Strong potential demand bodes well for mainland budget carriers

PUBLISHED : Monday, 17 March, 2008, 12:00am
UPDATED : Monday, 17 March, 2008, 12:00am

Kong Yuanyuan, 25, a project supervisor at a Shanghai-based licensing consultancy firm, is planning a simple business trip to Chengdu in two weeks' time.

But her travel arrangements are surprisingly complicated, and the first leg of her journey will be by budget airline to Chongqing from where she will travel to Chengdu by train.

The reason for the roundabout route? The plane-train combination will cost 600 yuan (HK$658.81), compared with 1,900 yuan that other airlines charge for a direct flight.

'There are so many exhibitions and conferences taking place in March that my company has had to tighten the travel budget,' explains Ms Kong.

Private enterprise accounts for 50 per cent of the mainland's gross domestic product. But, as is the case with Ms Kong's company, many small businesses cannot afford pricey business travel.

About 70 per cent of the nation's population, or nearly one billion people, have indeed never travelled by air, the fact that suggests a huge potential market for low-cost carriers.

'China is a perfect market for budget carriers - in theory,' says Damien Horth, Asian transport research head at UBS Investment. 'Given the huge market size and low GDP per capita, the government needs low-fare carriers to stimulate demand.'

But there are just a few low-cost carriers operating on the mainland, including Shanghai-based Spring Airlines and Air Asia of Malaysia.

'One of the biggest obstacles [for budget airlines] is the shortage of low-cost terminals in China,' said Spring Airlines chairman Wang Zhenghua.

Landing and take-off fees account for over 10 per cent of an airline's operating costs, representing the third-biggest expense after fuel and aircraft costs.

Ryanair, Europe's largest low-fare carrier, enjoys zero landing fees in some remote European airports, according to Mr Horth. 'As for the mainland airports, they have to be more creative [in attracting low-cost carriers] as airport charges are still regulated by the government.'

Mr Horth adds that mainland carriers lack the freedom to choose routes, and air ticket prices are still government-regulated. Domestic carriers have to apply for permission to fly to the top airports - Beijing, Shenzhen, Shanghai and Guangzhou - and ticket prices are expected to comply with upper and lower limits set by the government (though carriers do not always abide by the limits).

Okay Airlines, a Tianjin-based airline, says it will take five or six years for low-cost carriers to be profitable on the mainland.

But they may not have to wait long. Beijing is now studying a plan to add more low-cost terminals, according to an official of the General Administration of Civil Aviation.

The official said some former military airports were being tested for use as budget airports. One of them is Beijing's Nanyuan Airport, which will be open to international airlines during the Olympic Games.

'China's party line is to build a harmonious society with a more even distribution of wealth, and the ability to travel by air is one of the signs of a fairer society,' said a market observer.

The importance of budget airlines was highlighted after snowstorms paralysed the railway and road systems in southeast China during the Lunar New Year. Airlines could have a bigger share of domestic transport if fares were low enough to compete with train fares.

Other than private-owned carriers such as Spring Air, Okay Airlines, United Eagle Airlines, East Star Airlines, China Express Airlines, Juneyao Airlines and Lucky Airlines, several state-owned carriers could be budget carriers.

Xin Fu Airlines, a Xian-based airline formed by China Eastern Airlines and Avic I in last month, will fly with Chinese-made ARJ-21 and Xin Zhou 60 aircraft. Market observers say Chinese-made aircraft are cheaper, cutting a major operating cost.

Luo Zhuping, a director at China Eastern, said it had yet to form a management team at Xin Fu Air so it was premature to say which part of the market it would target.