Wings Magazine

Is Chinese government’s grip on airline industry too stifling?

Sept. 27, 2012, Hong Kong, China - When businesswoman Ren Hong flew home after a recent trip to Beijing on state-owned Air China, she was hoping for a decent inflight meal to tide her over until she got back to the spicy cuisine of her native Sichuan province.

September 27, 2012  By Carey Fredericks

The airline's meagre offering, which was little more than "just bread,'' was a galling experience for Ren who wondered why the
carrier didn't cut both the pretense of full service and the price of the ticket.

Her gripe highlights how Chinese travellers have been left out of the massive budget airline boom that has swept Asia. From almost none a decade ago, the region now has more than 50 low cost carriers. The fast growth of no-frills airlines such as AirAsia and the slew of recent start-ups including Singapore's Scoot and AirAsia Japan underline surging demand in the region for affordable air travel. The rise of budget carriers in Asia follows similar expansion in Europe and North America in previous decades.

But in China, where the government still keeps tight control of the rapidly growing airline industry, three big state-owned carriers dominate. Aviation authorities' efforts to shield them, as well as keep the industry from growing too rapidly and compromising safety, mean travellers like Ren pay up to twice as much.

"I've found that flight tickets domestically sometimes are more expensive than the international ones due to monopolization and less competition,'' said Ren, a 37-year-old who runs an export business and also blogs about her travels in her spare time. Even for tickets on Shanghai-based Spring Airlines, considered China's only discount carrier, "their price is just as same as the big airlines'' during high season, she said.


While Chinese travellers are benefiting from foreign budget airlines flying to some Chinese cities, analysts and consultants say
government policy measures are preventing the domestic aviation market from opening up too quickly. China's domestic market is one of the biggest prizes in Asia's travel industry, with 264 million passengers last year, according to the Civil Aviation Authority of China, which forecasts the number will grow about six-fold by 2030.

"The domestic market in China has more or less remained a fortress,'' Xiaowen Fu, an aviation expert at Hong Kong Polytechnic University, said at a recent conference in Macau organized by the Sydney-based CAPA-Centre for Aviation.

Like other essential industries in China, the policy measures are aimed at protecting the chosen few national champions from too much competition. China's three major state-owned airlines, Beijing-based Air China Ltd., Shanghai-based China Eastern Airlines Corp. and Guangzhou-based China Southern Airlines Ltd., carried 191 million passengers among them in 2011. But in the first half of 2012 their profits collapsed because of higher fuel prices and foreign currency losses. The rest of the market is divided between smaller state carriers — some owned by the big three — and a handful of private operators.

An unsurprising outcome of the cossetted state airline industry is a perpetual sense of grievance among travellers at poor service and lack of choice.

"The food on Chinese airlines is worse and more basic than it is on the international airlines,'' said 25-year-old Li Peng, who
recently quit his job in Beijing to travel overseas for a year.

"And when the flight is delayed, I never get any feedback after my complaints. Many flights are delayed more than two hours'' he said. "I do wish there were more budget airlines, especially in China,'' he said.

China's civil aviation policy hinders the country's budget airline industry in two ways, according to experts. First, it makes
it almost impossible for a private company to start a new airline. Second, the policy limits growth by existing airlines, including
state-run carriers, through measures including requiring approvals for new airplanes and routes.

For airlines operating in China, "they've got constraints whether it be on operating strategy, or what they're allowed to do
at the airports, or how they're allowed to recruit pilots, or what the airport charges,'' said Con Korfiatis, director of Flight Ideas
Consulting. "So the low-cost carrier explosion in China is still being constrained.''

In contrast, discount airlines continue to spread their wings elsewhere in Asia. Three started flying in Japan this year,
including Peach Aviation and local ventures from Malaysia's AirAsia and Australia's Jetstar. Also taking flight in 2012 were Singapore Airlines' Scoot, Thai Airways International's Thai Smile and AirAsia Philippines. Next year, Indonesia's Lion Air plans to start flights on Malindo Airways, a low-cost Malaysia operation, the company said earlier this month.

Even China Eastern Airlines Co. is joining in, although its low-cost carrier is a joint venture with Qantas subsidiary Jetstar
that will be based in Hong Kong rather than mainland China.

The Civil Aviation Authority of China hinted in July that it would support budget airlines by loosening price controls. But
director Li Jiaxiang stopped short of announcing any major policy reforms.

The measures aren't just aimed at China's private or discount carriers — they also apply to China's state-owned carriers. Analysts say policies are designed to prevent unfettered growth. Authorities clamped down following a spell of supercharged growth during which the number of passengers expanded by 40 per cent in 2003-2004. Such red-hot growth puts tremendous strain on pilots and infrastructure such as air traffic control and airports, especially on heavily congested air routes between major Chinese cities including Beijing, Shanghai and Guangzhou.

"The market is already growing at 11-16 per cent domestically at average fares,'' said Mario Hardy, a vice-president at research firm UBM Aviation. "Imagine if an AirAsia or a Spring was able tomorrow to lower that price by half. How many more people would be travelling?''

Hardy and other experts and industry insiders believe that Chinese authorities will allow the aviation market to open up
gradually so that there's enough time to build up the required infrastructure. China is building 82 new airports and renovating 101 others in a five-year plan that runs until 2015.

"Otherwise it will be a mess,'' Hardy said. "It would be chaos.''

Until then, travellers like Ren, the businesswoman and travel blogger, will have to put up with higher prices. Ren is thinking of
going to India on her next trip but is disappointed with the limited options. She could fly with Air China at a cost of 4,000-5,000 yuan ($$635-$790) round trip. Or she could pay 2,000 yuan ($320) on AirAsia — but she would need to change planes at AirAsia's home base in Malaysia.

"It's annoying,'' said Ren. But "life is not perfect and I have no choice. I could not ask for the flight to be both cheap and offer
the perfect route.''


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