China special: Chinese walls - Business aviation

Lack of basic infrastructure, high costs and a cumbersome bureaucracy have hampered China's aviation sector, but operators are optimistic

A meeting with Jay Shaw can almost seem like an evangelical session if you engage BAA Jet Management's chief executive in conversation about China's business aviation market, and his company's plans for it.

"There is so much going for China. It is the world's fastest-growing economy and a magnet for almost every major multinational. It is also becoming a place with a lot of rich people," he says, before adding with a small smile: "Where there's money, it becomes very exciting for us in the business aviation industry."

This optimism led to the formation of a joint venture earlier in 2006 between BAA, a Hong Kong-based charter and management company, and Chinese domestic carrier Shenzhen Airlines - the first of its kind in China.

Based in Shenzhen, a city just 45 minutes by train from Hong Kong and in the fast-growing Guangdong province, it will have a fixed base operation (FBO), customs, immigration and quarantine (CIQ) facilities, and aircraft and maintenance hangars. The ambitious plan is to eventually have a string of FBOs in China, possibly with a foreign partner, and begin comprehensive charter services using a fleet of Chinese-registered aircraft.

"The market is going to take off in a big way in China in the coming years, and we want to be in place and ready for it when it does," Shaw says confidently.

Optimism abounds about China when you talk to almost anyone involved in the Asian aviation industry. Estimates of the actual market for business jets fluctuate from 500 to 2,000, but even the lower end of that range is several times higher than the current 26 (including charter and government aircraft).

The optimism, however, is tempered by the challenges. "We're still talking about potential, and there's no big increase in the number of jets in China over the last few years," says David Dixon, the Hong Kong-based Asia-Pacific vice-president for Bombardier. "I get asked about China several times a week and I have the same message for everyone - things don't change overnight here, and the market will develop slowly."

Still fresh on everyone's mind is the lesson from Rainbow Jet. China's Shandong Airlines took over the charter operator in 2001 and, optimistic that the market was about to take off, ordered four Bombardier Challenger 604s. But in 2002, realising that the VIP charter market was limited, it converted two of the orders to CRJ700s in airline configuration.

Rainbow Jet struggled, and tried to grow its portfolio by adding managed aircraft. However, it failed to find any customers. In March, after reportedly heavy losses, it shut its business jet charter operation and sold both the 604s. It continues to operate five Cessna 208 Caravans, but only on general aviation and government missions.

Airspace ambiguities

Deer Jet, the subsidiary of Hainan Airlines, is now the largest of the three remaining domestic operators with four Hawker 800s, one Gulfstream GIV, one G200 and one Beechcraft Premier I. Air China Business Jet has one GIV and one Bombardier Learjet 45XR, while Shanghai Airlines Business Jet has one Hawker 800.

"The market is still too small for companies to rely solely on charter, especially if these are their own aircraft. For now, you make money only by managing aircraft," says Yuan Bingbing, chief marketing officer at Deer Jet.

When asked, observers say two major impediments are a dire lack of proper infrastructure and ambiguous control of airspace. "China has about 300 airfields in total, but only around a third of those are open to business jets. By comparison, in the US, there are about 5,500 airfields where business jets can land and that number doubles when you include light jets," says Chris Buchholz, executive director and chief operating officer at Hong Kong-based Metrojet.

"It makes incredible sense to have more airfields and airports in a big country like China, where the infrastructure like roads and railways are not well developed in many parts. Airports have an economic multiplier effect and help develop a country's hinterland, something the Chinese authorities are trying to promote, so it makes sense to develop the airports."

Existing airports lack the facilities, primarily FBOs, which are essential for users of business aviation. There is only one proper FBO in China, at Hongqiao Airport in Shanghai, while one more is being built in Beijing. In the US, for example, there are an estimated 4,500 FBOs that allow for separate VIP facilities.

"People who use business aviation are CEOs and big businessmen. They want to breeze through checks without queuing up, get into a waiting car and go off for their meetings. You don't have that in China now," says one Southeast Asia-based charter operator.

Investing in the future

Buchholz believes that it is a chicken and egg question. "You need the critical mass of business jets to justify the existence of and the investment in FBOs, but you also need the infrastructure to attract corporate travel. The answer has to be to grow them in tandem," he points out.

The industry is also engaging the Chinese authorities. The Asian Business Aviation Association (AsBAA) has formed a government relations committee, and its role includes regular dialogue with Chinese officials, says vice-chairman Chuck Woods.

Steps are being taken by the authorities, with the Civil Aviation Administration of China (CAAC) planning to spend ¥140 billion ($17.7 billion) to build an average of eight airports annually until 2010. That does not remove the other part of the problem, which is that most of China's existing airports and airspace are controlled by China's military.

"When the military is involved, it is much more difficult. You must file flight plans and get permission to land about seven days before the flight, and restrictions on the use of airspace may mean you cannot use the shortest route," says the South-East Asia-based operator. "The users of business jets must be able to change their itineraries at late notice, and the authorities need to recognise this."

It is easier for the Chinese-registered aircraft, with an official from Shanghai Airlines Business Jets saying his company's jets can fly to a domestic airport with a day's notice. "We have a business relationship with the army, and that makes it easier," he says.

The problem, however, is that most business jets that fly into China are based overseas - and the number is growing. It is estimated that about 1,800 foreign business aircraft visited China in 2005, up almost 30% from 2004.

High costs are another issue, with those buying aircraft in China facing 22% in taxes. "That is a big disincentive to buying business jets," says the Shanghai Airlines source. "Why should someone buy business jets when the government says the final amount due is almost a quarter more than the list price?"

Overflight and landing fees are also a disincentive, with non-China registered aircraft charged up to eight times more than a Chinese N-registered one. Companies can only get around this with a joint venture with a company that has a Chinese air operator's certificate (AOC).

"Most of the jets are based outside China, in cities where their owners are. Many owners do not want to register their planes in China," says Jolie Chung-Howard, director of business development at Tag Aviation Asia. "As a result, those wanting to charter these planes to travel to China face higher costs."

Even if you own an aircraft in China, maintaining it could be a problem. China recently introduced a Part 135-equivalent regulation, which gives business jets less stringent check criteria than airlines. That, however, does not get around the lack of facilities. "We can have D checks in China itself for our Hawker aircraft, as Hainan Airlines has the facilities and accreditation," says Yuan. "But for the GIV, checks have to be done outside China, in either Singapore or the USA. That adds to the operating costs."

Another problem is questions over the quality of maintenance in China. "The perception is that the maintenance and technical standards may not be as high, and that could affect the aircraft's resale value," says Chung-Howard.

Despite the challenges, almost everyone remains committed and the numbers are there. Chris Bogaars, Cessna's sales director for Asia Pacific, says his company is making enough sales to justify its continued involvement. "There is a new generation coming up, and they are more amenable to the concept of business aviation," he adds.

Domestic companies are also planning to build business jets, with the First Aircraft Design Institute (FADI) conducting a feasibility study that should be completed by the end of 2006. Embraer's joint venture with Harbin Aircraft, which now manufactures the ERJ-145 for Chinese airlines, could also produce the Brazilian company's Legacy business jets.

Business advantage

Changing mindsets could yet prove to be the biggest challenge for operators. "There's still a resistance to buying business jets or being seen on one. People associate them with the very rich who are flying off to Bali for the weekend," says Bombardier's Dixon. "Business jets bring investors into China, not golfers."

This will come as the benefits of aviation become more evident to the Chinese authorities, says Woods, who is also chief executive officer of Macau-based Jet Asia. "In the USA, the general aviation industry contributed $100 billion to the economy. When the Chinese authorities start seeing the benefits, they will open up," he adds.

China's attitude to business jets has changed in the last few years and that will continue, one local observer points out. "Things that took place in the USA 20 years ago are happening now. More operators are involved, and some will win if they find the right business model," he says. One model everyone is studying closely is the BAA-Shenzhen Airlines joint venture.

"You succeed by creating the environment for your success. If you are going to wait for things to happen, you will not succeed in business," says Shaw. "We are the first to go in like this, and we are determined to make it a success."

Source: Flight International