China blocks takeoff of new airlines
By Edward Russell
BEIJING - For those entrepreneurs interested in cashing in on China's booming
airline sector, there is bad news afoot. The Civil Aviation Administration of
China (CAAC), the country's industry regulator, has announced that it will not
entertain any new airline applications until 2010, meaning there will be no new
airlines in China until 2011 at the earliest.
The ban comes at a time when the Chinese airline industry is experiencing
unprecedented growth. Domestic passenger numbers grew 16.7% in the first half
of 2007. Chinese airlines' bottom lines are benefiting directly from the
explosive growth in
passenger traffic; the CAAC reported that China's airlines earned a record
US$11.46 billion in revenue during the first half.
"We are very excited about the CAAC's macro-policy decision," said a
representative of Wuhan-based East Star Airlines. "East Star is only a
beginner. We have a lot to do to build a solid foundation and continue our
development, and the move by the CAAC allows us to strengthen our own team step
by step."
While firm in manner, the CAAC's announcement is full of loopholes that allow
would-be airline entrepreneurs entry to China's airline market. The CAAC will
allow new cargo airlines that fly at night and airlines that fly to
under-served central and western China or operate Chinese-built aircraft. Each
of these loopholes emphasizes an existing CAAC policy, including shifting
traffic to nighttime when there is free space at airports and in the skies,
increasing access to China's underdeveloped center and west, and promoting the
home-grown ARJ21 jet.
"It is a good sign that the government is concerning itself with carrier health
and using its regulatory powers in a targeted way to address some of the
aviation sector's continuing problems," said Richard Pinkham, a Singapore-based
consultant with the Center for Asia-Pacific Aviation. "While I am sure the
airlines would like to see more done to improve the efficiency of the
air-traffic management system, they will view these moves as a positive
development."
Timothy Ravich, a law professor at the University of Miami who has written
extensively about aviation law, sees China as a fascinating aviation market -
one growing and evolving rapidly. To Ravich, China's ban seems to follow the
cliche "desperate times call for desperate measures", but he warned, "Desperate
measures do not make good, or safe, policy.
"While a moratorium on airline growth may reduce traffic and allow airport
infrastructure to improve, it is not clear that the operations of new-entrant
carriers are the most significant cause of delays and related safety concerns
in China," said Ravich.
Allowing infrastructure to catch up with airline operations in China is one of
the reasons cited in the CAAC's August 15 announcement. The announcement
specifically cited safety concerns arising from "the limited capacity of both
airspace and domestic airports".
This month, the CAAC cut the number of flights at Beijing's Capital
International Airport, China's busiest, by 336 flights per day. The reductions
will occur in phases through October. Prior to the cuts, Capital Airport had
more than 60 peak-hour flights.
Throughout China, airports are straining from a lack of infrastructure, but the
impact is felt most at major hubs. At its peak, Capital Airport had about 1,100
flights per day, about the same as Phoenix Sky Harbor International Airport in
the United States. However, the similarities end here; Sky Harbor has three
runways (and even so is smaller than most hub airports in the US), while
Capital Airport has two runways and is the ninth-busiest airport in the world,
with traffic growth of 18.5% from 2005 to 2006.
Runway capacity is a key concern as China's airline industry grows; no
commercial airport in China has more than three runways.
"An airport is like a highway: there are a maximum number of cars that can be
on a highway at one time, and when you surpass that number there will be
traffic jams. The same goes for airports," Ravich explained.
Under China's 11th Five-Year Plan, $17.5 billion is being spent on airport
expansion and construction. While a portion of this will go to airport
expansion in Beijing, Guangzhou and Shanghai, $6.67 billion will go to airports
in China's western regions. Flights to these new and upgraded airports are
causing capacity and safety issues at major hubs where infrastructure has not
kept up with the growing number of flights from China's hinterlands.
The CAAC has cited the need for the ban to improve safety after such incidents
as the retraction of an Air China Boeing 767-200's nose-gear during boarding at
Capital Airport in June. A looming labor shortage also threatens growth;
China's airlines are projected to need an additional 6,500 pilots by 2010.
Ravich feels that the CAAC's move to ban new airlines could in effect "create a
cartel among the remaining airlines ... reminiscent of the commercial airline
industry in the United States between 1938 and 1978". A regulated airline
market typically has higher airfares and fewer travel options than a
deregulated one.
A recent paper published by Eric Pals, a professor at the Free University
Amsterdam, proposes congestion pricing as a feasible market-based solution for
airport congestion. He proposes a pricing mechanism where airport fees rise and
fall during peak and off-peak periods.
Ravich is confident that a better approach to solving China's airport
congestion and safety ills would be "to let the marketplace deal with the
extensive growth of commercial aviation in China". Airport congestion pricing
in China is one possible market-based answer to airport and airspace
overcrowding.
The CAAC's decision has the potential of allowing China's existing airlines to
increase their market capitalization and for airport and air-traffic-control
infrastructure to catch up with demand. Whom the ban benefits the most remains
to be seen, but for all those downtrodden entrepreneurs there is hope yet.
China's 1.3 billion people will still be here in 2010 and, after three years of
airline growth limits and an improved aviation network, they are going to want
to fly more than ever.
Edward Russell is a Beijing-based freelance journalist.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
