• All eyes on China: SECTOR REPORT - Airlines
While the rest of the world aviation industry still reeled from the aftermath of 9/11, one nation saw record growth in passenger numbers and airline company profits in 2004. Despite the impact of rising fuel costs and memories of the Sars epidemic, air travel to China is reinvigorating the world aviationo industry, writes Sean Dodson.

Civil aviation in China is soaring. According to a report by the Centre for Asia Pacific Aviation published in January, Chinese airlines returned a record US$750m in profits last year. The figure contrasts sharply with losses of between US$6bn and US$10bn for US airlines, and losses of at least US$500m in Europe. Global passenger numbers may have returned to their pre-9/11 levels this year, but this achievement would be unthinkable if it wasn't for the contribution of Chinese airlines.

Rising incomes and a growth in international trade are creating huge demand for both leisure and business travel in China. To meet the demand Beijing is currently building the world's biggest airport, designed by Lord Foster, while China was among the first countries in the world to order the world's biggest passenger jet, the Airbus A380.

In fact, the entire Airbus fleet in service in China has grown from just 29 jets in 1995 to more than 280 today, a 10-fold increase. Moreover, China is expected sharply to increase aircraft orders to cope with the anticipated boom in tourist traffic.

Taking off the shackles
Increased demand is only part of the answer for such stratospheric growth. A market deregulating faster than you can say “lead-up to the 2008 Olympic Games in Beijing” is helping China's aviation industry grow faster than the economy as a whole, with growth of passenger flights easily outpacing freight transportation in 2004.

How high can it climb? According to the World Tourism Organisation, the sky's the limit. The UN's travel bureau, based in Madrid, recently reported as many as 100m Chinese citizens could be flying overseas every year by 2020, five times that of 2003. If the estimates are correct, and few doubt them, by then China is likely to be the world's second-largest commercial aviation market, just behind the United States.

It is also becoming easier for Chinese citizens to travel overseas. Chinese visitors to the UK no longer need to apply for a visa in advance if they are travelling in a group (see Business Opportunities, page 11). Beijing responded in kind by relaxing its rules on UK travellers in transit, who no longer require double-entry visas as long as their stay is less than 24 hours.
In 2004 the Civil Aviation Administration of China (CAAC) oversaw the gradual liberalisation of Chinese air space as well as winning favourable listings of China's flagship carrier, Air China, on the Hong Kong and London stock markets. True, high oil prices are causing some financial turbulence, but new direct flights to China continue to come into sight.

In April BA announced a new triple daily flight service between Hong Kong and London, while a new route to Shanghai takes off this month. Indeed, the deregulation of the Chinese civil aviation market is proving to be a two-way route. As the global industry struggles with its worst financial crisis in years, foreign carriers are increasingly concentrating on Asia, particularly China and India, to make up for losses on the domestic front.

Both American Airlines and Continental Airlines recently won federal approval - after years of indifference - to begin direct flights to China and many more are expected to follow. In Europe, Finnair is flying to Beijing and Shanghai, and flights from Helsinki to Guangzhou will begin in September.

Making it pay
Still, not all the news has been good. Both China Southern Airlines and China Eastern Airlines, two of China's major state-controlled carriers, have reported first quarter earnings badly battered by increases in fuel costs.

China Southern actually posted a loss of Yn285m (US$34.4m) after a net profit of Yn196m in the same period last year, leading the company's chairman, Liu Shaoyong, to admit, “2005 is expected to be a year of challenge for the Group”.

China Southern said the contraction in the domestic aviation market in the fourth quarter of 2004 continued until mid-March this year, when demand gradually picked up. Blip over, in April, the company signed a deal with Airbus for five A380s - the world's biggest passenger jet.

China also began approving private airlines last year, joining a trend that has seen low-cost carriers expand across Asia. In January Beijing issued new rules allowing the establishment of new, privately owned airlines, provided they offered no more than 25 per cent ownership to foreign investors.

The country's first private airline took off on 11th March. Operating out of Binhai International Airport near the port city of Tianjin, Okay Airways concentrates on domestic air cargo and charter flights within China. While the news has been welcomed, its launch is largely symbolic. The airline is only allowed to fly on six domestic routes, with a single leased Boeing 747.

Reaction to the service has also been mixed. Ticket prices on Okay have so far proved nearly identical to those of the established state-run carriers, while cabin services - right down to the in-flight meals - are also as similar as peas in a pod.

According to the China Business Daily, it could be at least five years before a true low-cost carrier can prosper in China. Landing fees, import tariffs and fuel costs are fixed at most airports, meaning private companies have little or no control over about 80 per cent of their total operating costs. Other ways of slashing costs, like e-tickets, are still unavailable in China.
Even so, China is also slowly relaxing its rules to allow some carriers to offer discount domestic flights. In Hong Kong, the recently formed Oasis Airline is reportedly planning to launch low-cost, long-haul services by the end of the year, possibly out of Macao.

Many industry analysts believe that the former Portuguese colony looks more likely to become an Asian hub for low-cost carriers with landing fees up to a third lower than those of neighbouring Hong Kong (70km to the east) and nearby Guangzhou.

The cheaper fees have already led Malaysia's Air Asia and Singapore's Tiger Airways to launch new direct routes, the latter offering a one-way ticket between the two cities for as little as US$6. It will take more than a handful of low-cost routes to introduce the benefits of no-frills flights to China, but watch Macao closely.

Elsewhere, Singapore's Jetstar Asia is set to become the first budget airline flying directly into China. The Qantas-backed carrier has received approval from the Singapore authorities to fly to Shanghai and six other regional destinations, including Hong Kong.

Not to be outdone, China's flagship carrier, Air China, which recently announced the introduction of flat beds in its premium classes, is also rapidly expanding its intercontinental portfolio. A spokesperson for the company told the Review that, “Since the rapid development of trade and tourism in China in recent years, especially following China's acceptance into the WTO and awarding of the 2008 Olympics, Air China have been responding to increasing demand for easy and regular access to newly opened areas in China by expanding our network to more and more cities across the country and onwards.”

What this means is that travellers from the UK will still have to fly into Beijing, but it is clear that Air China is taking the threat from new competitors seriously. For example, the company is offering a return fare from London to Sanya in Hainan province for £399 return, a price unthinkable a few years ago.

China vs the rest
Naturally, the deregulation of Chinese skies needs to be put in a global perspective. And it is worth remembering that the whole world is deregulating its civil air space. In January the International Air Transport Association (IATA) - which represents more than 94 per cent of all international scheduled air traffic - bowed to inevitable pressures and removed the restrictive rules that prevented the buying and selling of overseas airline tickets.

So many travellers were buying cheaper foreign tickets over the internet, said the Geneva-based association, that the task of identifying the country in which passengers book online tickets had become nearly impossible. What this means is that price harmonisation - where tickets cost the same amount anywhere in the world - is looking increasingly likely and that means lower prices across the board.

Nice position to be in
Undoubtedly, China has some catching up to do when compared to other Asian destinations, especially South Korea, Malaysia and Singapore. But many, including Boeing, believe it is only a matter of time. The world's second-largest aircraft manufacturer believes that China's air passenger traffic is likely to grow 7.3 per cent annually until 2023, faster than the global average of 5.2 per cent in the same period.

Despite worries over rising fuel costs and rumblings about oversupply, civil aviation in China looks very healthy. But China needs to deregulate its market even further if the widespread predictions of its growth are to become a reality.

Beijing has made a number of significant reforms over the past couple of years, but it will have to open up a larger portion of its skies to foreign investment before it can truly take advantage of its position as a global economic superpower. But, in doing so, it can also win the accolade of saving the global aviation industry.

Sean Dodson is a freelance writer and visiting lecturer at City University in London.

China Eastern flies to Shanghai and beyond

Chris Zhou, general manager, China Eastern Airlines London Office

China Eastern started flying direct between London and Shanghai in April 2004 with three flights a week. Since then we have increased to four flights a week, leaving from London Heathrow T2 on Mondays, Tuesdays, Thursdays and Saturdays around 9.00 p.m. With more of our domestic flights now leaving from Shanghai Pudong International Airport, China Eastern offers more convenient transfer services through to your final destination within China.
We have also widened our network of routes, which now cover 15 Japanese cities, five Korean cities, Bangkok, Phuket, Kuala Lumpur, Singapore, Delhi, Sydney and Melbourne. We have recently added Bombay and Moscow to our list of destinations from Shanghai. All of these destinations can be visited from London with a stopover in Shanghai, which means you could jet off to the beach after finishing your business trip, or combine Japan and China on one business trip for a great fare. Being thought of as one of the most progressive and fast developing Chinese airlines gives China Eastern an edge against its competitors.
China Eastern is often presumed to be an ethnic carrier, popular with Chinese visitors to the UK. However, with a broadening sales network, improvements in customer service and increasing public knowledge of our product, China Eastern is improving its image and awareness for all passengers originating in UK and in other countries of the European Union. With competitive fares, including some very good value companion fares in business and first class, China Eastern offers you the best of oriental hospitality. You can book and buy tickets directly from our London office or through your travel agent. Our fares can be found increasingly easily on internet booking sites.