China's airline sector leads Asia in opening up its local aviation market to competition - and the reforms are gathering pace
The Chinese government has introduced sweeping reforms to the country's air services regime to improve the local airline industry's competitiveness and drive economic growth.
China's protectionist policies of the past were aimed at helping its state-owned carriers, but the authorities have moved to introduce liberal reforms because aviation is seen as a key driver of the economy.
Derek Sadubin, general manager for information services at the Centre for Asia Pacific Aviation in Sydney, Australia, says the reforms are a reflection of the macroeconomic changes taking place in China. It is in line with the "broader picture of China's development" and "reflects the kind of opening up of all aspects of the economy", he says. "They view aviation as a key driver of growth in tourism and trade."
In terms of reforms to aviation, "what has been happening in the Chinese market has been happening at break-neck speed", says Sadubin. "They have done in 20 years what has taken half a century in most other aviation markets."
He says the adverse impact of last year's SARS outbreak and, before that, the 11 September terrorist attacks, temporarily delayed some reforms. But now that the Chinese airlines have rebounded quickly, the pace of reform has picked up again.
One of the boldest moves so far was the announcement in January of an "open skies" regime for the southern Chinese provincial island of Hainan.
Under the new regime, foreign airlines can operate as many passenger or cargo services as they wish to Haikou Meilanairport in the north of the province and Sanya Phoenix in the south of the island, as well as to third countries. Foreigncarriers are also permitted to stop in Hainan and travel on to any city in China, with the exception of Beijing, Guangzhou and Shanghai.
Civil Aviation Administration of China (CAAC) deputy director international affairs and co-operation, Wu Zhou Hong, says the CAAC is considering an "open skies" policy for other cities apart from the three major gateways of Beijing, Guangzhou and Shanghai.
"I think that is our priority for Chinese cities other than Beijing, Shanghaiand Guangzhou - to open up market access, including fifth-freedom traffic rights," he says.
Wu says it would be relatively hard to introduce an "open skies" policy for Beijing, Guangzhou or Shanghai because the CAAC needs to take into account the interests of China's three major airline groups, but "for other airlines it is not a problem". Air China, China Southern Airlines and China Eastern Airlines are based in Beijing, Guangzhou and Shanghai, respectively.
Open skies interest
Sadubin says an open skies policy could prove popular with airports in western China. Already the company in charge of the airports in the north-western province of Xinjiang has expressed a keen interest in such as policy. "We want to strive for fifth-freedom rights for Urumqi airportÉand apply to have 72h on land visas at Xinjiang's airports, including Urumqi airport," says Zhou Bin, a senior official at Xinjiang Airport.
Zhou says the airport company wants these concessions from the CAAC to boost traffic to Xinjiang by positioning Urumqi as an international hub, particularly for traffic between Central Asia and China.
Sadubin says the open skies policy for Hainan "was a fairly symbolic move because it showed the intention of the CAAC to open up access and after that, we saw more liberal air services agreements signed with countries such as Thailand".
In the past 15 months, the CAAC has signed more liberal air services agreements with several countries, including Australia, Pakistan, Thailand and the USA. In most cases the Chinese have granted fifth-freedom rights for cargo (see P42) and in some instances - Pakistan, Thailand and the USA - also fifth-freedom rights for passenger services. Pakistan, for example, gained rights to operate passenger flights beyond China to Tokyo and Los Angeles.
Thai-designated carriers, meanwhile, are permitted to operate beyond China to destinations in South-East Asia. These reforms are significant because in the past the CAAC was reluctant to grant fifth-freedom rights because state-owned carriers would have to compete more with foreign carriers.
"We are changing because of the huge market demand," says Wu, who works in the CAAC department responsible for negotiating China's international air services agreements. "The demand [for air services] can't be met just by the Chinese airlines. It has to be met by Chinese and foreign carriers. Our first goal is to meet these market demands. That way we can speed up liberalisation."
Another reason the CAAC is willing to grant fifth freedoms is that it wants to have international air hubs, says Sadubin. Many of the fifth-freedom rights for cargo, for example, have related to Shanghai. Sadubin says the CAAC wants to make Shanghai a hub, as well as Guangzhou and Beijing. It is granting fifth freedoms because it has seen how other countries, such as Singapore and the United Arab Emirates, have created international hubs using such liberal air service accords, he says.
Sadubin suggests that one reason the reforms are happening now, rather than earlier, is because the country's state-owned carriers are now stronger and better positioned to compete internationally.
In 2000-01, the CAAC set out to increase the scale of China's three leading carriers - Air China, China Eastern Airlines and China Southern Airlines - so the three could compete. It achieved this by letting the big three take over smaller, state-owned carriers and implement massive refleeting programmes.
The small, state-owned carriers that have remained outside the clutches of the big three airline groups have also gained concessions from the CAAC. Previously only the big three were allowed to exercise China's international traffic rights, but now the smaller carriers are getting in on the act. Early this year, the CAAC gave permission for Shanghai Airlines and Hainan Airlines to operate to Germany and Hungary, respectively.
Hainan also has an application before the CAAC to operate passenger flights from Beijing to New York Newark. But Wu says it is likely to be approved. He says the CAAC is now granting smaller Chinese carriers traffic rights to some long-haul international routes "because the CAAC wants to be fair with rights allocation to every carrier. No matter whether large or small, every carrier has equal rights."
Service rights
Sadubin predicts: "We will see more and more international service rights granted to smaller carriers and this is all related to the authorities' pro-competition stance." He says the government needs to create jobs for the local population and allowing more competition is seen as a way to fuel economic growth, boost trade and, ultimately, create jobs.
Competition policy might also be a factor behind the CAAC's decision to open up Shanghai to all domestic airlines next year. "In the past, only China Eastern and Shanghai Airlines could set up an operations base in Shanghai and Air China and China Southern, for example, were not allowed to set up in Shanghai," says Wu.
But next year any domestic airline will be allowed to operate from Shanghai to other cities in China. Shanghai was chosen first "because of market demand, which is huge in Shanghai", says Wu. Asked whether the CAAC is considering this policy for other cities, he says: "Yes, I think so" but declines to elaborate.
Competition in China's domestic market is also set to intensify over the next 18 months because the Chinese authorities have decided to allow private carriers to operate domestically. At least four carriers have applied to the CAAC to operate domestic services, including Okay Airways in Tianjin, Jetwin Air Cargo in Shenzhen, Spring Autumn Airlines in Shanghai and United Eagle Airlines in Chengdu.
All these carriers, apart from Jetwin, plan to operate passenger services based on the low-cost business model. Okay, for example, has been examining low-cost carriers in Europe such as EasyJet, and Spring Autumn Airlines is sending a delegation to the USA to look at Southwest Airlines.
While there is the threat of increased competition from the private sector, the Chinese authorities are easing restrictions so legacy carriers can gain more access to private capital. China Eastern Airlines and China Southern Airlines have already completed IPOs and Air China is preparing to float late this year or early next year.
Currently, private ownership - including foreign ownership - is capped at 49%, but this may change, says Wu. He confirms that the CAAC is considering easing private and foreign ownership limits but quickly adds that this reform is "only under consideration, so there is no formal policy yet".
LEITHEN FRANCIS / BEIJING
Source: Flight International
