Having largely overcome problems of maintenance, safety, aging
fleets, SARS and rampant illegal ticket discounting, China's aviation
market is starting to do very well, with probably the fastest growth
rates of any market in the world on the back of a huge and increasingly
mobile population.
For passenger traffic, rising salaries
and a relaxation of overseas travel regulations are helping, while
improved infrastructure and China's role as Factory to the World is
adding new air cargo volume all the time.
Passengers using
Chinese airlines alone are expected to top 100 million for the first
time in 2004 (compared with 68 million in 2000), with projected growth
estimated at around 8.3% per annum until 2022. Already the second
biggest domestic market for air cargo in the world with 1.3
million tonnes moved in 2001, growth is expected to increase annually
by 10.3% until 2021. With the industry set to outpace GDP rates by a
significant margin, international players are busy on the ground and in
the air exploring opportunities.
In
2003, the domestic industry completed a period of consolidation and
rationalization that resulted in the creation of three core airline
groupings Air China, China Eastern and China Southern
. Both China Eastern and China Southern have stock market listings and
Air China hopes to list in 2005. But the efficiency of these airlines
remains low by international standards. Revenue per km per employee in
2003 for China Eastern, for instance, was around one third that of Hong
Kong-based Cathay Pacific, and China Southern fares only slightly
better. A number of factors impact on the poor efficiency ratio-high
investment in new planes and personnel training, excess staff, and an
inability to hedge against oil prices. Fuel alone accounts for 25%-30%
of total costs, compared with a 10%-15% global norm.
The current government policy
encourages the purchase of larger trunkline planes and the growth of
domestic aircraft manufacturing by imposing higher import duties on
regional plane purchases(23% duty compared with 7% for trunkline) as
well as charging a single landing fee regardless of plane class. The
result is that only 18% of Chinese planes are under 100 seats(compared
with 35% in the US) leading to under utilization and wasted expenditure
on most domestic routes.
With a total national fleet of only
655 planes in 2003, (American Airlines alone had 854) China is
currently the world's largest purchaser of new planes, projected to
expand the fleet size to 2 050 by the year 2021. While the main battle
for market share is between Boeing and Airbus( with Airbus slowly
encroaching on Boeing's 60% market share), niche markets do exist for
smaller manufacturers as exemplified by Canada's Bombardier Aerospace
Group, which has supplied 25 regional sized planes to a number of
Chinese carriers including Shanghai Airlines.
Chinese firms are themeslves proving adept at airplane component assembly. Brazil's Embraer
is in an assembly plant joint venture in the northern city of Harbin
where they have already sold six 45-seater planes to China Southern,
and Airbus has committed itself to procurements from local factories
worth US $120 million a year by 2010. China also has plans for its own
aricraft construction including the manufacture of turbofan airliners.
In one venture, the China Aviation Industry Corp One is working with GE
to produce regional sized planes for the domestic market. They are
hoping to have them in service by 2008.
Although entitled to
own up to 49% few foreign investors have chosen to buy into Chinese
airlines, nor does this trend seem likely to change in the near future.
Foreign airlines however, are very active in China and the numbers
involved will continue to increase. In 2004 China signed its first open
skies agreement with Thailand as well as a liberalization agreement
with America that will see weekly flights increase from 54 to 249 by
2007 and allow in new carriers and routes. Talks with European
countries about a similar agreement are ongoing. In addition, regional
airlines are now flying direct to China's second tier cities and both
European and American airlines are increasing involved in code-sharing
with Chinese partners.
The open sky/liberalization
agreements have come about despite complaints from Chinese airlines who
risk losing out to the better services of their foreign competitors.
The government's
thinking however, is to the wider picture of increased air traffic and
visitor numbers, and in part, a belief that healthy competition will
encourage domestic carriers to restructure. China is predicted to be
come the fourth largest tour destination in the world by 2020 with both
the 2008 Olympics and 2010 World Expo acting as landmark
events. And by 2020, there are expected to be 100 million outward-bound
Chinese tourists a year. Many of these will be traveling by air.
The
predicted extra traffic will also have a positive impact on domestic
airports, some of which are listed and almost all of which lose money
due to under-utilization and poor management. Seen as a must have for
any self-respecting city, local governments have tended to spend
lavishly on their airport terminals, often employing award winning
foreign architects.
Opportunities, though, do exist in the
provision of airport and air traffic control equipment. In some cases
forign companies have invested directly in the airports, for example,
Lufthansa in the southern city of Shenzhen and French firm Thales won
the contract to upgrade the national air traffic control system.
A
lack of oversight, though, has led to overcapacity such as exists the
Pearl River Delta where there are now five international airports
within 350 square kilometer zone-Hong Kong, Guangzhou, Shenzhen, Zhuhai
and Macau. But overall, observers say there is plenty of room for
growth especially in cargo, as at present the three major hubs of
Beijing, Shanghai and Guangzhou account for 44% of the market,
suggesting big potential for other centers. On the other hand, the
government is upgranding road and rail links, obvious competitiors to
airfreight.
On way the government could assist provincial airports is through encouraging the growth of low cost airlines(LCA),
a possible area for foreign investment at some point in the future. In
2004, for the first time, 100% privately-funded airlines were permitted
to enter the market and already, a number of both cargo and passenger
carriers have been formed.
Ticket prices are centrally
controlled, but the discount bands were widened in 2004 to 45% below
and 20% above the set price. A Chinese equivalent for the low-cost
airlines in other markets could tap a whole new, and considerably
wider, consumer market. This is not expected in the immediate future
due to the impact such an airline could have on the existing operators.
