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Carr: The Slow Boat to China

An economic slowdown in the US is no longer the cause for concern that it once was among manufacturers of corporate airplanes. American executives are largely behind bulging order books at original equipment manufacturers (OEMs) such as Bombardier, but growth in developing international markets is picking up the slack of softening US demand.

The People’s Republic of China should be a slam dunk. Before the year is out it is expected to nudge past Germany as the world’s third largest economy. It is home to 150,000 multimillionaires (the top 100 boast a combined fortune of over US$30 billion) and is the world’s fastest growing air transport market. Yet restricted airspace, prohibitive costs and layers of red tape have kept corporate aviation light on the ground.

Mainland China has only 12 registered business jets compared with 20 in Hong Kong, and even this figure is deceiving. Only three are privately owned; the rest belong to state-run companies, especially airlines that lease them out to clients. China’s executives spend a great deal of time in the air and have been quick to follow the west’s insatiable appetite for luxury goods, suggesting change.

Indeed, change is already happening. The Shanghai Airport Authority reports corporate aviation activity in the city is experiencing year-over-year growth of 15%. Jean Chalopin, a French film producer who lives in Beijing, is reported to be considering starting up a fractional-ownership company, and Beijing Capital International Airport, which handled only 1,000 private aircraft departures last year, has opened the world’s largest FBO in time for the 2008 Summer Olympics. Managed by Capital Jet, the 7,000-square-metre facility is big enough to park 10 widebody commercial airliners and 15 mid-to-large business jets.

Impressive, unless you need to get somewhere. China’s general aviation infrastructure is woefully inadequate. Approximately 80% of Chinese airspace is under direct military control, compared with 10% in North America, and fewer than 100 airports can handle private airplanes, but slots are at a premium at most of China’s business centres.

The government is said to be considering relaxing airspace restriction by opening up low-altitude corridors on a trial basis. This is certainly expected before the Beijing Summer Olympics begin in August, but can only be the beginning. Before some no-fly zones are lifted huge investments will have to be made in navigation systems and other infrastructure.

There is great expectation that the Olympics will provide the starter pistol that OEMs have waited for to set off a round of serious buying. France’s Dassault Falcon Jet estimates that 300 business jets will be sold in China by 2015, including 100 large-cabin airplanes. This remains a fraction of the 9,950 aircraft Bombardier forecasts will be delivered worldwide by 2016, although few will bet against China eventually growing into the world’s second largest market for corporate aircraft.

Bombardier has the right product mix to capture share across several market segments, but the Montreal-based manufacturer is in tough competition. Dassault appears to have a head start building relationships with Chinese civil aviation authorities and believes it can grab 50% of China’s large-business-jet market by 2015. Dassault recently delivered a Falcon 900DX to Shanghai-based CITIC, a state-owned investment group. Hawker Beechcraft reports that it has also inked orders for 16 aircraft.

A barrier for all manufacturers is the expense of bringing a business jet to China. The government slaps a 17% value-added tariff and 4% import duty on every airplane, adding a whopping US$9 million to the sticker price of a Global Express. And it doesn’t stop there. Owners are forced to lock into expensive operating agreements with one of China’s notoriously inefficient airlines to manage and fly the aircraft, pushing back the date when having a private jet will begin paying for itself. 

Still, China’s resistance to private airplanes is crumbling. China is a large country with poor domestic air links. The country’s multimillionaire population is no longer hemmed into the southeast or Hong Kong, but spread out over the world’s fourth largest land mass. As the market develops, each airplane sold is likely to have a multiplier affect at the purchase window. The Olympics will open Chinese airspace to hundreds of foreign-registered machines, at which point the time will have come for the games to begin.