China’s Aviation Reform Process Moves to Competitive Phase

The focus of China’s highly-structured aviation reform process will shift this year to improving airline efficiencies and encouraging greater competition between airlines and airports, according to the Centre for Asia Pacific Aviation’s Outlook 2005 report.

The report says that the consolidation of China’s airlines and listing of Air China were “ground-breaking achievements in 2004, and provided the basis for the industry to enjoy greater autonomy than ever before”.

“The biggest challenges in fulfilling the potential for rapid growth in 2005 will be finding enough skilled personnel and developing infrastructure to accommodate demand,” the Centre said.

The report, released today at the Asia Pacific & Middle East Aviation and Tourism Outlook 2005 conference in Singapore, says that the policy course set by China early in the year, coupled with continued market liberalisation, will see “irreversible change to the country’s aviation systems”. 

“In particular, the emergence of a framework to encourage LCC operations will have significant ramifications for the domestic market and for China’s neighbours. Air services will continue to develop both internally and externally, and there will be greater engagement with foreign carriers and alliances. This, in tandem with regulatory reforms, will benefit the investment environment and promote overseas participation.”

Highlights for the Year Ahead

* China’s airports will move onto a new footing in 2005, as the transfer of ownership and management of airports across China realises increased commercialisation and possible privatization;

* Despite the slowing economy, tourism demand is likely to maintain exponential growth, especially outbound travel to a range of new destinations sanctioned by the Chinese government. Record inbound, outbound and domestic tourism levels should be achieved in 2005, after a strong recovery in 2004;

* Double digit traffic growth is expected this year despite a projected slowing of the domestic economy from 9%+ GDP growth to a more moderate 8%. This follows the achievement by airlines of a record 120 passengers in 2004. China remains on track to be the world’s second largest economy within 11 years and the largest by 2039.

* 2005 will be the year LCCs enter the mainland Chinese market. The imprint will be relatively modest initially, beginning with Jetstar Asia services from Singapore to Shanghai, but will gather pace with other LCC entrants connecting points in Southern China to Southeast Asia early in the year, including Thai AirAsia, Nok Air, Tiger Airways and AirAsia. Additionally, Virgin Blue is in the process of negotiating a deal with Air Macau to access the China market through the Macau SAR. Significant LCC competition will be restricted to short-haul international routes in the short to medium term. This will intensify pressure on yields, particularly to Southeast Asia, but the pressures for new entry will also provoke liberalised access to new gateways

* It is also highly likely that well-funded domestic Chinese LCCs underpinned by experienced foreign investors and/or the big three Chinese carriers will be in place well before the Beijing Olympics in 2008;

* 2005 will be underscored by heightened competition between Chinese airports, particularly those in the Pearl and Yangtze River Deltas, and continued pressure on funding airport development. The funding issue is likely to precipitate an increasing focus on airport privatisation in China, ensuring that the country’s massive airport infrastructure requirement (estimated at CNY10 billion each year) is achieved.

In 2004, Chinese aviation was dominated by: (1) rapid liberalisation; (2) resurgent traffic growth (recovery from SARS); (3) completion of the airline consolidation process; and (4) alliance-building. These issues will continue to impose themselves in 2005, with one other important new element – low cost carrier (LCC) entry.

The CAAC indicated that China had reached a transitional point in the development of air travel as, in its words, “a means of mass transport”. According to the latest aircraft manufacturers’ forecasts, China’s airlines will acquire an average of more than 100 aircraft each year for the next two decades. However, significant fleet rationalisation by the “big three” carriers, Air China, China Eastern Airlines and China Southern, must occur over the next 12-18 months, as the recent airline mergers are fully digested.

The report says that 2004 was “the year in which China asserted its presence as a dominant aviation and tourism power in the region”. “This was reflected most vividly in China’s role as an important driver of regional liberalisation.

“The signing of its first “open skies” agreement with Thailand set the course not only for aviation development in 2004, but signalled to governments in the rest of Asia an increasing openness in regard to air services. This generated significant growth opportunities for new entrants and incumbents alike.”

China’s aviation industry (airlines and airports) recorded total profits of CNY8.7 billion last year – equivalent to accumulated profits over the past ten years. Passenger traffic rose 37% to 120 million. The CAAC forecasts the industry to grow by 15% in 2005.

According to the report, the airline merger process, now in the final stages of injecting assets into the listed companies, has created “enormous ownership and operational complexity”. “For example, each of the big three have close to 20 different aircraft types in their fleets. Urgent priorities must be the simplification of the fleets and elimination of duplicated resources (including staff) if recent increase in unit costs is to be effectively contained.”

Meanwhile, substantial growth continued. China National Tourism Administration (CNTA) reports total foreign visitor arrivals in the January-November 2004 rose 19.6% year-on-year to 99.1 million. Tourism revenue rose 49.6% year-on-year to USD23.5 billion. The CNTA forecasts China will receive 105 million tourism arrivals in 2004. In 2004, China became the world’s largest domestic market with 900 million trips annually.

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