Flying coup

Five centuries ago, would-be pilot Wan Hu tied himself into a wicker chair attached to two kites and 47 arrow rockets and, perhaps unwittingly, gave birth to China's aviation market.

Wan certainly didn't have a paper ticket for his journey and, now, neither do the vast majority of Chinese passengers on domestic flights.

E-tickets have emerged as one of the most common and effective tools used by small private airlines to remain competitive in the industry.

This matches the goals of the International Air Transport Association (IATA), which wants its 261 member airlines to abandon paper tickets by the end of 2007. E-tickets cost an average of US$1 to process versus US$10 for paper tickets.

The first e-tickets appeared in China three years ago but now almost 95% of tickets on domestic flights are electronic, said Hou Kan, an official at the IATA.

However, it is taking longer to initiate change for international flights, where less than half of tickets sold before the end of April were e-tickets.

Progress has been slowed by requirements for information to be shared between foreign airlines, Chinese airlines and foreign airports.

It is on the domestic front that cheaper electronic tickets have made the greatest impact, keeping small airlines afloat in a market that is growing by 8% every year and last year saw 90 million seats sold.

China opened its aviation market to private and foreign investors in January 2005. By the end of 2006 there were five private and six joint venture airlines operating in the mainland with a combined total of 39 planes and registered capital of US$340 million, according to the Civil Aviation Administration of China (CAAC).

The CAAC has also issued licenses to a dozen other private airlines and is reviewing more than 20 applications.

Price cutting

In July 2005, Spring Airlines, the second private airline in the mainland, began offering tickets for US$25 (RMB199), about one-fifth of regular prices. The three giants in the industry – Air China, China Eastern Airlines and China Southern Airlines – accused the company, which was flying only three planes, of disturbing the market order.

But Spring argues that it only lowers prices to fill seats that would otherwise remain unsold.

"What we want least is an empty seat, and if we are to have one, we sell it at as low a price as needed. In this way the cost per unit is reduced," said Zhang Lei, a spokesperson for the airline.

Spring sold 95.4% of its seats last year, the highest percentage in China. More than 40% of tickets were sold through its parent company, Shanghai Spring International Travel Service, one of the largest travel agencies in the country.

To minimize costs, the airline has followed the example set by Southwest Airlines in the US and Ireland's Ryanair. It offers no business class seats or free food and puts 180 seats in a cabin meant for 150. Spring posted net profits of US$3.9 million in 2006 and US$1.3 million in the first quarter of 2007.

"If we consider only the market, we have great expectations," said Zhang.

Another success story is East Star Airlines, based in Wuhan, capital of Hubei province and the most populous city in central China. The airline launched in May 2006 and ended the year US$780,000 in the black.

United Eagle Airlines, the first private "low-cost" airline in China, was less fortunate. Last August, 10 months after its first flight, the airline was sued for failing to pay off debts. Its assets were frozen.

Cheap and cheerful

Larger players have also sought to tap the budget market. Shanghai-listed Hainan Airlines, China's fourth largest, set up a low-cost subsidiary in August 2005. Lucky Air is still flying out of Kunming with five planes and a sixth is on its way.

"We are the fastest growing low-cost airline in China," said Lucky Air spokesperson Su Zhiyi. "We have enough pilots, enough cash and a great advantage over competitors… because we have this mother company at our back."

The challenge for small airlines is getting past regulations heavily tilted in favor of the big players.

The complex regulations attached to buying planes, the distribution of air routes, flight scheduling and the need for frequent approvals from both local and central authorities may prove to be issues beyond their ability to overcome.

"The rules of the game are all for big players," said Zhang. "They have priority in almost everything."