The Civil Aviation Administration of China (CAAC) announced in February that it will build 45 new airports and buy 700 new aircraft over the next five years, at a net cost of US$228.2 billion.
The multi-billion dollar investment comes despite the admission by CAAC head Li Jiaxiang that 130 of the country’s 175 existing airports lost a combined US$256 million last year – which Li described as “a rather small amount.”
As business propositions, small airports are tough. In developed countries, non-aviation-derived income accounts for 70-80% of total revenue generated by large airports. Due to limited passenger flows, smaller airports must depend almost entirely on income from landing slots and handling fees, making losses almost inevitable. The new airports in China are unlikely to prove exceptions to this rule.
This has not dissuaded the government from pushing forward. For one, air travel is booming, and Beijing planners hope that rising passenger numbers will help to at least stanch the losses. According to government figures, there were 267 million passenger flights within China’s borders last year, an increase of about 16% from 2009, and this growth pattern is expected to continue.
“Many regional airports can’t make ends meet right now, but we need to think long-term payback,” said Frank Lin, a consultant at Empower Group.
Officials have publicly argued that even loss-making airports are a public good. Building airports creates local jobs, both temporary construction work and the long-term service positions required to keep airports functioning. CAAC produced figures suggesting that even small airports in China have stimulated local economies by boosting the tourist trade, facilitating foreign investment and enabling local farmers to export their fresh produce to other regions.
CAAC’s Li said the government will actively encourage private investment in the aviation industry to capitalize on the expected uptick in inter- and intra-province flights. And Lin notes that new airports could also help the development of budget airlines.
“The future of low-cost flights is very promising,” said Lin. “There are already some good budget airlines like Spring Airlines, and more are expected to enter the market in the future.” Of China’s current 43 carriers, just eight are held privately.
Planes, trains and development
New airports will also help connect cities that are being bypassed by high-speed rail, said Zou Jianjun, a professor at the CAAC’s Civil Aviation Management Institute of China (CAMIC).
“The main reason for building a new airport is to improve local transportation,” said Zou. “However, building a new airport can improve the overall investment environment and boost industrial development.”
Gao Yuanyang, a professor at the Beijing University of Aeronautics and Astronautics, also sees new airports as being pivotal to China’s ongoing drive to improve logistical connections between China’s growing cities. “As far as I can tell, the investment in new airports will have a positive effect on air traffic volume in the short term,” he said. “New airports will help force airlines to open up more routes at competitive prices. This is important for lower-tier cities in the west of the country where high-speed rail doesn’t operate.”
A related question is whether the new airports and planes will compete with the US$106 billion worth of railway initiatives already underway. High-speed rail has already become a headache for large carriers like China Southern and China Eastern; improved rail services aggravate an already competitive market for plane tickets, and new airports won’t help.
Moreover, new airports in underdeveloped western regions are unlikely to see a surge in traveler demand just because planes can land there. Airline margins may be squeezed further if they are forced by the regulator to provide loss-making routes to the new destinations.
A rash of new airports and accompanied higher air traffic also create another problem for the country: pollution. According to a study by Eurostar, air travel creates 10 times more carbon emissions per passenger than train travel.
Then there is the money – in China, as elsewhere, graft tends to follow infrastructure spending.
The Ministry of Railways is already embroiled in scandal after ministry head Liu Zhijun was removed from his post in February due to “severe disciplinary violations.” Liu, who was responsible for overseeing the country’s US$300 billion rail and high-speed rail network development, stands accused of embezzling more than US$120 million.
The aviation industry is no stranger to corruption either. Just one week before the CAAC announced its new
investment initiative, the National Audit Office (NAO) revealed that it had uncovered accounting “irregularities” at 31 airports in 10 provinces during an investigation conducted in the summer of 2010. The NAO said hundreds of millions of dollars had been pocketed by airport managers through duplicate project applications and fake invoices.
Graver still was the case of Li Peiying, former head of Capital Airports Holdings, which operates 30 airports nationwide – including Beijing Capital Airport. Li was executed in 2009 after being found guilty of bribery and embezzlement of funds totaling US$16 million
Yet CAMIC’s Zou believes this time will be different – after all, Beijing is not targeting present requirements but anticipated future demand.
“Airport investment is different from railway investment,” Zou said. “New airports are being built corresponding to the government’s western development strategy and will be under greater scrutiny. There is less chance of over-investment in this sector.”