With growth rates among the highest on the planet, China's air transport sector should be the envy of much of the rest of the world. But with such rapid expansion come many challenges, and the Chinese industry is being tested in new ways every year.
Air traffic management systems are being pushed to the limit and airspace congestion is becoming a problem airport infrastructure is at its limits in many parts of the country many of China's airlines remain inefficient and unprofitable and are struggling to cope with the realities of new competition and the regulatory systems are trying to cope with so much expansion and change.
Next year may prove to be the most challenging ever for the sector, as demand for air travel is forecast to grow far more than normal in the run-up to the 2008 Olympic Games, which will be held in August in Beijing. But being a planned economy is beneficial in many ways, as regulatory authorities are able to make necessary changes rapidly where necessary. Overall the Chinese industry is expanding steadily and the outlook is generally positive. And it has come far in a short time. Barely 20 years ago China had just one airline, operated by the regulator, and it carried only a few million passengers each year as air travel was not open to the average Chinese citizen. This year alone domestic passenger numbers are forecast to increase 16% to around 185 million.
LATE DEVELOPER
Things only started to change in the mid- to late 1980s, when the government split the single Civil Aviation Administration of China (CAAC) airline into several regional arms in a bid to spread aviation beyond the capital Beijing. In the following years many more new airlines were launched by municipal and provincial governments, and by the early 1990s there were around 30 airlines in the country.
The industry was not ready for such intensive growth, leading to a situation whereby essentially all the country's airlines were losing money. Safety deteriorated and hundreds of people were killed in accidents, giving China a reputation in the early 1990s of having one of the world's worst safety records.
The brakes were put on expansion in 1994 and the government stopped issuing new airline licences. Aircraft imports were controlled and foreign expertise sought. Change came quickly, and China's aviation safety record is now one of the best, with no fatal accidents since November 2004, despite domestic traffic growth by passenger numbers in the double-digit percentages each year.
But profits have often remained elusive for the airlines. The regulator has dealt with this by forcing consolidation and airline mergers. It is now a much more stable environment, but there are concerns that there are again too many airlines following an easing of regulations to allow the first privately owned carriers to be established. Since 2004 more than half a dozen new airlines have launched, with several more seeking approval.
The CAAC is being cautious again about issuing new licences, as it is concerned about an overheating market. This is particularly true ahead of next year's Olympics, which should boost traffic even more strongly and in turn create many new challenges.
There are 24 airlines licensed in China, and the CAAC sees the right number as being somewhere being 20 and 30. As a result it will be holding back from issuing new licences, according to CAAC minister Yang Yuanyuan. Many observers also expect to see consolidation among some of the weaker new players in future. Overall, Yang is positive about the future and predicts that by 2020 three of the country's airlines will rank among the world's top 10, when measured by operating revenue and revenue passenger kilometres.
In its latest five-year plan for economic development, which runs until 2010, the government expects around 140 billion yuan ($18.5 billion) to be invested in airport development, during which more than 40 all-new airports will be built. There are now a little more than 140 airports in the country, but by 2010 there are expected to be 186, and 220 by 2020.
New airports are needed as traffic growth rates have been nothing short of phenomenal, with domestic air traffic doubling roughly every five years. At the end of this decade growth rates will probably start to slow, but they should still continue at double-digit percentages between 2011 and 2020, according to CAAC estimates of about 11% annual passenger traffic growth. Between now and 2010 it expects average growth of around 14% annually, although many see this as conservative.
While there is obvious business and tourism demand to China, and the CAAC has been agreeing far more liberal air-services agreements to allow more foreign carriers to serve the country, it is also the world's fastest-growing outbound tourism market. And there is still much more room to grow. Chinese airline traffic is less than one-fifth that of North America's, but it will increase to more than half the size by 2026, say Airbus and Boeing forecasts.
This year alone, traffic growth is expected to come in around 15-20% domestically, after a similar increase last year. Next year it may exceed 20%. Fleet growth will also be enormous, say industry experts. One in 10 new aircraft produced by the world's major manufacturers will be destined for China over the next two decades and it will be the second-largest buyer of new aircraft after the USA, according to both Airbus and Boeing.
FOURFOLD GROWTH
The fleet size is expected to quadruple over that period. Airbus last forecast 2,929 new passenger aircraft would be required over 20 years and Boeing 2,600 aircraft, but forecasts are likely to be revised upwards later in the year.
International Air Transport Association director general Giovanni Bisignani said at a recent conference in Beijing that China has been coping well in terms of keeping up with growth, but needs to stay focused. "China has an important role in the industry, and is a future global leader for air transport," he said.
"By 2010, the largest single market for aviation will be intra-Asia, accounting for nearly a third of all air travel, with China at the centre. China is at a critical moment that is also a great opportunity. And to build a more successful future, China has to avoid the mistakes made in other parts of the world."
IATA has been working closely with the CAAC on implementing change over the years, and the association is providing regular guidance to the regulator. A particular challenge is on the personnel front, and China is doing a lot to try to cope. It is allowing new pilot training schools to be established and more foreign pilots to fly within China.
The new cargo airlines that have been launched in China recently have done so with foreign investment, which has added international expertise, and three of the country's airlines are due to join multilateral alliances later this year: Air China and Shanghai Airlines will be joining the Star Alliance and China Southern Airlines is due to join SkyTeam. China Eastern Airlines is meanwhile seeking regulatory approval to sell a stake to Singapore Airlines, which already is a minority stakeholder in cargo carrier Great Wall Airlines.
Great Wall is one of several new cargo airlines to have launched in recent years. Most of the new entrants are passenger carriers operating domestic services with the original intention to be low-cost operators. But they have had difficulty operating as genuine low-cost carriers due to restrictions on pricing and on which routes they can operate.
The Sydney-based Centre for Asia Pacific Aviation forecasts that China's aviation industry could grow by up to 10 percentage points above current rates of growth if central controls are 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 the aviation market from achieving its full potential," it says.
Many challenges face the Chinese aviation market, but most observers say it is largely a positive story. "A market that can achieve a perfect safety record, implement global electronic ticketing in a year and a half and grow business by 14% certainly has the ability to lead and manage change in Asia and globally," says IATA's Bisignani.
Source: Flight International
