In a significant step toward "open skies", the United States and China agreed
on a landmark air-liberalization deal last week, allowing increased air service
that should bring economic benefits to both sides of the Pacific.
At the second meeting of the Sino-US Strategic Economic Dialogue (SED) in
Washington, DC, US Treasury Secretary Henry Paulson and Chinese Vice Premier Wu
Yi agreed to increase the number of daily flights between the two countries,
allowing 11
additional daily passenger flights and almost unlimited cargo flights by 2012.
US officials have proactively pushed China for further air-service
liberalization since the previous agreement was signed in 2004. Chinese
officials have been wary of further liberalization because Chinese airlines
claim to be unable to compete with US rivals, both in terms of flight frequency
(Chinese carriers only operate six of the available 10 daily flights) and
market share (Chinese carriers carry less than half the current passenger
traffic).
The agreement at the SED is a significant step toward "open skies" - unlimited
air service between the United States and China. The agreement will allow US
and Chinese airlines to take advantage of the booming aviation market between
the two countries, which is growing 17% annually.
Prior to last week's SED, the US and China had held talks last August,
December, January and March on air-service liberalization. In April, US
Secretary of Transportation Mary Peters set the bar high for May's talks,
emphasizing that the US wanted to put the "basic framework" of an open-skies
agreement in place by the end of the meeting.
Though not succeeding in coming to a full open-skies agreement for passenger
services, the elimination of restrictions on cargo airlines will allow
unfettered access to China by US shipping giants Federal Express and United
Parcel Service, both of which previously announced significant expansions in
China.
Talks for full liberalization between the two countries are to resume in 2010.
The SED aviation agreement is likely to force the Chinese government to ease
restrictions on Chinese airlines that keep costs artificially high. Current
government policies require Chinese airlines to purchase fuel from
state-selected suppliers, which is normally priced higher than the
international average, and limits air routes to only 30% of the
military-controlled Chinese airspace.
Chinese airlines could benefit greatly from the relaxation of such
restrictions, becoming more able to compete in the domestic and international
marketplace.
China Eastern Airlines chairman Li Fenghua was quoted as saying that he does
not want to see "international flights open too fast" because at "the three
major [Chinese airline] groups, income on international air routes is generally
lower than on domestic routes".
These fears are justified, as the three major Chinese airlines - Air China,
China Eastern and China Southern - have been unable to turn a profit on routes
that have been a boon for US carriers. Foreign airlines are interested in
courting Chinese carriers, which have access to the world's
second-fastest-growing domestic airline market (India is first).
Chinese airlines still hold an ace in their domestic market as passenger
traffic is expected to grow by 9.6% a year through 2009, according to the
International Air Transport Association (IATA).
Singapore Airlines announced last week that it is in the advanced stages of a
deal to acquire 25% of China Eastern, China's third-largest carrier. The move
is seen as a significant step toward making the weakest of China's three major
carriers a stronger and more competitive company and providing Singapore with
access to China's domestic market.
China Daily reported this Wednesday that Singapore Airlines and parent Temasek
Holdings may pay about US$930 million for a combined stake of about 24% in
China Eastern Airlines to expand the Southeast Asian carrier's reach in China.
Singapore Airlines would invest about $600 million and Temasek about $330
million. The terms of the deal are to be finalized and approved by the
regulators.
China Eastern is currently not part of a global alliance nor is it being
officially courted, though speculation abounds that Oneworld - the only global
alliance without a mainland Chinese carrier - may court the airline. Singapore,
a member of Star Alliance, may use the acquisition to add to Star's growing
Chinese membership, which includes Air China and Shanghai Airlines.
Albert Tjoeng, a Singapore-based corporate communications manager with the
IATA, emphasized that China is making "all the rights steps towards
liberalization, including airport infrastructure, safety advances and universal
e-ticketing".
IATA director general and chief executive officer Giovanni Bisignani, speaking
at the China Civil Aviation Development Forum this month, remarked: "With
consolidation, effective cost allocation, and access to best practice in global
financial and management tools, the Chinese carriers are even better prepared
to face strong global competition."
The SED agreement will only continue to push the issue and will force Chinese
airlines to make the necessary changes to compete globally.
As an impetus for liberalization, the SED agreement may push for reforms of
Chinese air-traffic control. The military currently controls Chinese airspace,
opening only 30% to civilian aircraft. Air-traffic controllers currently
require aircraft to fly with a 2,000-foot (610-meter) "cushion" between planes;
the international standard is a 1,000-foot cushion.
Officials had announced that the cushion would be reduced to 1,000 feet by
August but recently postponed the much-needed reform to November. These reforms
are seen as necessary to cope with demand for domestic regulatory reform and
increased international air service, especially with the Beijing Olympics
looming.
Tjoeng said that more direct aircraft routing saves a significant amount of
fuel, and that the opening of additional Chinese airspace is necessary to
accommodate more direct routes. Such savings are seen as necessary as Chinese
carriers have been going to great lengths to conserve fuel; China Eastern is
planning to cut in half the number of in-flight magazines on planes along with
other weight-reducing measures.
For the United States, the agreement comes on the heels of the heated contest
for the last daily flight to China, which was awarded to United Airlines in
January. Five US airlines - American, Continental, Delta, Northwest and United
- bade for the flight in a battle that included sending 5,000 fortune cookies
to members of the US Congress and gaining the backing of Wal-Mart.
Peters said the SED agreement will "stimulate some $5 billion in new business
for our [US] airlines".
US airlines showed significant enthusiasm for the SED agreement. Northwest and
Delta "applauded" the agreement while Continental "praised" and US Airways
"congratulated" it. After the intense lobbying for the last daily flight, US
airlines have much to gain from any additional frequencies. One additional
daily flight will be awarded this year and in 2008, four in 2009, three in 2010
and two each in 2011 and 2012.
One US airline sure to benefit from the agreement is US Airways, which, after
its 2005 acquisition by and ensuing merger with America West Airlines,
announced its intentions to apply for a coveted China flight in February. The
airline will be able to apply for service under the new agreement.
US Airways, which currently offers no service to Asia, has played down the
upcoming battle as it pushes its proposed Philadelphia-Shanghai non-stop
service, saying: "We look forward to participating in the allocation process of
these newly awarded routes with the Department of Transportation."
Edward Russell is a freelance writer focusing on aviation and
transportation topics based in Bangkok.
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