Development and Prospects of the Aviation Industry in China

By Anming Zhang

Airneth column
October 2011
By Anming Zhang

Chinese air passenger traffic has grown at 16% annually since 1978, and China has become the 2nd largest aviation market (behind the United States) since 2005. Beijing, Shanghai and Guangzhou (with Shenzhen) now all have annual passengers of 70 million each, placing them among the world’s busiest aviation cities. This rapid growth is driven largely by China’s integration into the regional and world economies as well as its GDP growth (about 10% per year since 1978). China’s international outbound travelers have increased much faster than both inbound travelers and domestic travelers, due to the rapid increase of the “for private purpose” tourists. Thanks in part to China’s growth, in 2009 and for the very first time, more passengers took flights in the Asia-Pacific region than in North America. IATA forecasted that the Asia-Pacific region will account for about half of the world air traffic by 2050, during which China plays a pivotal role in the region’s liberalization/integration and in the formation of inter-continental networks.

The Chinese market is dominated by the state-owned “Big 3” carriers: Air China, China Southern, and China Eastern. The carriers used to be uncompetitive with inefficient management, limited capacity and international network coverage, which explains largely the government’s conservative approach towards regional and international “open skies.” For the past decade, significant efforts have been extended to competitiveness enhancement. Mergers have been undertaken to consolidate the industry and explore economies of scale and traffic density. In 2010, for instance, China Eastern merged with Shanghai Airlines (China’s 6th largest carrier) whereas Air China acquired Shenzhen Airlines (5th largest carrier), and China Southern became Asia’s largest carrier by passenger numbers (overtaking Japan Air Lines). Internationally, in 2007 Air China joined Star Alliance and China Southern joined SkyTeam, while China Eastern joined SkyTeam last April. By leveraging on the global alliances, “Big 3” aim to develop their international networks and improve managerial efficiency. In addition to these efforts, China has been more proactive in opening up markets: the air transport industry is viewed more as a facilitator of “national” interests (including investment, trade, economic development, and consumers’ benefits). Liberal air service agreements have been signed with, for example, the US, Korea and Singapore, with air cargo services being more aggressively targeted. China also declared a unilateral “open skies” policy for its Hainan Province.
The number of flights per capita is still quite small for China – about 0.15 flights per person in 2008 – as compared to those in more matured markets (over 3 for the US, and about 1 for Japan and Korea). As China sees continued growth in GDP (estimated 6-7% per year to 2020) and tourist market, this suggests huge traffic potential. Albeit bright growth prospect overall, China also faces a number of challenges. First, the planned capacity expansion is unlikely to keep up with traffic growth at hub airports Beijing, Shanghai and Guangzhou. The “Big 3” carriers appear to move from the existing point-to-point network to a hub-and-spoke network, which would require more capacity at these three hubs. Runway and airspace capacity shortages at hub airports have led to severe flight delays, and will be a bottleneck for China’s future growth.
Another threat is from high-speed rail (HSR) which is under rapid and ambitious development in China, with 42 HSR lines spanning 13,000 km by next year (and 18,000 km by 2020) and having speed of 200 km/hour and above. Demand for air routes less than 1,200 km (over 60% of Chinese carriers’ passenger throughput) will be negatively affected. Third, low-cost carrier development in China lags much behind that in Europe and North America. This is due to the capacity shortage at major airports and scarcity of secondary airports in metro areas, and to various regulatory barriers in such areas as aircraft purchase, pilot recruitment, fuel purchase, airport charges, route entry and pricing. As a result, 80% of costs are out of airline control – the “low cost” carriers in China are better called the “low fare” carriers. It is critical for the government to come up with a clear policy towards the sector.