Loosening the rules earlier this year, the Civil Aviation Administration of China (CAAC) heralded the arrival of private ownership of air carriers, and nofrills flying – but with oddly Chinese characteristics, like ticket prices that run as high as China's full-fare airlines.
"Changes in China's agenda include giving airlines freedom to choose routes and frequency, set fares, and negotiate airport charges," chirped Peter Harbison, managing director of the Center for Asia Pacific Aviation (CAPA) at an industry forum in Singapore in January.
Civil aviation authorities announced that they would continue lowering barriers to private capital in the sector, subject to market demand. And that has been exploding, according to CAAC data. Last year, domestic passenger traffic grew 37% to 120 million (while total profit for the sector hit US$1.1bn). Indeed, state-owned China Daily reported that carrier profits last year were more than those for the preceding 10 years combined.
CAAC, which expects growth to moderate this year, but still reach 15%, made other significant moves: now foreigners can own up to 25% of firms running private airlines and any one which cobbles together three planes – if only in their business plans, if not actually on the tarmac – can start one.
Okay Airways (fleet count: 1) was the first private airline to lift off with its March inaugural flight from Tianjin to Kunming, in Yunnan province (with a stop at Changsha, in Hunan province). It follows the same no-frills, low-cost model the other two, Chengdu-based United Eagle and Shanghai-based Spring International, plan to follow when they launch services next month.
Spring International is backed by Shanghai's Spring International Travel Service, one China's largest travel agencies. It says it plans to operate flights to popular Chinese tourist destinations like Kunming. A fourth private airline, Huaxia, based in Gansu province in northwest China, has yet to say when it will begin operations.
Okay Airways, which operates its sole Boeing 737 out of Binhai airport in Tianjin, has approval for six routes – Tianjin to Zhangjiajie in Hunan province, Taiyuan, Yanji, Guilin, and Hohhot in Inner Mongolia. But to date, it is operating only one daily flight: Tianjin-Changsha-Kunming.
And that brings up a sticking point: Fewer than 5% of regional routes in China see more than one flight a day, and unless carriers can scare up enough traffic to run three daily flights, at least for short hops, carriers will have a hard time attracting business travelers, according to Lu Jianheng, a CAAC official speaking at a Jiuzhaigou industry forum in Sichuan province in December.
"We have only one passenger plane at the moment," Okay spokesperson Han Jing explained. "We are still making adjustments to our operations and we will be looking at market demand before operating the other routes."
Ticketing wrinkles during Okay's early days have been smoothed out, he said, and tickets are now available through major flight agents nationwide. The airline plans to introduce online ticketing in July or August.
Spring International said in February that it was targeting domestic tourists and business travelers and had its sights set on serving popular tourist destinations such as Kunming, Guilin, and Hainan. But Spring International Travel's business development manager Li Cuiling declined to confirm route details and fares, saying only that "nothing is finalized."
No big deal
The incumbents in the domestic market are taking all this in their stride, a China Eastern Airlines official telling one newspaper he didn't expect the private carriers to have a big impact on the market – especially since they were operating routes none of China's majors even bothered with.
Okay concurred, saying that it was targeting a different market. But less than a week after its inaugural flight, Hainan Airlines, China's fourth-largest domestic player, announced the resumption of its Tianjin-Changsha flight from late March. The route was suspended two years ago because of low demand.
"We resumed the flight to meet increasing demand along the route, not for competition with Okay," a Hainan Airlines official insisted in China Daily. So far there has been no price war, which budget carriers were presumably designed to wage – both Hainan and Okay charge about US$80 for one-way runs, according to Okay's Han, who thinks the competition could be good for business. "With more flights, the Tianjin-Changsha route will gain higher visibility and people are more likely to consider departing from Binhai airport if there are more flights available," he says.
Okay actually planned to be an air cargo line, but for one big detail: "We don't have a freight plane," Han said. "And we're not the only one – there simply isn't enough supply,' it's a worldwide problem."
The budget model runs into big trouble in China, Okay Airways boss Liu Jieyin even conceding a true low-cost carrier cannot really exist under current policies. Why? Because nearly 80% of private airline operating costs – such as aircraft import tariffs, landing fees, fuel and the like – still remain under government control, according to Zhou Liqun, dean of economics in Tianjin's Nankai University, quoted in one recent news report.
The assertion seems a little improbable, given that a very significant recurring cost for commercial airlines is the monthly wage bill, which private carriers should be able to contain nicely. According to CAPA in Sydney, it usually runs around 30% of operating costs "and more than that in China and India," as one staffer put it.
China's state carriers are world-beaters when it comes to overstaffing. CAPA data indicates, for example, that revenue per passenger kilometer at China Eastern was just a quarter that of Australia's Virgin Blue, and one third that of Hong Kong-based Cathay Pacific.
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