Chinese aviation expansion 10% below full potential

(Sydney: 18 March 2007) Centre for Asia Pacific

Aviation’s new Aviation Outlook report contends that China’s aviation

industry could be expanding by up to ten percentage points above current rates

of growth, if central controls were eased.

“Double-digit air traffic growth is a certainty in an economy growing by 8-10% annually, but controls over fares, routes, aircraft purchases, airport charges, fuel supply and distribution services are keeping China’s aviation market from achieving its full potential”, said Executive Chairman of the Centre for Asia Pacific Aviation, Peter Harbison.

The Outlook report states this situation is unlikely to change soon. Total domestic deregulation was attempted in the mid 1990s with disastrous results on airline profitability and – after the arduous airline consolidation efforts of the first part of this decade – central controls will likely be maintained for the foreseeable future. In any case, it is doubtful that China’s out-dated and over-burdened airport and ATM infrastructure could cope with growth rates much above the already industry-leading levels.

“An unfortunate by-product of these controls is that they may delay the advent of genuine domestic LCCs in China’s market until the end of the decade. China’s nascent independent private airline sector will find the going tough in this environment and will largely remain confined to serving niche roles”, said Mr Harbison.

The Outlook Report finds that while 2006 was a challenging year for China’s major airlines financially, the outlook for earnings for the entire sector in 2007 is much better, due to lower fuel prices.

“Well-managed and politically favoured Air China can look forward to another good year in 2007, especially as greater network cooperation with Cathay Pacific comes online. Air China will join Star and Cathay Pacific will remain with oneworld – linkages that will come under inevitable scrutiny over the medium term, but not in the next 12 months”, said Mr Harbison.

China Southern Airlines needs quickly to find a partner for its freight business, according to the Outlook Report, or risk getting left behind, particularly with FedEx moving into Guangzhou by 2008. The carrier will join SkyTeam in the second half of 2007, and has unveiled its biggest ever-international expansion, to build its hub at Guangzhou and raise profits after a lower than hoped for domestic returns. China Eastern Airlines also needs a savvy strategic investor to help turnaround its struggling operation in the highly competitive Shanghai market.

Foreign investment in China’s airport sector is expected to gain momentum in 2007, led by Changi Airport International (CAI)’s breakthrough agreement in Nanjing.

“There is a growing hunger by the Government for foreign investment, which is eager to reduce the CAAC’s burden of funding airport infrastructure – a role it clearly does not want to retain in the long term”, said Mr Harbison.

The Outlook Report also predicts long haul international access to China will continue to be restricted so long as China’s flag carriers are unable to compete effectively for foreign inbound travelers. This situation will continue so long as their awkward branding and offshore distribution problems remain unresolved – perhaps provoking the need for innovative foreign partnerships.

“But the country seems poised to have, in Air China-Cathay Pacific, a combined carrier that will be able to compete on any terms with the best and biggest airlines in the world”, said Mr Harbison.

These findings from part of the Centre’s 181-page outlook report, available now at centreforaviation.com. This year’s report covers the Big Issues facing Asia Pacific aviation in 2007, including LCCs, liberalisation, restructuring, aircraft orders/deliveries, skills, funding, security, the environment and the economy.

The overall themes of ‘Outlook 2007: Dawn of a New Era’ include an impending “full frontal attack” on flag carriers commencing in 2007, and the continued unfolding of the influential LCC story in Asia.