China air sector could grow by 10 percent

China’s aviation industry could expand by up to 10 percentage points above current growth rates if central controls are eased, the Centre for Asia Pacific Aviation (CAPA) said.

‘Double-digit air traffic growth is a certainly possible in an economy growing by 8-10 pct annually, but controls over fares, routes, aircraft purchases, airport charges, fuel supply and distribution services are keeping China’s aviation market from achieving its full potential,’ CAPA’s executive chairman Peter Harbison said in a report.

The report added that the current situation is unlikely to change soon.

Total domestic deregulation was attempted in the mid 1990’s with disastrous results on airline profitability and after the arduous airline consolidation efforts of the first part of this decade central controls will likely be maintained for the foreseeable future, the consultancy said.

It also said it is doubtful that China’s out-dated and over-burdened airport and air traffic management infrastructure could cope with growth rates much above current levels.

‘An unfortunate by-product of these controls is that they may delay the advent of genuine domestic LCCs (low-cost carriers) in China’s market until the end of the decade,’ Harbison said, adding that China’s nascent independent private airline sector will find the going tough in this environment and will largely remain confined to serving niche roles.

But he noted that while 2006 was a challenging year financially for China’s major airlines, the outlook for earnings for the entire sector is much better this year due to lower fuel prices.

Air China is well-positioned, as it is well-managed, politically favored, and will further benefit as its greater network cooperation with Cathay Pacific comes online, Harbison said.

Meanwhile, China Southern needs to quickly find a partner for its freight business or risk getting left behind, particularly with FedEx moving to Guangzhou — where China Southern is based — by 2008, CAPA said.

It added that China Eastern also needs a strategic investor to help turn around its struggling operation in the highly competitive Shanghai market.

CAPA also said that foreign investment in China’s airport sector is expected to gain momentum in 2007, led by Changi Airport International’s breakthrough agreement in Nanjing.

Nanjing Lukou Airport announced in February that Changi had signed a framework agreement to acquire a 29 pct stake in the Chinese airport, based in the eastern province of Jiangsu.

‘There is a growing hunger by the government for foreign investment, which is eager to reduce the CAAC’s (aviation regulator’s) burden of funding airport infrastructure, a role it clearly does not want to retain in the long term,’ Harbison said.

The consultancy also predicted long haul international access to China will continue to be restricted as long as the country’s airlines are unable to compete effectively for foreign inbound tourists.

‘This situation will continue so long as their awkward branding and offshore distribution problems remain unresolved, perhaps provoking the need for innovative foreign partnerships,’ CAPA said.

But Harbison added that, with the Air China-Cathay Pacific partnership, China seems poised to have a combined carrier that will be able to ‘compete on any terms with the best and biggest airlines in the world.’