Air China

Nation's carriers face rough landing over plan to lift fees

PUBLISHED : Friday, 10 February, 2006, 12:00am
UPDATED : Friday, 10 February, 2006, 12:00am


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China's proposals to ramp up the profitability of its second-tier airports could not have come at a worse time for the country's airlines, many of which are struggling to cope with higher fuel costs under a regulatory regime that restricts their ability to generate more revenue.

The General Administration for Civil Aviation of China (CAAC), the industry's governing body on the mainland, has been circulating a consultation paper which proposes to raise airport user charges for domestic flights next year by an average of 15 per cent.

If passed into law, the proposal could increase individual operating costs for China's main carriers by 'several hundred million' yuan per year, a senior executive from one of the mainland's Big Three airlines told Below Deck yesterday.

Given that two of those carriers - China Southern and China Eastern - have issued guidance to the market that their earnings for last year will fall at least 50 per cent despite enjoying robust growth in passenger ticket sales, the proposals are being viewed darkly in airline quarters.

All of China's airlines struggled last year to deflect a 45 per cent increase in the average cost of jet fuel, handcuffed as they were by state restrictions on how much they charge for domestic passenger fares, surcharges or even how much they can hedge their fuel bills.

The regulator's logic is simple and twofold: 85 per cent of China's airports are losing money because their user fees are set too low to recover the operating costs of running the facility; essentially any airport handling fewer than five million passengers a year is running at a deficit - and the regulator knows that has to stop.

Moreover, China has emerging obligations under its agreement with the World Trade Organisation not to discriminate between foreign and domestic airlines and that extends to airport user fees.

At present, when Cathay Pacific or any foreign airline lands a 400-seat B747 at a Category 1 airport such as Shanghai, the fee is about $33,000; Air China or one of its cohorts pays about $13,000 for any flight headed for an international destination.

Foreign carriers also pay a 25 per cent penalty for landing at airports between 11pm and 6am and a further 10 per cent for landing anytime runway lights are needed.

Landing fees are just one of many charges waiting for airlines at China's airports but they are by far the largest not applied on a per capita basis. The CAAC aims to bring those fees more in line without damaging the airports' revenue streams. To do that, it would like to cut the overall penalty on foreign carriers by 20 per cent while boosting levies on domestic carriers on international flights - Hong Kong and Macau included - by 70 per cent.

Other than mainland carriers - which say user charges in China account for about 14 per cent of their operating costs - the proposals will have the biggest impact on airports with the least international flights.

It is estimated that airports such as Hangzhou Xiaoshan, which handles about 85 per cent domestic traffic, would enjoy at least a healthy single-digit rise in annual revenues, filling the coffers of its shareholders such as Hong Kong's airport authority.

According to mainland media reports, the aviation administration was hoping to bring the consultation process to a close and publish its decision by the end of last month. But with so much at stake for both airports and airlines, the carriers now say a decision may not be reached until the middle of the year.

Whatever decision is reached will be set in stone for the industry's next five-year plan, which begins in March. If the proposal is passed as written, operating costs for Chinese carriers will rise on both international and domestic flights.

And with little ability to boost revenue or recover those costs elsewhere, it can be a long five years on the mainland.