China's Belt and Road Initiative and aviation
There has been considerable speculation about China’s ‘One Belt, One Road’ initiative as it used to be called (now Belt and Road Initiative, BRI), surrounding its application to the Chinese air transport sector to it. This report looks at which airports along the two Belts – Land and Maritime, are receiving any support from Chinese construction firms and/or investors. It finds that Chinese firms continue to enhance their presence in selected areas of these belts but not in others.
The majority of them are attracted fundamentally by Western Europe, and then by opportunities in the east of that continent where cargo rather than passenger facilities can be erected to take advantage of a comprehensive road network. Accordingly, some small airports there have been courted by several Chinese operators/investors. In contrast, many of the airports along the line of the original Silk Road through West Asia have been thus far ignored.
But in each case, it appears that aviation is either an implied part of the BRI future or is already becoming relevant.
Connectivity and co-operation is the key to the success of the initiative
The Silk Road Economic Belt and the 21st century Maritime Silk Road or The Belt and Road Initiative (BRI) is a development strategy put forward by the Chinese government that focuses on connectivity and cooperation between Eurasian countries, led by the People’s Republic of China (PRC), the land-based Silk Road Economic Belt (SREB) and the ocean-routing Maritime Silk Road (MSR). The initiative was known in English as the One Belt and One Road Initiative until 2016.
It is based loosely on the original Silk Road, which was an ancient network of trade routes that connected the East and West and which was central to cultural interaction between the two for many centuries.
The Silk Road refers to both the terrestrial and the maritime routes connecting Asia with the Middle East and southern Europe and derived its name from the lucrative trade in silk carried out along its length, beginning in the Han dynasty (207 BCE–220 CE). The Chinese took great interest in the safety of their trade products and extended the Great Wall of China to ensure the protection of the trade route.
The routes of the original Silk Road
China was and is a world leader in infrastructure investment. It has pursued - and continues to do so - an infrastructure-based development strategy, which has resulted in engineering and construction expertise and a wide range of modern reference projects from which to draw, including roads, bridges, tunnels, and high-speed rail projects.
Some analysts have argued the Belt and Road Initiative constitutes a natural extension of the infrastructure-driven economic development framework that has sustained the rapid economic growth of China since the adoption of Chinese economic reform under chairman Deng Xiaoping. The Belt and Road Initiative connects Asian markets to Europe and is intended to be a rallying point for private and public investment.
An idealistic reconstruction or a calculated strategic move?
Between 2014 and 2016, China’s total trade volume in the countries along Belt and Road Initiative exceeded USD3 trillion, while China’s investment in these nations surpassed USD50 billion. However, there are concerns in those partnering countries about the large debt burden on China to promote the Initiative. There are differing views on whether the BRI is an idealistic reconstruction of the Silk Road concept or a colossal strategic move to expand China’s influence.
The timing does however coincide with official expressions about China’s need to take its place in the world order, using its vast foreign reserves more effectively than, for example, investing in low yielding US securities.
In a 2015 speech, CAAC Deputy Li Jian proposed that all BRI countries (including China) adopt a proactive, more liberal and flexible aviation policy for an active, orderly and progressive approach to liberalisation. This was the first occasion where the strategy was made public.
(Extracts from Mr Li's speech - unofficial translation:
"All countries en route B&R to adopt a proactive, more liberalised and more flexible aviation policy for an active, orderly and progressive approach to liberalisation...
"China will train 500 personnel for the B&R countries, through exchange, training or accepting as international students. And will also support ICAO’s safety support Partnership program to provide safety support to B&R countries...
"Seeking to incorporate key flightpaths and major projects, such as joint investment and construction of airport, and air traffic control facilities into China’s regional support program under the umbrella of B&R".)
Transport projects include airports as well as bridges, tunnels and rail projects. China builds its own airports, largely financing them from its own resources too, and has in the main dispensed with foreign assistance, which previously came in the form of, inter alia, Copenhagen Airports, Fraport, Aeroports de Paris (now Groupe ADP) and Vinci.
On the contrary, it is now a net exporter both of expertise and of capital, investing in airports across Europe and elsewhere, though it has not as yet focused on the easterly part of the BRI.
The graphic below shows the Asian countries that are participating in the BRI, including larger African ones, and the overall investment they are forecast to receive from 2017 to 2021.
Asian and African countries participating in the BRI
The Asian Development Bank estimates emerging Asian economies need USD1.7 trillion annually in infrastructure to maintain growth, tackle poverty and respond to climate change.
The next graphic, below, identifies the scope of the Silk Road Economic Belt and the 21st century Maritime Silk Road. It should be of no surprise that the eastern terminus of the belt is situated in Xi’an, the oldest of the Four Great Ancient Capitals, the starting point of the original Silk Road and home to the Terracotta Army of the first Emperor of a united China, Qin Shi Huang.
Xi’an itself is representative of modern-day China, a city of 8.7 million people in a metropolitan area of 12.9 million and one of a number of emerging megacities in China.
The old Silk Road and the Maritime "Road"
Many projects form part of the BRI but this short report is concerned only with airport projects in countries that lie on the route of the land and maritime-based roads, and highlights where Chinese capital and/or expertise has been brought into play, and where it could be. The source is the CAPA Airport Construction Database.
The countries examined are:
- (Land) Kyrgyzstan; Kazakhstan; Tajikistan; Uzbekistan; Iran; Turkey; Russia; Belarus; Poland; Germany; Netherlands
- (Maritime) India; Sri Lanka; Africa (general); Greece; Italy
BRI: Land activities
There are four known airport projects, at Bishkek Manas (the capital), Batken, Isfana and Jalal-Abad airports, with all scheduled for completion by end Dec-2022. They are all terminal expansion or extension projects, with a new runway at Bishkek Manas.
In 2014, Bishek Manas International Airport OJSC and China's Beijing Urban Construction Group signed a protocol on the construction of a new terminal at Manas Airport and the rehabilitation of Batken and Issyk-Kul airports; projects with aggregate estimated costs put at USD1 billion.
The New Osh Airport is a proposed new airport for the second largest city, at a cost of USD300 million. Manas International Airport OJSC, operators of the nation's capital airport, signed an agreement with China Machine Engineering Corporation (CMEC) to construct the proposed regional hub.
Six projects are known to the CAPA database, at Astana (the capital), Baikonur, Kostanay, Oral Ak Zhol, Semey and Shymkent airports, with a total value, where known, of USD345.6 million. They are mostly terminal or airport reconstructions, with a new terminal and runway at Astana and Shymkent. All will reach a conclusion between Dec-2018 and Dec-2020.
There is no known involvement by Chinese firms in these projects, which are the product of the Railway Company.
China’s Tengri Holding submitted proposals to Kazakhstan’s Ministry for Investment and Development, for construction of a new airport at Almaty, the largest city.
The CAPA Airport Construction Database contains two existing airport projects: a terminal upgrade at the small Nukus Airport, and a new USD431 million terminal at the capital Tashkent’s Islam Karimov International Airport. In the latter case, the financing is coming not from China but from the South Korea Ex-Im Bank. Indeed, in Sep-2016 South Korea and Uzbekistan signed an MoU on infrastructure projects generally in Uzbekistan.
Under the agreement, Korea Economic Development Cooperation Fund would provide USD250 million for the construction of the passenger terminal at Tashkent, as well as the establishment of a data centre. Moreover, Seoul’s Incheon International Airport Corporation and the Korea International Cooperation Agency (KOICA) undertook the construction and economic feasibility study.
There are no new airport developments.
Iran finds itself at a crossroads since President Trump rescinded the Iran Nuclear Deal (not ‘Treaty’; no formal agreement was ever signed). The huge western interest in providing aircraft and airport construction and financing services, which was evident in the attendance at two CAPA conferences in Iran, dissipated immediately in the face of the renewal of sanctions on Iran and the threat of possible sanctions against them.
But Iran needs external investment. None of the Iran Airport company's 54 airports is profitable with the exception of Imam Khomeini International Airport.
The main deals that had so far been completed involved mainly French and Italian companies.
The CAPA Airport Construction Database lists 13 Iranian airports with construction projects, mainly terminal works. None have any involvement with China with the exception of the new Mashhad Airport where Iran Airports Company signed financing agreements with both French and Chinese companies for the development of a new airport in 2014. A provision in the financing arrangement covered investments by Iran Airports Company in the development of 54 other airports around Iran.
Of the new build airports (of which there are many, considering the financial plight of the Airports Company, and which include Bushehr, Chabahah, Ahvaz, Saqqez, Qom and Aras Jolfa, the only known involvement of the Chinese is a visit by unnamed investors from that country to the Qom Airport in 2014 to discuss investment projects.
Turkey, for centuries the Asia/Europe bridge, is the location of one of the world’s largest new airport projects, at Istanbul, one that is scheduled to open in its first phase in Oct-2018. But there is no Chinese involvement; all the financing and construction participants are Turkish.
Otherwise, there are major projects at seven airports, the main one being at Istanbul’s other airport, Sabiha Gökçen (USD1.75 billion).
There is no evidence of direct backing from China in any of these, either, nor in the six greenfield airport projects, which are typically under the control of DHMI, the State Airports Authority. Turkey is a challenger to China in the matter of overseas investment and development.
Much the same can be said of Russia, although that country is, by nature of the sanctions imposed on it, not so much of a foreign investor these days. According to the CAPA Airport Construction Database, there are over 70 infrastructure projects at existing airports in Russia, and 14 greenfield airports being built or planned for. However, there is scant evidence of any Chinese input; the projects being the responsibility of the state, individual communes or the burgeoning numbers of private Russian investors and their companies.
The Federal Antimonopoly Service (FAS) aims to reduce administrative barriers for investing in the country’s port and airport infrastructure with foreign investors in the second or third quarter of 2018. The Russian Federation is widely acknowledged to be a tough place to do business. Ordinary fresh impetus might be expected to come from the west, but the current political deadlock between Russia and the west rules that out.
If Chinese companies are to get involved, it is more likely initially to be at the eastern end of Russia where they are closer to home and where Russian companies may be less inclined to participate owing to low traffic figures, rather than in the western area around Moscow and St Petersburg, where most of the traffic is, and which has already attracted much of the necessary investment, including a sovereign wealth fund.
There is only one airport known to have a significant infrastructure programme but it is a big one, at Minsk National Airport where a second runway is under construction which, together with other works, amounts to over USD300 million in investments.
Minsk is in an excellent position to benefit from the “road” as it meanders towards its western outpost at Rotterdam and at this project and initially the works were to have been undertaken in conjunction with a Chinese company, IF (from 2013). However, in 2014 Russian interests replaced Chinese ones as the partner.
Political expediency may have had much to do with that decision. This is possibly a conscious strategy on Russia's part, where former Soviet Union states remain in the Russian camp. Georgia, further removed from its former Soviet associations, is by contrast more engaged in the BRI.
There are 10 airports with infrastructure projects in Poland, the biggest of them being Krakow’s John Paul II Balice International Airport (USD273 billion). There is one new airport under construction and the new Central Polish Airport near Lodz looks likely to get the final go-ahead, one that will dwarf the others.
However, Poland, via its State Airports’ Authority, PPL, tends to control most of the airport infrastructure and there is only one example of private sector activity there – the new airport at Suwalki – and very little external input.
It is in Germany, where the “road” traverses the Ruhr industrial area on its way to the Netherlands and the North Sea, that some of the better of examples of Chinese co-operation in the airport sector can be observed.
The Frankfurt Hahn Airport, an important cargo distribution centre (always attractive to Chinese operators), came under the scrutiny of several Chinese firms before it was taken over (82.5%) by HNA Airport in conjunction with German firm ADC GmbH, in Aug-2017. Ten years earlier, Beijing-based Link Global bought by auction Schwerin-Parchim Airport, on the German Baltic coast, again with its employment as a cargo base in mind.
Although it was somewhat out of the way, to the north of the projected line of the road, it does lie between Berlin and Hamburg and the latter’s port could arguably be considered an alternative BRI port to Rotterdam.
Later (2010), Link Global conceded management of the airport to the Xiamen Airport Group.
Frankfurt Hahn Airport annual system cargo payload (kg) capacity
And finally to the Netherlands and the western end of the road. There are five airports with construction projects momentarily, the largest (USD2 billion) at Amsterdam.
All but one (Maastricht) is within the public sector and none have any known connections to China. There are no new airports under construction but there is the conversion of Lelystad Airport to commercial use.
BRI: Maritime activities
The second part of this examination looks at the maritime part of the BRI.
It passes through the Bay of Bengal city of Kolkata. There is no known Chinese presence in India in the construction (44 existing airports and 52 greenfield ones) and/or financing of airports, even at Kolkata itself, where the airport has suddenly come back on the radar as a potential concession project, having been taken off it in 2015.
Where there is a foreign presence, it tends to be a traditional one from Germany, Switzerland and South Africa, from where companies were involved in the initial big-city airport concession deals in 2006.
That might not be the case forever. In 2017 it was revealed that 42% of the 600 companies that plan to invest a total of USD85 billion in India in projects in the country in next five years are Chinese. Some of the Chinese ones are specifically land developers. That India needs the investment is without a doubt. Whether or not the Chinese firms would be welcomed by a country that believes it can overtake China to become Asia Pacific’s leading economy is another matter.
There are complicating issues of a different kind in Sri Lanka (Colombo is on the Maritime Silk Road), where a white elephant vanity project that opened in 2013 as “Sri Lanka’s second international airport”, the Mattala Rajapaksa International Airport, has become a politically strategic battleground between India and China.
The airport, the usage of which has been diverted towards MRO and cargo activities after just 6,500 passengers used it in 2015, was financed with soft loan funding from China Exim Bank.
But the presence of China at the nearby Hambantota shipping port (to access one of the world’s busiest shipping lanes) raised concerns that as China seeks to spread its reach cross-continent via the Belt and Road initiative, it would use the port as a naval base. But its ability to do so is severely hampered without access to an airport.
Consequently, the Indian Aviation Authority (not Airports Authority of India or a private operator) began discussions with Sri Lanka’s government at the end of 2017 to form a joint venture with the Sri Lanka CAA to operate the airport, effectively to block Chinese expansion here. Its operational plans for the airport remain vague.
There is insufficient space to go into detail about Chinese influence in Africa, in which Nairobi features as an outer location on the Belt.
That influence is extensive and Kenya, in particular, has actively courted Chinese investment for several years, mainly for industrial growth but also in the railway sector, where the Chinese 90% financed and are building the USD4 billion Nairobi-Mombasa railway; one of a network of similar projects that will eventually connect internationally throughout East Africa.
In the airport sector, Chinese presence in the form of a contract to build a (subsequently cancelled) USD500 million terminal at Nairobi Jomo Kenyatta International Airport several years ago caused political fallout.
Greece lies on the Maritime belt as Istanbul lies on the Road belt. It has a powerful port at Piraeus. It is primarily western interests that are driving Greece’s airport sector though, through local companies such as the Copelouzos Group, western funds and through German operator Fraport, which took on many of the diverse regional and island airports under concession.
While the port is of interest to the Chinese (in 2009 half the container port was leased to a Chinese firm, COSCO, for 35 years, there is no evidence yet of significant Chinese attraction to Greece’s airports. A long-anticipated further transaction on the already partially privatised Athens International Airport (although it is no longer situated close to Piraeus, as the old Ellinikon airport was) could see a change in that position although it is unlikely a majority stake could be secured immediately.
At the far end of the Maritime Belt is Italy, which is a country that has been identified by Chinese firms in the past for investment in the airport sector. For example IZP Technologies, a digital company which in 2014 attempted to buy Parma Airport and to reposition it as a cargo airport to service the vast Turin-Milan-Venice corridor to the north. The deal did not go through.
The problem with Italy for Chinese investors is that much of it is isolated too far to the south of the main commercial regions of Europe, especially for cargo services; there are severe political tensions as strongly-differentiated parties battle for control; the economy is weak; and there are too many airports, as the government has long acknowledged.
Moreover, ownership of airports typically follows a pattern of mixed municipal/Italian private sector shareholdings that are difficult for foreigners to penetrate. The chart below, of the ownership of Venice’s Marco Polo airport, serves as a good example.
Opportunities such as that at Parma, where there had been foreign interests already, arise infrequently.
Who are the Chinese investors in airports?
This report has so-far concerned itself mainly with individual airport projects which have attracted Chinese companies, also where they have not.
Another way of looking at the influence of China on Road and Maritime Belt countries is to examine who its airport investors are and where their preferences lie.
According to the CAPA Airport Investors Database, there are over 40 Chinese firms that have either looked at airport investment opportunities along the Belts or which are in a position to do so (i.e. their investment outlook is not restricted to China). Not all of this accumulated interest has been in the countries mentioned; much of it is in Southeast Asia. A handful of them have taken the plunge and made investments, but only a handful.
HNA Group, which was mentioned with reference to Frankfurt Hahn Airport, has long coveted airports in Europe and once sent a team to scour the continent for them. Six months after the Hahn transaction it secured a 35-year concession on Plovdiv International Airport in Bulgaria’s second city. HNA Group specifically mentioned that it was playing an active role in the Belt and Road initiative at the time of the transaction.
Bulgaria sits between the land and maritime belts as they enter Europe and Plovdiv Airport had also attracted the attention of Hainan Longquanren Century Invest and Development Co., a Chinese investment firm that is a participant in a USD40 billion fund which was established under the 'New Silk Road' economic plan and aimed at boosting trade ties with Europe.
The other significant investor is the Hong Kong-based Friedmann Pacific Asset Management, which initially joined with the Shandong Hi-Speed (rail) Group to form a consortium to take a stake in France’s Toulouse Blagnac Airport. (Central and local governments still retain the majority of the equity.)
More significantly with respect to the Belts, Friedmann Pacific subsequently (Oct-2016) joined forces with China Everbright (Hong Kong and Beijing), through Keen Dynamics, to acquire 100% of Tirana International Airport (TIA), which serves the Albanian capital. Once again the acquisition was described as being "a proactive corporate approach to identify good infrastructure investment opportunities, which is in line with China's 'One Belt, One Road' Initiative.’”
The Chinese conglomerate Alibaba also deserves a mention. It’s only declared interest in the sector to date is Siberia’s Irkutsk Airport, to build a cargo terminal. No transaction took place but the positioning of this airport in the extreme east of the Road Belt is intriguing.
Several investors made pitches for the concession on Belgrade’s Nikola Tesla International Airport in 2017/18 (which was eventually won by France’s Vinci), including HNA Group, AVIC International Holdings, a conglomerate, and the Chinese-ASEAN Investment Cooperation Fund. Belgrade again sits between the two road and maritime belts in Southeast Europe but is more central than Tirana.
Two Shanghai-based entities have made themselves known in this area. Shanghai Construction Company expressed in 2015 the desire to convert and build an unnamed disused Hungarian airport into a European cargo base. Nothing came of it. Meanwhile, Shanghai Yiqian Trading Company actually reached a deal to acquire Frankfurt Hahn Airport well ahead of HNA Group, in 2016, but the deal did not complete owing to financial difficulties adversely affecting the investor.
Finally, Hong Kong-based Sixiãn Holding produced an audacious scheme to build a EUR15 billion greenfield airport between Brescia and Verona in Northern Italy, in 2015. It would have been as close to the optimum location for a Maritime Belt airport in that region as it could be but no progress has been made with the scheme since.
Otherwise, Chinese airport investors seem mainly to be interested in the UK, especially London and Manchester. Several of them have investments there including London Heathrow Airport (China Investment Corporation) and Manchester Airport (Beijing Construction and Engineering). Neither of those places is anywhere near the Silk Road.
Two of them tried to acquire the Ciudad Real airport in central Spain, again to use it as a cargo base, but were unsuccessful. Once again, Spain is well away from the direct influence of the Belts. Several of them are focused on Vietnam, which is part of the Maritime Belt.
In summary, a growing number of Chinese mainland and Hong Kong investors are looking to Europe in particular for airport-related investments and while it is evident some are doing so with the spirit of the Silk Road at the forefront of their thinking, it is not the case with every example.
Airlines are not following suit …
Surprisingly, the airlines are not following them, even though in some cases Chinese airline operators and airport investors are inertwined.
One intriguing fact that emerges is that in most of the Silk Road Economic countries, the only Chinese airline operating is China Southern. The exception is Russia, which all of the major Chinese airlines predictably fly to. The same airline is the dominant carrier at Urumqi, and less so, at Xi’an, at the eastern end of the Road Belt.
HNA Airlines makes for a good example. It is part of the same HNA Group as HNA Airport, the investor, though there is little correlation between its air services, the places where HNA Airport has invested (Plovdiv and Frankfurt Hahn airports) and most of the places along the Road and Maritime Belts, some of which are crying out for the air service the Belts “promise”.
Hainan Airlines route map
…despite a plan of action
That is despite the existence of a top-level One Belt, One Road (OBOR) - related policy document from 2015 which was published by the Civil Aviation Administration of China and called Important Civil Aviation Projects 2015.
It had 51 of its 193 projects focused on OBOR and the projects ranged from CAAC focusing its aeropolitical efforts on the OBOR countries, to Chinese airlines increasing capacity on these routes (apparently their RPK growth to OBOR countries is materially higher than to non-OBOR countries), to China-aligned aircraft lessors (i.e. those that are prepared to finance large numbers of Chinese-manufactured aircraft) focusing their efforts on OBOR countries.
There is some visible action already, such as China Everbright Group's leasing arm pushing Chinese aircraft into OBOR countries (as well as purchasing the Tirana International Airport, as above). There may be more going on behind the scenes.
Chinese airlines may be seen to invest in failed/failing OBOR state-owned airlines, though evidence of that is scant at the moment.