Low cost & regionals: Regional return

Once bitten, twice shy. That is how some Chinese airlines feel after experimenting with regional jets in the late 1990s. It began when China's aviation regulator called on carriers to add regional aircraft to create a hub-and-spoke network. Many did, but made hefty losses, leaving them wary.

For years regional sales campaigns went almost nowhere in China, but now carriers are taking another look. Shenzhen Airlines is forging a joint venture with US firm Mesa Air Group, while Hainan Airlines, which already operates 32-seat Dornier 328Jets, is planning to aggressively add larger regional jets.

State-owned manufacturers China Aviation Industry Corp (AVIC I) and China Aviation Industry Corp II (AVIC II) are also in on the action. AVIC I is building a 90-seat regional jet called the ARJ21, while Embraer's 50-seat ERJ-145s are being assembled in China through a partnership with units of AVIC II.

Market potential

"The market exists for regional aviation in China," says Embraer China managing director Guan Dongyuan. "Regional aircraft represent only about 7% of the fleet in China. It is far behind Europe, which is about 36%, and the USA, which is about 43%. From that 7% you can see there is great potential."

One catalyst appears to be the Olympic Games, which Beijing will host in August 2008. Chinese airlines, which almost universally dislike turboprops, anticipate huge growth in travel and many tourists will hope to combine visits to Beijing with trips to smaller cities.

The market is also maturing, say observers, and there will be more demand for services to secondary cities. Air travel is still concentrated around Beijing, Guangzhou and Shanghai, through which most flights operate, but there are 140 other airports seeking business and dozens more are being built.

In addition, the government is trying to make the operating environment more suited for regional operations and is offering subsidies and other incentives in some areas, such as the north-west. Operators of small aircraft have long complained they must pay the same airport fees and air navigation charges as operators of large aircraft, which, together with strict regulations over domestic airfares, keeps yields low.

"There have been a few changes that make things much better now," says a senior Hainan Airlines executive. "We now have more passengers travelling from the medium-sized cities. We also have more smaller airports that are suitable for this kind of aircraft. And the government has been encouraging smaller aircraft to fly regional routes."

The final point is perhaps most important. High taxes on small-aircraft imports and hefty charges over the sector have until now prompted many to fly larger Airbus and Boeing aircraft on higher-yielding trunk routes. "There is still a huge imbalance between regional aviation and trunk aviation," says Embraer's Guan. "But we can see the movement inside the Chinese government. They have recognised the importance of regional aviation. There is still some way to go, but the trend is there."

Mesa's Chinese move

Shenzhen Airlines has agreed a joint venture with US regional specialist Mesa. The new airline is to be called Kunpeng Airways and is being prepared for a late-2007 launch, initially operating 50-seat jets on domestic routes.

Also last year Hainan ordered 50 Embraer ERJ-145s and 50 Embraer 190s in the biggest-ever regional deal in China. Deliveries of the 50-seat ERJ-145s are due to start around September and the 106-seat E-190s soon after.

The ERJ-145s will be built in China and the E-190s in Brazil. They will be operated by a new airline Hainan has set up in Tianjin called Grand China Express, which began operating some of Hainan's 328Jets at the end of March and should eventually operate all the Hainan Group's regional aircraft.

AVIC I has, meanwhile, had more success with ARJ21 sales to Chinese airlines, one of its key selling points being that high import taxes do not apply to it.

The home-built aircraft is due to enter service in 2009. Although several years later than planned, the delays could prove beneficial as the market should be even more suited for regional operations by then.

Says the Hainan executive: "Things are better now and they will improve further in the near future because there are even more changes coming."

Source: Airline Business