9 Jul, 2001
First China Aviation Report Says Huge Restructuring to Come
Along with other elements of its economy and services sector, China’s multi-billion dollar aviation industry is being rigorously restructured in preparation for the liberalisation and competition that will come with its entry into the World Trade Organisation.
Exactly how the country’s dozens of airlines and airports are being reorganised, and the impact this will have on the inbound/outbound potential of Asia’s largest travel market is the subject of a newly-released research study produced by the Sydney-based Centre for Asia-Pacific Aviation (CAPA).
The first study of its kind, “The Essential China Book 2001: Airports, Airlines and Tourism,” has undertaken the complex task of bringing together all the policy and forward planning positions of the China Civil Aviation Administration (CAAC) as it strives to slowly but surely modernise and strengthen China’s aviation sector.
For investors, immense opportunities await those seeking to sell associated products and services as China liberalises its traffic rights regimes, strengthens airport hubs, privatises some of the airports, and restructures the airlines to pave the way for them to become part of global alliances.
However, the priority is to ensure that its huge market potential best serves Chinese interests by enhancing their negotiating positions in the deal-making to come.
in his preface to the book, Peter Harbison, managing director of CAPA, says, “The potential of China’s aviation and tourism markets defies comparison. It is immense. But the path to realisation of this potential is fraught with challenges – for policymakers, for infrastructure interests and for service providers.
“The timing and nature of changes, the rate of growth in each sector and in each geographical area remain very much the realm of speculation. In interpreting trends, assessing commercial risk and planning investment, a thorough knowledge of the market is an essential prerequisite. The rewards for those who get it right will be significant but the margin for error is even larger.”
The study notes, “If aviation and tourism are to flourish, foreign investment and joint venture partnerships will be essential. But while consistent internal profitability is absent, so is any private capital rush to invest. An unpredictable investment regime, with as-yet limited transparency and lingering government intervention has not helped.”
The book notes that between 1978 to 2000, airport passenger movements grew 29-fold to 134 million. About 70 new or substantially expanded airports were added, with about US$7.9 billion being invested in the last five years alone. Its 48 large and small airlines operate 596 air-routes linking 139 civil airports.
According to CAPA’s research director Derek Sadubin, while China’s WTO membership will not immediately affect commercial air services rights – the WTO does not yet have jurisdiction in that area — it will have explicit implications for attempts to protect a budding aircraft repair and maintenance industry as well as selling and marketing of computer reservations systems.
Outbound tourism will rise after WTO membership as a more open economy generates a greater propensity to travel and more countries are designated as approved destinations in response to trading pressures and free trade rules.
“Outbound growth could potentially be sustained at or ahead of historic rates over the coming decade, a compounding effect that will have implications for a wider range of destinations,” Mr Sadubin said.
For inbound tourism, short-to medium-haul markets (from north and southeast Asia) dominate current arrivals in China and will do so through the next five years.
However, the single most significant operation under way in China’s aviation industry, which will impact airlines, airports and tourism is the CAAC’s ambitious airline merger plan under which the 31 airlines and 17 branch carriers that existed in 2000 are to be gradually restructured under the three pillars of Air China, China Eastern and China Southern, which operate respectively out of the country’s three major hubs, Beijing, Shanghai and Guangzhou.
Mr Sadubin says that this could achieve what in other countries took years of market and regulatory evolution, by:
— reducing competition, thereby delivering some commercial certainty to shareholders and capital providers (lenders and investors);
— providing a solid international base for China’s airlines to compete internationally with the increasingly megalithic European and US operators;
— placing the newly strengthened airlines in a much more powerful position in negotiations with global alliance partners;
— permitting China’s air services negotiators to focus route grants on a limited number of gateways, thereby allowing greater control of onward traffic distribution (so that it travels on Chinese carriers behind these gateways, a policy which has played an important role of the growth of many of the world¹s stronger carriers); and
— focussing on the key airport infrastructure which has been put in place in parallel with the big three airlines. The three airports in Beijing Capital, Shanghai Pudong and Guangzhou are all undergoing or have undergone have major upgrades.
Says Mr Sadubin: “In turn this move should make travel and tourism patterns more predictable. If the airline consolidation is successful, selling into and out of the China market will be subject to establishing the necessary airline connections over those gateways.”
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