INTERVIEW-Air China to invest CNY3.5 billion in Beijing, focus on key routes

Ma told XFN-Asia in an interview that the airline also wants to develop Shanghai into a cargo hub and an international passenger gateway, while it expands its regional hub in Chengdu in southwest China's Sichuan province.

"We will pay attention to our market depth in selected markets," Ma said. China's aviation industry is likely to maintain a rapid pace of growth over the next three to five years and Air China is well positioned to take advantage of the booming market, Ma said.

"We expect 12% to 15% annual growth in China's aviation industry over the next three to five years. Beyond 2010 the market will slow but still show growth," he said.

Air China has a fleet of 160 aircraft, 97 of which are based at Beijing International Airport, where the carrier achieved a 45% market share in the first half of this year, Ma said.

"Our top target is the Beijing hub, where we are trying to realize the synergy of our international and domestic flight network," Ma said.

"The plan is to get the Beijing hub in shape within three years...it will reach full maturity in five years' time," he added.

A new international terminal is currently under construction in preparation for the 2008 Beijing Olympics and there are also plans to build a third runway at the capital's airport.

Air China's investment at Beijing airport will include the development of cargo operations, engineering and maintenance programs, together with catering and IT services, Ma said.

The national flag carrier recently invested CNY300 million in a 120-acre site in Shanghai as part of its plans to enhance cargo operations there and develop the hub as an international passenger gateway, Ma said.

Air China currently has 20 aircraft serving Shanghai and a 12 pct market share, Ma added.

Air China's cargo operations, through its 51% stake in Air China Cargo, accounted for 9.9% of the group's total revenue of 16.94 bln yuan in the first half of this year.

The regional hub of Chengdu in southwest China's Sichuan province is also a key location, and Air China is looking to increase its market share there to 50% in two to three years.

The carrier currently has a 40% market share in Chengdu, where it uses 30 aircraft, Ma added.

"The Chengdu regional hub is another strategy, the airport's infrastructure is good and the potential development of an economic zone between Chongqing and Chengdu will definitely benefit the aviation industry," Ma said.

Air China currently operates international flights to North America and Europe from Chengdu through Beijing, but may open direct flights to these destinations in the future.

"In the future, if the market grows and we have capacity, we will open direct services," Ma said.

Revenue from interline and connecting flight sales is expected to top CNY10 billion this year, compared with CNY7.6 billion in 2004 and CNY2.8 billion in 2003, Ma added.

The development of the airport hubs will broaden Air China's international business, which accounts for 49% of the international operations of all of China's air carriers combined, Ma said.

"Internationally we will increase capacity mainly for the European market. Currently Air China is the largest carrier between China and Europe...38% of revenue comes from our European operations," Ma said.

"We will also focus on Japan and South Korea and put more capacity there, and increase the route network between China and North America. We are also taking steady steps in the southeast Asia market," he said.

Air China will increase its fleet size to serve both its international and domestic routes.

As previously reported, the carrier, which had a fleet of 160 aircraft at the end of June, plans to introduce 15 new aircraft before the end of this year, Ma said.

Over the next three years, Air China plans to introduce 25 to 30 new aircraft annually, and has already ordered 20 Airbus A330s and 15 Boeing 787s.

The carrier will take delivery of six Airbus 330s, a twin-engine regional and medium-haul airliner capable of carrying up to 311 passengers, next year and seven more in 2007, Ma said.

The first Boeing 787 Dreamliner will be delivered in the first half of 2008, he added.

The new orders were funded by the proceeds from Air China's recent three bln yuan corporate bond issue, its initial public offerings in London and Hong Kong which raised 10.2 bln yuan and by the carrier's capital reserves.

There are currently no plans to use the Airbus 380, Ma said, adding that it is too early to introduce the superjumbo to the Chinese market.

"We do not have an introduction plan for the A380, it is too early to introduce it to China," Ma said.

Air China also has no plans to introduce new regional jets to its fleet in the next three to five years, Ma said, adding that the carrier currently operates 10 CRJ200 Bombardier regional jets on a leasing arrangement with Shandong Aviation Group, in which it has a 48% stake.

"We have no plans to introduce regional jets in the next three to five years as we do not see the market for them...we will pay attention to our main market," he said.

Air China posted a first half net profit of CNY591.25 million for the first half of this year, down 25%t from a year earlier, but ahead of its main competitors China Southern and China Eastern, which recorded net losses of CNY1.03 billion and CNY475.31 million for the same period.

Ma said that Air China's combination of marketing efforts, cost controls, and use of hedging tools helped it achieve this solid first half performance.

The main challenge to Air China and other airlines is the mounting cost of jet fuel, and analysts forecast continued price rises over the next few years.

Morgan Stanley last week said it expects the cost of jet fuel to come in at USD70 per barrel for 2005, and USD75 per barrel in 2006.

Air China will continue to use hedging tools, cost cutting measures and the levy of a fuel surcharge to combat rising fuel costs, Ma said.

Hedging tools helped Air China generate savings of CNY93.5 million in the first half of this year, Ma said.

In the first six months, Air China hedged 4.5% of its jet fuel requirements. This was well below the 30% limit on the amount Chinese carriers can hedge, but still more than other carriers.

Air China will also try to reduce fuel consumption by adjusting its route structure, Ma said, adding that the airline saved around 20,000 tons of jet fuel in the first half of this year this way.

The levy of a fuel surcharge on passenger tickets also generated some CNY350 million in the period, but was not enough to offset higher jet fuel costs.

"The income from the fuel surcharge cannot bridge the gap caused by the jet fuel price increase, so the airline must take the hit from increased jet fuel cost," Ma said.

China's fuel market is monopolized by a state company and the government sets jet fuel prices. But Beijing is likely to loosen its tight control in the coming years to meet international standards and allow other jet fuel providers to enter the market.

But Ma noted that is not expected in the near future.

"Theoretically, more providers will mean cheaper fuel and that will reduce airlines' costs, but for China to have diversified providers of jet fuel will take time," he said.

Ma added that Air China will continue to explore code-sharing opportunities with other international carriers as part of its growth strategy.

Air China currently works closely with around 18 other carriers including United Airlines, Lufthansa and Air Japan, he said, adding that "all major airlines" want to work with the Chinese carrier.