The emergence of a mobile middle class, the growing numbers of Chinese traveling abroad and China's status as factory to the world are spurring market demands for domestic and international travel as well as creating fast-expanding air cargo capacity. But fluctuations in world oil prices make it difficult to predict profitability for the Chinese airlines.
The total number of air passengers in 2004 was 121m, up 38% from the previous year (although the jump was largely due to reduced travel during SARS in 2003), with projected growth estimated at around 8.3% per annum until 2022. China is already the world's second-biggest domestic market for air cargo in the world with a 2004 increase of 26.3% over the previous year. The annual rate of increase is expected to stabilize at 13% in the next five years.
Industry realignment
A period of consolidation for China's airlines concluded in 2004 with Air China as the last of China's big three airline companies (including China Eastern, China Southern) to publicly list shares. But the efficiency of these airlines remains low by international standards. Revenue per km per employee in 2003 for China Eastern, for instance, was around one third that of Hong Kong-based Cathay Pacific, and China Southern fared only slightly better. The big three have yet to stabilize profits. China Eastern reported profits for 2004 at RMB514m (US$62m) down from RMB949m the year before, while China Southern was only able to reduce its losses of RMB 358m in 2003 to RMB48m in 2004. Air China reported annual profits of RMB2.5bn in 2004.
Among a number of factors that cause a poor efficiency ratio – high investment in new planes, personnel training and excess staff – the largest problem is oil prices. Fuel alone accounts for one third of total operating costs for Chinese airlines, compared with around 20% for US airlines. Fuel is domestically supplied by the scandal-linked state monopoly, China Aviation Oil at prices fixed by the central government.
The government has adopted measures such as eliminating ticket surcharges and airport construction fees and allowing domestic ticket prices to float between 125% and 55% of the government set prices in order help the industry. With a total national fleet of only 655 planes in 2003, (American Airlines alone had 854) China is currently the world's largest purchaser of new planes and is projected to expand the fleet size to 2,050 by the year 2021. Aircraft are largely supplied by Boeing and Airbus. Airbus's share of new airplane deliveries to China rocketed from 18% in 1993 to 67% in 2004. But recent evidence suggests that Boeing may be pulling itself out of a China sales dive, with the sale of 60 of its new 787 jets to Chinese airlines in 2005. Niche markets do exist for smaller manufacturers as exemplified by Canada's Bombardier Aerospace Group, which has supplied 25 regional sized planes to a number of carriers including Shanghai Airlines.
Chinese firms are themselves proving adept at airplane component assembly. The "Mountain Eagle" is an internationally competitive trainer model currently produced by the Guizhou Aviation Industry Group, and Airbus has committed itself to procurements from local factories worth US$120m a year by 2010. China also has plans for its own aircraft construction, including the manufacture of turbofan airliners.
Foreign airlines are active in China, and the numbers involved will continue to increase. In 2004 China signed its first open skies agreement with Thailand as well as a liberalization agreement with America that will see weekly flights increase from 54 to 249 by 2007 and allow new carriers and routes. Talks with European and other Asian countries on similar agreements are ongoing.
China is forecast to be the key driver for growth in Asia-Pacific air travel; outbound passengers were about 20m in 2004. China is predicted to become the fourth-largest tour destination in the world by 2020 with both the 2008 Olympics and 2010 World Expo. And there are expected to be 100m outward-bound Chinese tourists a year by 2020. Many of these will be traveling by air.
The predicted extra traffic will also have a positive impact on domestic airports, some of which are listed and almost all of which lose money due to under-utilization and poor management. Seen as a must-have for any self-respecting city, local governments have tended to spend lavishly on their airport terminals.
Opportunities exist in the provision of airport and air traffic control equipment. In some cases foreign companies have invested directly in the airports-for example, Lufthansa in the southern city of Shenzhen, and the French firm Thales has won a contract to upgrade the national air traffic control system.
But there is significant airport overcapacity in the Pearl River Delta where there are now five international airports within a 350 square kms-Hong Kong, Guangzhou, Shenzhen, Zhuhai and Macau. But overall, observers say there is plenty of room for growth, especially in cargo, as at present the three major hubs of Beijing, Shanghai and Guangzhou account for 44% of the market, suggesting big potential for other centers.
With the emergence of China's middle class, there exists great market potential for low-cost carriers. Almost three-quarters of airplane deliveries to Chinese airlines over the next 20 years are expected to be regional jets and other single-aisle airplanes. These aircraft will serve domestic and short-range international markets from China's regional gateway cities.