Actually, a country where flying is affordable for only top 8 percent of the population is beneath any notice. But not in the case of the country called China. Recent years have seen a thriving Chinese economic development which has brought a huge demand for aviation business. The aviation market in China is expected to double in size about every eight years.
As expansive as the market may seem today, it is still in its infancy. As a result, business aviation, private aviation, emergency, industrial aviation are expected to embrace for substantial growth potential. Today, the Chinese economic miracle has been fuelled in large part by a flood of foreign investment. However, the influence of Chinese government is extremely present
and restricting the aspiring industry. Since China has been a socialist country, the leaders in Beijing play a predominant role in nearly every single sectors of Chinese economy. In contrast, government policies have been very supportive of the industry and, unsurprisingly, it has yielded positive results.
The aim of this research paper is to analyze present capability and potential of Chinese aviation industry and to identify its future challenges. The key questions to be answered in this context are: What are recent developements of Chinas aviation policies focusing on airline
consolidation and how does the domestic airline and manufacture framework look like? Do endemic manufacturers have the ability to become a serious competitor to persist on the global stage and what are current challenges of Chinese Aviation industry?
In order to answer these questions I am goiig to examine the evolution of Chinas aviation polices focusing on airline consolidation and the efforts in constructing a global and competitive manufacturer environment. Based on the historical development of Chinese aviation industry I will assess present market conditions and possible perspectives of aviation in China.
An overview of the enormous air transport growth including aviation manufacturer expansions is given. In the second step I am going to clarify whether the emerging aviation industry in China has the potential to become a serious global competitor on the manufacturer market. Furthermore I will assess selected current collaboration programmes of the Chinese aviation manufactures in order to answer whether Chinas aviation industry will be able to spread ones wings anytime soon.
Table of Contents
1 Introduction
2 Aviation Industry Development in China
2.1 A New Area in Aviation
2.2 Chinese Aviation - A Market Overview
3 China - Partner and Competitor
3.1 China Competes with the World
3.2 YiŶ aŶd YaŶg of ChiŶa͛s PlaŶs
4 Conclusion and Outlook
5 Appendix
5.1 List of Abbreviations
5.2 Bibliography
5.3 Figures
5.4 Tables
1 Introduction
͞China's airline industry is an improbable blend of state control and regulation, traditional culture, modern market reality and a zeal for profit, yet it works͟ (Thomas 2005, p. 36)
Actually, a country where flying is affordable for only top 8 percent of the population is be- neath any notice. But not in the case of the country called China. Recent years have seen a thriving Chinese economic development which has brought a huge demand for aviation 3 business. The aviation market in China is expected to double in size about every eight years. As expansive as the market may seem today, it is still in its infancy. As a result, business avia- tion, private aviation, emergency, industrial aviation are expected to embrace for substantial growth potential. Today, the Chinese economic miracle has been fuelled in large part by a flood of foreign investment. However, the influence of Chinese government is extremely pre- sent and restricting the aspiring industry. Since China has been a socialist country, the lead- ers in Beijing play a predominant role in nearly every single sectors of Chinese economy. In contrast, government policies have been very supportive of the industry and, unsurprisingly, it has yielded positive results.
The aim of this research paper is to analyze present capability and potential of Chinese aviation industry and to identify its future challenges. The key questions to be answered in this context are: What aƌe ƌeĐeŶt deǀelopŵeŶts of ChiŶa͛s aǀiatioŶ poliĐes foĐusiŶg oŶ aiƌliŶe consolidation and how does the domestic airline and manufacture framework look like? Do endemic manufacturers have the ability to become a serious competitor to persist on the global stage and what are current challenges of Chinese Aviation industry?
In order to answer these questions I͛ŵ goiŶg to examine the evolution of ChiŶa͛s aǀiatioŶ polices focusing on airline consolidation and the efforts in constructing a global and competi- tive manufacturer environment. Based on the historical development of Chinese aviation industry I will assess present market conditions and possible perspectives of aviation in Chi- na. An overview of the enormous air transport growth including aviation manufacturer ex- pansions is given. In the second step I am going to clarify whether the emerging aviation in- dustry in China has the potential to become a serious global competitor on the manufacturer market. Furthermore I will assess selected current collaboration programmes of the Chinese aviation manufactures in order to answer whether China͛s aviation industry will be able to spread ones wings anytime soon. The paper concludes with an outlook to Chinese future aviation ambitions.
2 Aviation Industry Development in China
The progress of aviation in China is more than a simple story of success. To gain a full picture of the industry it requires a short dip into the past. In this Chapter I will go into more detail by investigating the historic development of the aviation industry of China in general. In a seĐoŶd step I͛ŵ goiŶg to examine the Chinese aviation market by the introducing the most successful and influential domestic airlines and aircraft manufactures.
2.1 A New Area in Aviation
The growth in Chinese aviation industry has been nothing short of extraordinary. In 1978, China was only ranked 37th place in the world measured by revenue passenger kilometers* (RPKs). Since a socio-economic reform was initiated in China in the same year, there has been an extraordinary growth in Gross Domestic Product (GDP) registering on average of almost 10% per year for the past three decades (World Bank 2014). During the same period, the air transport sector has witnessed a growth of almost double the GDP figure, recording an average of least a 17% average yearly increase in total traffic, passenger traffic, and car- go/mail traffic for China (Thomas 2005, p. 36). In less than 30 years, the landscape of the Chinese aviation market has been entirely transformed as the ͚Middle KiŶgdoŵ͛ became the largest air travel market in Asia and the second largest aviation market worldwide just be- hind the United States (U.S.) in regard of RPKs since 2005 (Zheng/O’Connell 2011, p. 829).
From the very beginning the Chinese government played a major role in shaping its aviation industry within this fast transforming economical process. Prior to 1978, the air transport sector was paramilitary organized and mainly existed to exclusively serve the political needs of China. The entire aviation industry was under intense control of the Civil Aviation Admin- istration of China (CAAC). The CAAC not only acted as an industry regulator but also, on be- half of the state, took ownership of Chinese airlines and was responsible for their day-to-day operations. Almost all aspects of the industry such as market entry, route frequency, air- fares, aircraft purchasing and funding were heavily controlled by this powerful organization (Zhang/Chen 2003, p. 32).
In the following decades, a series of reforms were initiated with the aim to decentralize pow- ers towards regional and provincial civil aviation bureaus as the CAAC became more marketoriented. The ultimate decision-making and control, however, was not touched and remained with the Chinese government.
In the hope of building a strong and profitable airline industry that was capable of oppos- ing foreign competition, the government of China decided to start a regulatory reform of the whole aviation sector starting in the past decade. From now on China also adopted an ex- port-oriented development strategy. Establishing direct air links to important international 5 markets became one of the top priorities for regional governments. Based on the new goals, the institutional environment in which the airlines were operated was radically transformed from a strictly regulated market to a partially deregulated environment. This new alignment included airline consolidation, opening up of domestic aviation market and adoption of liber- al international aviation policy (Zheng/O’Connell 2011, p. 829 f.). However, there had been no explicit policy regarding international air transport being spelled out in any Government white paper until the year 2003. Until today bilateralism still dominates Chinas international air transport negotiations while Open Sky arrangements are only moderately and limitedly accepted. Nevertheless Chinese government announced 2020 as a guideline year for begin- ning Open Sky negotiations (Zhang 2010, p. 2; IATA 2012).
illustration not visible in this excerpt
FIGURE 1: CHINA PASSENGER NUMBERS AND GROWTH FORECAST 2003 TO 2050F (CAPA 2012, P. 40; GSIR 2010, P. 18)
Despite the fact that China is rather skeptical towards the opening of the domestic sector, the country is still one of the most dynamic markets in the world. This assumption is based on the on the following numbers that are shared by some of the most prominent business consultancies and financial service providers. Thus it is shown in Image 1 that aviation traffic has quadrupled, from 83 million per year to 319 million passengers (93% are domestic), in the last 10 years. The CAAC expects this to increase to 450 million in 2015, 700 million in 2020 and according to a survey by Goldman & Sachs traffic in China is even expected to ex- ceed 1 billion passengers barrier per year by 2022 (GSGIR 2010, p. 4). Going in more detail we see that international travel is expected to grow faster than domestic travel over the next 20 years. An annual increasing rate of 7.2 percent for international traffic is faced by annual 6.8 percent for domestic travel (Boeing 2013, p. 20).
2.2 Chinese Aviation - A Market Overview
The preceding numbers have shown impressively that China is obviously heading towards a promising future. The comprehensive and almighty influence of the CAAC was described already. But who are other players in Chinese aviation industry who are making the rapid success possible? A short market overview tries to bring light in the darkness.
As China was becoming a member of the World Trade Organization (WTO) in 2001, the CAAC was under enormous pressure to build a strong and profitable airline industry which would engage Chinese multilateral trading. From now on the CAAC gradually shifted its long- standing protective international aviation policy towards a liberal regime. As one result, nine state-owned airlines directly controlled by the CAAC were ordered to consolidate into Air China, China Eastern and China Southern. The CAAC itself began to focus exclusively on reg- ulatory functions while at the same time a number of regional airlines were created with the aim to link provincial capitals with key gateway cities in China. This reform finally broke up the CAAC monopoly and created a competitive marketplace (Zheng/O’Connell 2011, p. 829).
Today Air China, China Eastern, and China Southern, also called the ͚Big Three͛, have a leading national HUB system in Northern China (Beijing), Eastern China (Shanghai) and Southern China (Guangzhou) respectively. This triangular HUB network seems to give each airline a stronghold in a different corner of the country. Originally conceived as a nationalist unifying effort, consolidation is now allowing the carriers to begin to construct powerful connecting Ŷetǁoƌks. Beside the ͚Big Thƌee͛ theƌe do edžist aďout ϭϬ otheƌ ŵaiŶlaŶd Đaƌƌieƌs that have scheduled international services and about another dozen airlines that are additionally operatiŶg ǁithiŶ ChiŶa͛s ďouŶdaƌies. In total China commands 23 scheduled carriers - the largest amount for any country besides the United States (CAPA 2012, p. 45).
The market leader position of the big three Chinese airlines, however, remains untouchable as the airlines reported an incredible annual net profit of $2.8 billon USD, compared with total global airline net profit of $7.9 billon USD (GSGIR 2012, p. 5).
illustration not visible in this excerpt
FIGURE 2: THE DEMAND FOR SCHEDULED SERVICES OF AIR CHINA, CHINA SOUTHERN AND CHINA EASTERN FROM 2000-2012 (OWN ILLUSTRATION)
To underline the fabulous rise and market power of the ‚Big Thƌee͚, I ŵade an intense re- search in order to create a meaningful statistic. Due to the reticence of Chinese companies it was quite difficult to find appropriate and reliable data, which are mainly based on annual reports published by the airlines. As a result Figure 2 shows that Air China, China Southern and China Eastern all encountered large increases in RPKs since the year 2000. In 2009, China Southern became the largest airline in Asia in terms of RPKs. Yet, it is a predominantly do- mestic airline as 79% of its RPKs were generated from its domestic operations in 2012. By ĐoŶtƌast, ChiŶa͛s flag Đaƌƌieƌ Air China had the most extensive international network among the large carriers. To make the data in hand more comparable - LufthaŶsa Gƌoup, Euƌope͛s largest carrier has a number of approximately 200bn in terms of RPK. In my opinion, based on the unequal market proportion between China and Europe we can see what an enormous growth potential can predicted for Chinese airlines in the future.
While the airline industry is still mainly state-controlled and dominated ďLJ the ĐuƌƌeŶt ͚Big Thƌee͛, the doŵestiĐ ChiŶese ŵaƌket has the highest poteŶtial foƌ Loǁ Cost Caƌƌieƌs ;LCCͿ iŶ entire Asia. On the other hand the LCC market can be seen as emerging challenge for the hyper-static Chinese system, with AirAsia and Tiger Airways considered to be the biggest threats (Thomas 2005, p. 36).
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* RPK: Is a Key Performance Indicator which describes the number of fare-paying passengers multiplied by the number of kilometers they fly.