China's aviation sector is going through a period of consolidation and rapid expansion. Substantial growth is expected both of airlines and of the increasing number of airports across the country that serve them.
Over the next 10 years, China is likely to become the world's biggest aviation market. With passenger volumes growing at about 20 per cent annually, mainland Chinese are likely to make 109m passenger journeys by 2005. In 2001, domestic air cargo volume was up almost 20 per cent.
China has made great strides in building airports and improving airport infrastructure over recent years. Between 1980 and the end of 2001, total foreign investment in the country's civil aviation sector was US$30.3bn. In the short term, China will invest almost US$4bn to build two new airports, in Changchun and Hanzhong, and to expand four others – Beijing, Shanghai, Chongqing and Hotan in Xinjiang. During the 10th fiveyear plan (2001-05), investment will total US$16bn.
The Beijing Olympics of 2008 are an additional driver of airport expansion. Beijing Capital International Airport has announced that it will invest US$1bn in improvements in the run-up to the Olympics. While Beijing and Shanghai already have sophisticated airports, the other Olympic venues of Tianjin, Qingdao, Qinhuangdao and Shenyang will need to expand their airports to accommodate visitors.
Consolidation process Over the past two years, the Civil Aviation Authority of China (CAAC) has embarked on an ambitious and long overdue process of consolidating the airline industry. Before this process started, there were 34 airlines in China operating on 220 routes. Regional governments or ministries set up many of these airlines, which operated with just a few aircraft on a small number of routes. Most of them operated at a loss.
Under the new plan that was formally set in motion in mid-October 2002, there will be three large airline groups under the CAAC umbrella: China Southern, China Eastern and Air China These three groups have started the process of acquiring all the smaller CAAC-affiliated airlines, including China Southwest, China Northern, Great Wall Airlines and Xiamen Airlines. This forced process, which should take 18-24 months to complete, will result in a healthier airline industry whose participants can compete on more equal terms with each other. CAAC needs to complete the process of consolidation as quickly as possible.
Regional airlines that are not under CAAC control are following a similar process of consolidation, but are moving faster because of their independent management. For example, Hainan Airlines and Shandong Airlines have been acquiring smaller airlines such as China Xinhua Airlines, Changan Airlines and Shanxi Airlines. A similar, but less visible, process is under way with airport ownership, and the effects will be equally far-reaching.
China had a total of 143 airports at the end of 2001. Of these, only 22 were big enough to accommodate Boeing 747 aircraft, while an additional 35 could land 767s. The rest were small or medium-sized airports. Eighty-seven of them were under CAAC control, and of these an estimated 69 lost money on their operations. A report by Aviation Analyst newsletter estimated that 90 per cent of China's airports lost money in 2001.
Three large airports dominate – Beijing, Shanghai and Guangzhou. They were the only facilities to handle more than 10m passengers apiece in 2001. Passenger traffic between these three airports makes up twothirds of the national total. This is a high level of concentration for such a large country with so many airports but, even with all the growth and investment anticipated in the aviation sector, the picture is not expected to change substantially over the next decade. According to Aviation Daily, only 38 airports achieved more than 50 per cent utilisation, while 29 recorded less than 20 per cent.
Between 2000 and 2015, an astounding 118 new airports will be built in China, though most of these will be small feeder airports. CAAC's plan is to develop a handful of airports as national hubs, such as Chengdu and Xian, in addition to the existing hubs of Beijing, Shanghai and Guangzhou. Airports in western China will get preferential development funds under the government's 'Go West' programme. By 2015, China aims to have established seven key regional airports in the interior: Chongqing, Xian, Chengdu, Kunming, Lanzhou, Urumqi and Guilin.
However, this expansion needs to be put in a regional context. Beijing and Shanghai are currently the only two Chinese airports to feature in the top 10 list of Asian airports. Only six airports in China had a passenger volume in excess of 5m a year. Over the next decade, up to 10 airports in China will grow to a size that will bear comparison with leading airports across the region and the world. The rest will continue to be small feeder airports that are linked to one of the large hubs.
Each of China's three large airports is run by an operating company: Beijing Capital International Airport(BCIA). Shanghai Puding and Guangzhou Baiyun. BCIA has drawn up aggressive plans for taking shareholding stakes in airports across the country, creating an aviation network and becoming the largest owner of airport assets in China. This will help to alleviate traffic pressure on Beijing and exploit the potential of small airports, while eliminating duplication of construction. BCIA has already taken a stake in Tianjin Binhai Airport, and has signed contracts to acquire stakes estimated at 40 per cent in Xian airport, the ninth largest in the country, and Dalian (11th largest). BCIA has also pledged to co-operate with Shenyang (12th largest) and Chengdu (sixth), while discussions are also taking place with Chongqing (10th).
In 2000, the leading international airport operating company in France, Aerports de Paris, acquired a minority stake in BCIA. This relationship is expected to give the Chinese company insights into how to run an airport efficiently and profitably, and to introduce knowledge on specialist information systems and systems suppliers. Aï¿½roports de Paris also designed the terminal building at Shanghai Pudong airport. Copenhagen Airport has announced that it is acquiring 20 per cent of Melian HaiKou on Hainan Island, prior to Meilan's planned listing on the Hong Kong Stock Exchange in the next few months. The proceeds from the listing will go towards increasing capacity to cope with an expected growth in tourism.
Like BCIA, Shanghai and Guangzhou international airports are making moves to acquire airport assets around the country, and to form their own airport networks. In Shanghai, Pudong is being positioned as the airport of the future. In spite of it being located more than 30km from the city, all international traffic as well as a number of domestic flights have now been re-routed to Pudong. The hope is that this will help boost utilisation of the airport, which handled 6.9m passengers in 2001 against an installed capacity of 20m.
Guangzhou Baiyun and Shenzhen airports are working together to rationalise flight routes in the Pearl River Delta area. Guangzhou Baiyun entered into a joint venture for airport services with the Guangdong Huaohao Industrial Group in July 2002.
The Airport Authority of Hong Kong is also getting in on the act, announcing in 2002 that it was looking to take a stake in Shenzhen airport. This is intended to provide Hong Kong with some control over, and synergy with, the airport's expansion plans. In early 2002, the five Pearl River Delta airports – Hong Kong, Shenzhen, Guangzhou, Zhuhai and Macau – formed an alliance to co-ordinate business development plans. Despite significant economic development in the region, competition among the airports had driven Zhuhai to the brink of bankruptcy. Discussions are now focusing on Hong Kong taking a stake in Zhuhai, or Zhuhai utilising its capacity for freight rather than passenger traffic.
At the end of this process, there will be three large airport groups – Beijing, Shanghai and Guangzhou – mirroring the structure of the airline industry. However, like many other markets in China, the regulatory framework will take some time to evolve, and this will delay the consolidation process. It could take three to five years to complete.
The CAAC is in the process of transferring ownership of airports to provincial governments. This move is consistent with other industries in China, such as the power sector, where the roles of industry regulator and operator are being separated. In future, provincial governments will be responsible for financing the development of their own airports, and CAAC funding will no longer be available. The ownership of 111 airports will be transferred to provincial governments over the next two to three years. Twenty-four local aviation administrations will be abolished, leaving seven regional administrations. However, few provincial governments have been able to run airports profitably, so it is an open question how successful this process will be.
Local governments must now approve any acquisitions or investments by major airport operating groups, but the exact dates and processes for such transfers are still being worked out. BCIA recently announced that its own acquisition plans were being delayed by the regulatory approvals process.
In common with just about every other industry sector in China, airports and airlines have been opened to foreign investment. Effective from August 1, 2002, the CAAC and the Ministry of Foreign Trade and Economic Co-operation have issued revised regulations on foreign investment in civil aviation. According to official sources, foreign investment is now permitted up to a maximum level of 49 per cent level for airports and 35 per cent for airlines. The CAAC has also promised to scrap restrictions on foreign investors nominating senior management in airports where they have holdings.
Evolving business model
The business model will continue to evolve, with the leading airport operating companies such as BCIA being under continued profit pressure. For example, BCIA recently announced that it was planning to stop leasing airport space to restaurants and other outlets and operate them itself to prevent excessive price competition.
There are a number of local Chinese companies that can integrate diverse offerings from different equipment suppliers and software companies to qualify as prime contractors for airport expansion projects. Very often, companies with provincial government investments are seen as preferred partners for such projects.
In the long term, the Chinese government does not want the aviation sector to become too reliant on foreign companies. Yao Yabo, deputy general manager of the Airport Construction Corporation, expressed his hope back in December 2000 that all future airports would be designed and built by local contractors.
While this might be a laudable ambition, it is likely that in the short term there will be a number of opportunities for foreign companies in a wide range of areas such as architectural design, airport operation consultancy services, productivity and efficiency consulting, financial structuring, supply of specialist equipment and systems integration.
Joint ventures have already been set up in freight warehousing, ground services, aircraft maintenance and aviation fuel supply. Among Asian countries, Singapore is considered a preferred partner for investing both in airlines and airport operating companies. Singapore Chagi Airport Enterprise recently signed an agreement to provide Hangzhou international airport with training and consultancy services. Russia's Tupolev intends to set up an aircraft service centre in China that would be similar in quality to a Boeing or Airbus facility.
However, structuring and executing these deals and alliances is not going to be easy. Singapore Airlines Engineering, for example, recently announced that it was withdrawing from prolonged discussions to take up Lockheed Martin Service 25 per cent stake in the Guangzhou Aircraft Maintenance Company.
A number of companies such as Boeing, Raytheon, Lockheed Martin, Motorola, Northrop Grumman and Metrologic Systems have strong supply relationships with CAAC and various airports around the country. For example, Boeing Air Traffic Management is undertaking a consulting project with BCIA on ground manoeuvring and terminal operations. Companies like these should be in a good position to leverage these relationships, but there will be plenty of scope for other companies to play a part as well.
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