Business aviation has yet to take off in China despite great expectations. How can a conservative market be convinced of the benefits of corporate flying?
Business jet manufacturers expect a trickle of orders over the next year from Chinese corporations, but barriers must be overcome before a long-anticipated flood of orders is unleashed.
There are only 13 business jets operating in mainland China outside the government sector. Over the past year this figure has remained stable, despite increasing hype about the potential of the market, driven in part by the establishment of an annual exhibition in China organised by the US National Business Aviation Association (NBAA).
Next week the NBAA will hold its second annual Asian Business Aviation Conference and Exhibition (ABACE) in Shanghai. Manufacturers are backing the event in the hope that it can be used to promote business aviation in China and spur on sales to Chinese corporations.
Nine of the business jets operating in the private sector in China have been acquired directly by airlines for the VIP charter market. But the four Chinese airlines that operate these aircraft are not looking to expand their charter fleets and are instead focusing on building managed aircraft portfolios.
The largest business jet operator in China, Hainan Airlines subsidiary Deer Jet, established a managed aircraft portfolio earlier this year with the delivery of a Raytheon Premier I owned by Hangzhou Daoyuan Chemical Fibre Group. A Hainan source says Deer Jet is negotiating with a Shanghai-based corporation that is also interested in acquiring a Premier I. Deer Jet already has an outstanding order with Raytheon for four more Premier Is, the first of which is scheduled to be delivered late next year. But it is hoping to convince corporations to commit to the aircraft and is not interested in adding the Premier I to its charter fleet, which consists of one Gulfstream IV and four Raytheon Hawker 800XPs. “If this is successful [managing Premier Is], a new model would be established in China,” says the Hainan source.
The other three business jet charter companies in China – Air China Business Jet, Shandong Airlines subsidiary Rainbow Jet and Shanghai Airlines – also say they are in talks with several Chinese corporations interesting in acquiring business jets.
Fleet plans
“We have a plan to improve our fleet, but our company’s leaders think we should not occupy an aircraft totally and we should manage an aircraft,” says a Shanghai Airlines source. He says Shanghai’s business jet division, which now operates one Hawker 800, is negotiating with two corporations looking for an operator to manage a Gulfstream G350 or Bombardier Challenger 604.
Shanghai is trying to convince the corporations to acquire a Challenger 604 because it is similar to the Bombardier CRJ200, a type it uses for scheduled passenger services, and occasionally for corporate shuttles. Shanghai believes it has a competitive advantage over its competitors in building managed fleets because it owns a ground-handling company and fixed-based operation (FBO) at Hongqiao airport near downtown Shanghai, a fast-growing city with the largest group of potential corporate jet customers.
Shandong’s Rainbow Jet says it is also trying to convince Chinese corporations to acquire Challenger 604s. A Shandong source says the carrier is in talks with several corporations interested in acquiring aircraft within the next year and believes it has a competitive advantage because it is the only Challenger operator in China. Shandong operates CRJ200s on scheduled services and its Rainbow Jet subsidiary operates two Challenger 604s on charters.
Air China Business Jet says it too “has great interest in managing a Chinese corporation’s jet”. It now operates a GIV and a Bombardier Learjet 45XP. The GIV is leased by Air China, while the Learjet is owned by Japanese charter company Global Wings but operated by Air China and used mainly for domestic charters within China.
General aviation companies throughout China are also vying to operate aircraft on behalf of local corporations. A GA company in Xian operates two Cessna Citations for Broad Air Conditioning and several Chinese operators of helicopters and small fixed-wing aircraft are looking to expand into business aviation. Industry sources say foreign companies, including business jet operators from Europe, North America and elsewhere in Asia, are considering acquiring stakes in these small operators to help fund the establishment of a business jet operation.
Macau-based Jet Asia and Hong Kong-based Metrojet, for example, are considering buying stakes in Chinese general aviation companies to improve their access to the mainland market. By owning part of a company that holds a Chinese air operator’s certificate (AOC), Jet Asia and Metrojet could avoid paying some fees that are only charged to overseas operators and could accept bookings with less notice. “We are thinking of going in that direction,” says a Metrojet source. Metrojet, which operates three Gulfstream G200s, has held talks with potential Chinese partners. It is familiar with the Chinese market because 60% of its flights now connect Hong Kong with mainland China.
Start-ups emerge
Jet Asia flies more to other Asian countries, but is interested in gaining a larger share of the domestic Chinese market. It operates two Bombardier Challenger 601s on charters and manages a Bombardier Global Express and Embraer Legacy. Several potential GA start-ups have also emerged, backed by a combination of Chinese and foreign investors, and have begun the process of applying for AOCs.
“There is a lot of activity with new companies,” says an Asian-based representative of a major business jet manufacturer. “But some question if they will come to fruition. There are several with business plans I am not sure are solid.” The Hainan source warns that the business aviation market in China “is not mature. Anyone who tries in this market will lose money.”
The potential new operators have already begun competing with Hainan and the other operators to manage jets on behalf of corporations, which are prohibited by Chinese regulations from operating their own aircraft. Some of the new operators are also considering acquiring their own aircraft for use in the charter market, but manufacturers expect most new orders to come from corporations rather than charter operators.
“The charter business is too unpredictable, but a managed model is a no-lose,” says a sales executive for one manufacturer, while another executive says: “That is the right direction. We’re clearly seeing more and more companies interested in buying aircraft. We’re getting a lotof enquiries.”
Raytheon has had the most success, selling seven of the corporate jets operating in China. Bombardier has sold three there, will deliver a fourth later this year and is confident it will finalise new deals within the next few months. Gulfstream only placed its first aircraft into China in late 2003 and is believed to be close to securing additional commitments.
Dassault Aviation has so far failed to sell any Falcon jets in China, but sources say it recently secured a commitment for a used Falcon 2000, with delivery planned for later this year. Cessna is still looking to place its first aircraft in the charter sector, but sold Broad Air Conditioning a CitationJet in 1997 and a Citation Excel in 2000. Cessna also has had success in the government sector, last year selling two Citation XLSs to the China Flight Inspection Centre and six CJ1s to the Civil Aviation Flight University of China.
Fierce competition
The manufacturers are fighting for orders from several potential new customers. Competition is fierce, with heavy discounts available because the manufacturers are keen to expand their presence in the Chinese market. But sources say the discounts may not be enough to overcome high operating costs in China and some companies are demanding revenue guarantees the manufacturers are unable to provide. Over the past two years several airlines in China looked at establishing corporate charter divisions, but decided against acquiring any business jets.
“There is a desire to have more charter companies, but there’s a lot to be learned in terms of managing charter operations in China,” says a sales executive for one manufacturer. All four charter operators in China are unprofitable and complain the market has been flooded with excess capacity over the past few years. As a result charter prices dropped to some of the lowest rates in the world, although operating costs in China are higher than elsewhere. “The competition is horrible,” says a Hainan source. “We had several start-ups, the same demand, but a lot more capacity.”
The stiff competition prompted Hainan late last year to decide against renewing the leases on two of its six Hawker 800s. One aircraft was returned at the end of last year and the second early this year. “Four is now perfect and if the market improves we’ll add more,” says the Hainan source.
High costs
Air China, Shandong and Shanghai have been reluctant to expand their charter fleets in the face of stiff competition. Shanghai has indefinitely put on hold plans to add a second Hawker 800. “It’s very hard to get a profit from charters because of the high operating cost,” says the Shanghai source. Industry sources say Air China and Shandong last year considered shutting their business jet divisions. But both operators say they are committed to staying in the market and conditions are improving. “The environment for business aviation is getting better and better,” says an Air China source.
Air China and Shanghai say their business jets are now flying 40h a month, while Rainbow Jet says its monthly utilisation is up to 60h. The Hainan source acknowledges Deer Jet is still unprofitable, with the exception of two Boeing 737-300s it uses for travel agent charters, but says 800XP and GIV utilisation rates are improving. As a result, Deer Jet is considering adding a second used GIV this year. The first GIV was subleased last June from Raytheon and was initially intended to be an interim solution until the delivery of a Hawker Horizon set for September 2006.
The operators say more local corporations are beginning to charter their aircraft, an encouraging sign that could lead to more companies acquiring their own fleets. Two years ago charters from multinational corporations doing business in China generated almost all the business for Chinese business jet operators. While Air China and Deer Jet say foreign companies still account for more than half of their business, Rainbow Jet and Shanghai say half their customers are now local companies. The operators say over the last year Chinese firms have also begun chartering flights to Australia and Africa. “It’s a beginning,” says the Shanghai source. “They are starting to change their mind. They realise business charter is not a waste of money. It saves time and is more convenient.”
But the operators and manufacturers warn several challenges must be overcome before the Chinese market really starts to grow. They say stiff import taxes, a lack of infrastructure and a conservative business culture scare away potential customers.
Chinese corporations are generally reluctant to acquire charter aircraft and do not understand jets can be used as an effective business tool. Individuals also do not like to flaunt wealth and are not interested in using jets as a recreational vehicle. “It’s kind of the attitude of the people who run these companies,” says an Asian-based sales executive for one manufacturer. “You need to target younger entrepreneurs.”
Chinese airports also lack the VIP facilities some corporations require. Most major airports have a separate entrance for VIPs and a small lounge. But there is only one pure FBO in China, at Shanghai’s Hongqiao airport, and next week it will host a static display of at least 10 business jets as part of the ABACE show.
Tax relief hope
“The ground-handling service in China is unprofessional compared with the USA because there is less infrastructure for business aviation,” says the Shandong source. Operators hope several airports, including Shanghai Pudong, Beijing and Guangzhou, follow through on plans to open full-service FBOs with foreign partners. They are also hoping for relief from the government in the form of lower taxes and charges and less stringent restrictions on filing flight plans. Operators now must file flight plans the afternoon before a flight and some dual-use civil/military airports require additional notice.
Also hampering potential sales is a reluctance by Chinese corporations for joint ownership. Operators say there is no legal framework in China to support fractional ownership and group ownership is frowned upon because companies want to control their aircraft. “We’re trying to advertise it, but it’s hard to convince people,” says the Hainan source.
But group ownership has caught on in Hong Kong and Chinese operators hope mainland Chinese businessmen will follow suit. Metrojet already manages two G200s on behalf of two groups of owners and will add another G200 and a G450 next month, also on behalf of groups of local owners. “In Hong Kong, friends get together to buy aircraft,” explains the Metrojet source. “It’s not fractional. In Asia the fleet is not big enough for fractional.”
BRENDAN SOBIE/SINGAPORE
Source: Flight International
