BEIJING/SINGAPORE Aug 8 The battle for China's
domestic air passengers is shifting into the country's vast
interior as carriers blaze trails to new destinations and start
subsidiaries in second-tier towns, all with the backing of
generous state funding for new airports.
Airports in the main coastal hubs of Beijing, Shanghai and
Guangzhou are bursting at the seams, while further inland more
than 50 cities with populations exceeding three million people
are crying out to be connected to the nation's aviation network.
The opportunities in such towns, which are rapidly catching
up with the wealthier coastal cities that dominated the first
years of China's economic boom, are one reason aircraft
manufacturers like Airbus and Boeing Co are
confident China will remain a lead market for years to come.
The opening up of the interior is also sparking intense
competition between carriers like Air China Ltd
, China Eastern Airlines Ltd , China
Southern Airlines Ltd and Hainan Airlines Ltd
, which are fighting to dominate what is destined to
become the world's single biggest aviation market.
"Even though the income level and infrastructure in inland
areas are not at the same level as the east coast, the growth
potential for both private and business travelers is much
bigger," China Eastern board secretary Wang Jian said.
For the manufacturers, China's relatively untapped interior
means aircraft like the Airbus A320 and Boeing's 737, which are
ideal for routes of up to five hours, will find new markets. Big
orders are expected for upgraded variants such as the A320neo
and the 737 MAX.
For the airlines, it helps ensure a soft landing as China's
economic growth slows and gives them a domestic fillip at a time
when rising competition and insufficient aircraft are making it
difficult for them to crack the international market.
It helps that China bars foreign airlines from competing on
its domestic routes.
BEIJING LENDS A HAND
Last week, the Civil Aviation Administration of China (CAAC)
announced rebates of around 433 million yuan ($70.7 million) for
airlines operating regional services. Air China, China Eastern
and China Southern received 252 million yuan in total.
In March, the CAAC said that it had allocated 524 million
yuan this year alone to help finance 134 smaller inland
airports. China is scheduled to build 70 airports in the 2011 to
2015 time frame, with total airports in the country projected to
reach 244 in 2020 - up from 180 at the end of 2011.
But that could just be the start of the airport building
boom. The United States had around 5,000 civil airports at the
end of 2011 for a population less than a third as big as China's
1.3 billion, according to a 2012 report by consultancy Frost &
"In the 80s, people would say 'if you want to get rich build
a road'. Nowadays they say 'if you want to develop, build an
airport'," CAAC chief Li Jiaxiang said at an industry forum in
Airlines are taking the government's bait. China Eastern
signed an agreement with the Ningxia regional government
to add services and increase existing ones to Yinchuan, its
largest city with a population of about 2 million. In July,
China Eastern chairman Liu Shaoyong flew to Henan province to
seek expansion opportunities in Zhengzhou, a central city of
more than 8 million people where Apple Inc iPhones are
China Southern already has a joint venture in
Zhengzhou. The Guangzhou-based airline also has a stake in
Xiamen Airlines, Chongqing Airlines and Sichuan Airlines.
HNA Group, parent of Hainan Airlines, wants to set up five
new subsidiaries in the remote provinces of Xinjiang,
Heilongjiang and Guangxi, among others. HNA also has a stake in
regional carriers such as Tianjin Airlines, and Kunming-based
City and provincial governments are also piling in to
justify their investment in airports. Local authorities, for
example, hold a fifth of Air China's Dalian Air and Inner
Mongolia Air. China Southern's airline in Zhengzhou is 40
percent-owned by Henan provincial government.
"The airlines can get all kinds of perks from provincial or
city governments. Capital investment, subsidies, preferential
tax treatment, cheap land, you name it," said a veteran
executive with a major airline who did not want to be named.
THE PLANE FACTS
All of this is music to the ears of planemakers as China's
growing middle class in second-tier cities takes to the skies.
Chinese airlines will operate 4,500 aircraft by the end of
2015, up from 2,600 this year, according to the CAAC's Li.
Boeing said in a September 2012 report that China alone
would need more than 5,000 new jets in the next 20 years. The
U.S. company's senior vice-president for sales in Northeast
Asia, Ihssane Mounir, said more than 75 percent of that demand
would come from new growth rather than replacement. Boeing said
last month it was considering lifting the production rate of its
top-selling 737 jet to more than 42 a month, from 38 currently.
China itself is developing the Comac C919 aircraft to
compete with the A320 and 737, although that jet is not likely
to make a significant impact on the market in the near-term.
Other beneficiaries of Chinese demand could include regional
aircraft manufacturers like Embraer SA and Bombardier
Inc, which make 50- to 110-seat aircraft that cater to