Explore the Genetic Components of a Strong Civil Aviation Industry - Professor Qiu Lianzhong
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Explore the Genetic Components of a
Strong Civil Aviation Industry
Professor Qiu Lianzhong
Civil Aviation Management Institute of ChinaHow Far Are We From the Objective
z How strong and developed the civil aviation industry is should be
measured by the aviation service provided to its citizens
z Judged by this measurement, Chinese civil aviation industry still has a
long way to go
¾ China is not really in the same league as developed countries like the U.S.
and Europe. Among the so-called “BRIC” countries, China ranked
third-only better than India.
RPK Per Capita （ 2006）
4,500 4 ,2 0 2
4,000
3 , 52 1
3,500
3,000
2,500 2 ,3 6 1 2 , 3 17
2,000
1,500
1,000
490
500 264 177
54
-
Unit ed Unit ed Germany France Russia B razil China India
St at es Kingdom
2The Genetic Makeup of a Strong Civil Aviation Industry
From an airline industry perspective, a strong
industry should have the following genetic traits:
¾ An extensive passenger base
¾ A convenient regional network
¾ Strong international competitiveness
¾ A dynamic and open civil aviation market
3Foundation of a Strong Aviation Industry
z An airline can be profitable by getting into a niche
market or focusing on a specific segment. But the power
of whole civil aviation industry must derive from an
extensive passenger base.
z For a century, global civil aviation industry growth
surpasses economic growth, mainly due to two powerful
internal forces: “globalization” and “popularization by
low cost carrier”; which continuously expands both
domestic and international passengers base.
z An important sign of a strong civil aviation industry is
that air service reaches the ordinary family and air
travel becomes a mass transit mode
4Purpose of Building a Strong Aviation Industry
z Safety, reliability, profitability and competitive strength are the
targets that airlines chase. But if good air services are not accessible
by the majority of its public, what is the purpose to be strong?
z Owing to the polarization of rich and poor and the imbalance of the
regional economy, the majority of Chinese passengers are from rich
areas. Beijing, Shanghai and Guangdong account for 9% of the total
population but 43% of the total passenger volume
Air Passenger Per Capita (2006)
1.40 1. 2 3
1.20
1.00
0.80
0 . 55
0.60 0 .4 4
0.40
0 . 14
0.20
0.00
Beijing/ Shanghai/ Guangdong Including 4 air por t s cat chment s Top 7 air por t s cat chment s The Rest
5Low Cost/Low Fare Should Be the Main
Theme
z Without Southwest and Jet blue in the U.S. and Ryanair and Easy Jet in
Europe, how much would civil aviation market shrink?
¾ Although low cost airlines only take about 20% of the European and US market,
they force those legacy airlines to follow and more consumers get benefit from
low fare air service
z Expanding domestic passenger base require efforts from both demand side
(increase income level and rationalizing income distribution) and supply
side (low cost/low fare model to meet demand from low income passengers)
z The start up of U.S. Southwest Airlines took the advantage of a gap in
Federal Regulation, but low cost airlines are becoming a worldwide trend
under deregulation
z In western countries, under a free market, low cost is a business model that
airlines innovated. In China, low cost/low fare needs government policy
promotion since resources (routes/slots) are under government control.
Benefiting the majority of public should be the focus of building a strong
civil aviation industry in Socialist China.
6Which Came First, Chicken or Egg? Dilemma
of Chinese Regional Air Service
z In recent years, the development of Chinese regional air service is really
much talk, less action because of a high unit cost of regional operation. High
pricing needs support from a developed economy. On the other hand, lack
of transportation in those regions is one of the underlying causes for a
backward economy.
z So, increasing economic development needs a developed regional network.
But regional air service needs compensation from a developed economy.
Regional air service has been wandering within the circle of which one
should be the first.
z With the priority of developing west regions, governments of all levels have
started to support regional air service. A set of favorite measures have been
taken by CAAC trying to break the circle though government subsidiaries.
It is true that developing regional air service has economic benefits. But
there are still some misconceptions from building harmonious society and
scientific development point of view.
7Building Road Is Only For Wealthy?
z The action of improving transport by all levels of governments are
motivated by “Building roads lead to wealthy.”
z On the opposite, Chinese traditional view is “Be wealthy first then
build roads”. Building roads and bridges is a good deed and our
ancestors considered transportation as a social service quite long ago.
z It is a misunderstanding that air service is a luxury because of its
high price. To those urban citizens, air service is not different from
other goods or services; but to those remote areas, air service is a
necessity for disasters relief and medical emergencies, etc.
z So air service, especially regional air service has dual natures, that is
public goods as well as economic goods
z Basic necessities are essential elements of a harmonious society. The
government has the responsibility to ensure a proper transport
service whether it can bring economic growth and GDP or not.
8Transportation System Is a Key Linkage to
Unite a Country And Its Peoples
z Since China is a country with vast territories and minorities, the
significance of building a regional network which connects various
parts of the country is more important than just providing a social
service: A transportation network is the backbone of a modern
country.
z Quebec separatists lost a referendum in a close vote in 90’s. The
people who showed a strong support for unity were the aboriginal
people who live the northern part of Quebec, near the Arctic Circle.
There were many reasons why those people were against the
separatists-but here are some statistics that can shed some light:
¾ In 1999, the average Canadian flew 2.8 times a year, but 13.5 times for
those who live around the Arctic Circle. It is not because northern
regions are wealthy. The long winter and bad weather conditions would
make people isolated if there was no air service. After deregulation,
Transport Canada always set a high priority for providing air services
to those remote areas and small communities.
9Travel Convenience Relies on a Vertical
Transportation System
z In China, undeveloped areas should be supported and transportation in small
communities should be improved so people in different regions can enjoy equal travel
convenience. But there are still differences among regions. Providing travel
convenience ought to be based on a multi-mode transportation system. The
development of regional air service must take into consideration of transportation
economics.
¾ In the U.S. and Canada, each person has 0.7 seat of regional flight on average, but in UK,
France and Germany, only 0.1. Does that mean that there is an inconvenience of travel in
small communities in Europe? Not really. US and Canada have a more developed regional
air service while in Europe, they have a much better public ground service. The population
density in US is 31 people per square km, 3.2 in Canada. There are not enough population
density to support ground public transportation except certain densely populated regions. In
Europe, 176 people per square km is adequate for a cheap and similarly convenient ground
public transportation service.
¾ For those China eastern coastal and central provinces, the least in population density is
Hainan province(241) while the most is Jiangsu province (724), almost three times that of
European countries. But in the southwest and northwest provinces, the lowest population
density is Qinghai (7), Xinjiang(7), Inner Mongolia (20) while the least is Tibet, only 2, all less
than that of the U.S.
10Travel Convenience Relies on a Vertical
Transportation System（Cont.）
¾ Airlines may prefer profitable routes in eastern parts of the country. But as a part of
national transportation planning, development of regional air service should focus
more on western areas.
¾ Recently, railway and aviation competed a lot in China. When competing with others
transportation modes, airlines industry cannot neglect the complement among
transportation modes. Due to limitation of the resources, vast territory and
complicated geography, China needs scientific planning and joint work of civil
aviation, railway and road departments to form a vertical transportation network to
enhance the convenience of traveling in remote areas and small communities.
¾ Many people consider the new Transportation Department as a way of simplifying
government functions. Actually, modern transportation system itself is a vertical
network. The separation of waterway, ground service and air service makes it
impossible to use limited resources to satisfy the economic growth and transportation
demands of all regions.
¾ Though the cost of building an airport is lower than building railway and roads,
operating cost also needs to be considered. Actually, there is quite a lot investment in
constructing smaller airports. The problem is that the operating capital is ignored
and it is out of proportion to the investment in airport construction. To create real
benefit, government planning should not only have a budget of airport construction
but also an operation subsidy; not only develop a regional air service network but
also develop general aviation system.
11International Competitiveness
z The strength of civil aviation industry of China should be evaluated
on the platform of global market and be matched by competitiveness
of Chinese airlines.
z Between 2001 and 2006, total passenger kilometers of Chinese
airlines climbed 4 steps from sixth to second while international
passenger kilometers only climbed 2 steps from 17th to 15th.
¾ Regarding international passenger volume, a 1.4 billion population
country is not only behind less populated Australia and Canada, but is
even behind small gulf countries and Hong Kong and Singapore.
2006 International RPK（in Million）
95000
90000
85000
80000
75000
70000
65000
60000
55000
50000
Three Gulf Singapore Hong Australia Canada China
States Kong 12Stuck in the Middle
z Low GDP per capita and improper income allocation can explain
the low average passenger km in domestic market. International
ranking actually reflects competitive strength of Chinese airlines as
many international passengers are from developed countries.
z An airline’s competitive strength can be evaluated from three
aspects: high yield market, bilateral transfer market and
multilateral market. Chinese airlines have an obvious disadvantage
in high end market.
China - NA Market share by cabin（2007）
80%
80%
65%
70%
60% 49%
50%
40% 30%
30%
15%
20% 11%
10%
0%
High Economy Low Economy Premium Cabin
13
Chinese Majores NA MajorsRely on Point to Point Traffic
z Furthermore, it is clear that for point to point international markets,
Chinese airlines are doing pretty well. But for transfer market their
competitive strengths drop off greatly. Their market share of first
and business classes only equals to a third country carrier with the
six freedom right.
Chinese Airlines Market Share in China - NA
Market（2007）
56%
60%
43%
50%
40%
30%
17%
20%
6%
10%
0%
Point to Point Connection
Back Cabin Front Cabin
14Invisible Front
z In recent years, there have been quite a few international trade disputes,
but the globalization of civil aviation market has not been affected by trade
barrier. Since airlines can be involved in multilateral market, which has
nothing to do with their own national air transportation under the
framework of bilateral agreements. The formation of alliances also greatly
advances the development of this multilateral market.
¾ Many neighboring southeast Asia countries have no direct flight to North
America and rely on multilateral market greatly. According to MIDT statistics,
first and business class passengers for this market in southeast Asia reach
200,000 each year, almost the same amount as China – NA market, unfortunately
Chinese carriers have no penetration in this important 6th freedom market.
Southeast - NA Multinational Market
Share（ 2007）
24.7%
25.0%
20.0%
20.0%
15.0%
10.0%
5.0%
0.1% 15
0.0%
CA/MU/CZ UA/NW/AC CX/KE/OZ/JLCompetitiveness Only Comes from
Competition
z Competitiveness is neither natural born nor decided by the size of a company.
International competitiveness of an airline is an extension to of its domestic
competitiveness.
¾ Pam Air used to be the biggest airline not only in US but also around the world.
Relying on the traffic right granted by government, it flew all over the world. But
after deregulation, Pam Air was driven out of market by more competitive US
carriers such as UA and AA.
z Since the separation from government functions in 1987, Chinese airlines
embarked on market economy. Although Chinese domestic market is not as
deregulated as European and US market, from the consumers’ point of view,
the degree of price competition is almost the same. However from the
suppliers’ (airlines) point of view, there is a structural weakness in Chinese
civil aviation market that restrains the market efficiency
¾ entry and exit mechanism needs improvement
¾ No free mobility of resources
¾ Lack of comprehensive legal system
16Entry And Exit Mechanism Ensures
Market Efficiency
z “Metabolism” is the foundation of the evolution of nature and human
society. A dynamic market also builds on a healthy entry and exit
system. Market competition is a process where inefficient ones are
washed out; therefore efficiency is improved.
z Some Chinese airlines are state owned. Even at huge loss, they do not
need to worry about exit (bankruptcy), and can continue to keep a
high growth
¾ Once the limited resources are all occupied (slots in big airports, shortage
of pilots), CAAC has to stop new entry in order to ensure a normal
operation. Then, how can a static market produce competitiveness?
z Market exit not only results in improving efficiency, it also reducing
the surplus supply in an industry. When supply and demand is
totally out of balance or the industry has an uncontrollable attack
(such as 9/11) , exit of those inefficient companies could balance the
industry and draw it back on track. Without a proper entry and exit
mechanism, would add risks to whole civil aviation industry.
17Resource Can Be Optimized Only
When It Is Floating Freely
z If resources float freely, then market economy can optimize its allocation. The shortage
of resources is not a problem- it becomes a problem when pricing cannot reflect the
shortage.
¾ The grandfather rule of slots allocation is a common practice around the world. At congested
airports, this practice interferes with the floating and optimizing of resources. In U.S. and
Europe, airlines leasing bank owned slot and the secondary slot trading market has alleviated
this deficiency. And the existence of many secondary airports also reduces the airline
dominance by taking advantages of limited slots in major airports.
¾ Despite all this, EU civil aviation authority is incubating a market mechanism to allocate
limited slots to further the mobility of resources.
z The shortage situation of slots in China is almost the same as in Europe. Moreover,
civil aviation market is so concentrated that eight big congested airports actually equal
to two thirds of the market and the majority of profitable routes.
¾ Under current slot allocation system，airlines focus more on fighting for those limited slots
and how to keep them, while pay less attention on innovation and management improvement.
¾ Airlines in China are facing two fights: atypical competition in domestic market and free
competition in global market, which interfere with their effort to enhance international
competitiveness.
18Market Performs Under
Comprehensive Legal System
z The efficiency of market economy embodies in money. Pursuing
effectiveness could lead to unfair competition. Under a planned
economy, government could use a coupon to regulate trades. For the
market economy situation, fair laws and regulations are indispensable.
¾ Chinese airlines can get behind with the payments for a fuel company. On
the other hand, the fuel company is not allowed to refuse to fuel even
though the airline ignored the repeated warnings.
z It is quite common for Chinese airlines delay their payment to fuel
company, airports, but only small private airlines get punished. For
instance, another private airline was sued by Price Bureau for 99
Yuan tickets. The selective enforcement totally damages the fairness
and justice of laws. Not respecting laws is worse than no laws. If
there is no law, legislate one. If there is no respect for laws, a nation’s
stability would be in danger.
19Two Internal Drivers for Rise of Super Carriers
z There is a hot discussion on Chinese super carriers recently. Airlines are the
main body of a civil aviation industry. A strong civil aviation industry needs
the support of one or more super carriers. But we must be aware that
merging or restructuring is only an external form of becoming bigger. Real
super carriers are driven by two internal causes.
¾ It is the competitiveness, not the aircraft number, that eventually determines the
size of an airline. The ability of merging and restructuring its opponent depends
on airline’s competitive strength.
¾ The size of an airline is closely related to the size of market. Through
penetrating into multilateral markets, Singapore airlines, Cathy Pacific and
Emirates have a brisk business though they have a such small a population base.
The merging of Air France and KLM follows the steps of single European
aviation market. The common Atlantic market will also bring about new merges
and restructuring.
z Undoubtedly, Chinese civil aviation industry needs super carriers. But an
open market is essential. Otherwise, the more super a carrier is, the more
risks of monopoly of the market will it face.
20“Ascend Further, Were You to Look Farther”
z Based on scientific development view, our national
development strategy has had a significant change. Both
airlines and civil aviation policies makers need to
reposition themselves.
¾ From micro perspective , airlines should change from pursuing
solely growth rate to balance growth and efficiency. Getting
bigger is not the only way to build a strong aviation industry,
Chinese airlines also need to be more innovative and develop a
variety of business models
¾ From macro perspective, the aim of government policy should be
both for civil aviation development and benefit majority of
public. In a sense, a nation’s development can be sustainable only
when it benefits majority of its people, and also protect the
benefits of their generations to come.
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