now working as
a consultant to a Shenzhen aviation association.
Compared with the huge state-owned
players, the tiny private airlines face major
challenges such as financing, human resources,
logistics services and fleet expansion, said Xian.
But he also noted that the vast territory
and growing market in China will give private
airlines room to grow. "Local governments will
offer help to private airlines as they improve the
regional connections, which are sometimes ignored
by the state-owned companies," he said.
More than 15 private airlines have been
given the green light to take off by the central
authorities since the market opened in 2004.
Candy Zeng is a Shenzhen-based
freelance journalist.
(Copyright 2006
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