01/08/09, 12:46:25 UTC

  e-mail this article

Turbulent journey for China's fledgling budget airlines

channelnewsasia.com

Two years after China's first budget airline took to the skies, the low-cost boom seen elsewhere around the world remains a distant prospect despite the Chinese aviation industry's spectacular growth.

Passenger traffic on Chinese airlines is forecast to rise 16 percent to 185 million journeys in 2007, making it one of the world's fastest growing aviation sectors, but only a tiny fraction of those trips will be on a low-cost airline.

While budget carriers have flourished in Europe and other parts of Asia, in China they face a host of bank-breaking restrictions that puts them at a huge disadvantage to the bigger, government-linked airlines.

High landing fees, bans on lucrative routes and high prices charged by the state-run fuel provider are just some of the barriers for the low-cost hopefuls.

The government has given signals recently that it will ease some of the controls, but the privately-run small carriers said they still had a long way to go before the state monopoly was dismantled.

"We are still waiting for a breakthrough," Wang Jianbin, chief financial officer of Okay Airways, told a conference in Shanghai recently.

Okay began operating in March 2005, creating history as China's first privately-run carrier and the Chinese pioneer of the low-cost model.

But it saw its revenue stream under such pressure that it scrapped its budget concept in favour of a more standard pricing strategy.

Wang said the planned government reforms gave cause for some optimism, but said there was still a long way to go before the conditions were ripe for passengers in China to enjoy ultra-cheap flights.

"Only when liberalisation of the aviation industry is realised will the low-cost model be popularised," he said.

Chen Ke, a financial manager for Spring Airlines, another small private carrier, agreed that running a budget airline was tough but said the government would change its course once it realised that there was money to be made.

For example, Chen said Spring had been able to win reduced landing fees by persuading officials that its passenger occupancy rate -- about 95 percent compared with 70 percent at its larger state rivals -- would translate to cash for local economies.

In its latest forecast Spring said it would double net profits this year to more than 80 million yuan (10.5 million dollars) from about 30 million yuan in 2006.

However analysts noted that Spring had an edge over China's five other small private carriers because its parent firm, Shanghai Spring International Travel Service, was a leading travel agency that filled up its planes.

"Spring has a guaranteed passenger source," said Gao Shiliang, aviation analyst with Central China Securities.

Gao said Chinese carriers remained "shackled" by high costs compared with their foreign peers and it was still "difficult to be really low-cost in China".

He pointed to the landing fees that are strictly controlled by the authorities.

Low-cost carriers tend to choose hub airports with higher passenger traffic, but landing fees there are set by the aviation administration and are higher than airports in second- and third-tier cities, Gao explained.

"The landings fees are not suitable for low-cost carriers," he said.

Industry experts also said that state-controlled jet fuel prices accounted for an astronomically high 25 to 30 percent of firms' costs compared with the eight to 12 percent seen globally.

Gao said the government was not expected to relinquish its hold on fuel pricing anytime soon, however it was poised to loosen controls on landing fees for regional routes and airports in second and third-tier cities.

Another cause for mild optimism for the small carriers was an announcement in the state-run press recently that the government intends to end the monopolies enjoyed by the major airlines on China's most lucrative routes, such as Beijing-Shanghai, by 2010.

 Printable Version  | published Jul 08, 2007