Baiyun shows how historical obligations weigh on mainland aviation

There would have been more than a few smug smiles of acknowledgement among the logistics community this week when a senior executive from Guangzhou's fiercely independent Baiyun airport said it was seeking a foreign investor to help pay the bills and sharpen management skills.

With a 17.3 billion yuan bill for the second-phase expansion at a loss-making airport staring them in the face, Baiyun's management bit the bullet and conceded it may need some help.

Of course, the Hong Kong Airport Authority's assistance was ruled out: Baiyun will have to be facing far greater challenges - like the ones faced at Zhuhai airport - to approach its arch rival. But rather than gloat, it would be more constructive to view Baiyun's news as more of a mid-term report card on the liberalisation of China's international transport sector.

With an investment of 35.3 billion yuan in the first two phases of its development, the pace of Baiyun's rise to profitability was always going to depend on its ability to attract the region's high-value international services.

Although there are 24 airlines offering international services at Baiyun, it is nowhere near the critical mass it needs to start paring down its debt burden two years after opening.

For Baiyun to turn a profit, its home carrier China Southern had to develop a strong portfolio of international services. That hasn't happened and isn't likely to in the near future.China Southern lost 665 million yuan in the first three months of this year, not the kind of result that inspires expansion.

Like all mainland airlines, it is suffering mightily from the skyrocketing price of fuel and having the non-fuel costs - such as airport user charges, fleet maintenance, catering and ticketing services - in the hands of the government or monopoly services providers.

Chinese carriers have been hit harder by rising fuel because they have fewer cost levers in their hands than rivals in more liberalised aviation environments.

Simply put, while no airline executives are comfortable with escalating costs, higher fuel costs have made the strong stronger and the weak less able to compete.

Regulators would like to liberalise China's air transport sector to keep the economy ticking along but they want to do it cautiously so that their home carriers don't get wiped out by a full-scale injection of foreign competition. The problem is, with fuel prices where they are, mainland airlines have never been more vulnerable than now.

So while China's economy continues to race forward, liberalisation of its aviation regime would unfold at a more relaxed pace, Fang Liu, director of international affairs for the General Administration of Civil Aviation of China, told a Hong Kong audience this week. Ms Fang, who was undoubtedly aware she was talking to delegates whose main carriers have largely had to watch the opening of China's aviation sector from the sidelines in recent years, defended the 'safe-guarded' way in which liberalisation was being rolled out.

Being state-owned enterprises, mainland carriers 'may not be as rational as their rivals in the market', she said. 'Moreover, they have a social responsibility to provide job opportunities, maintain social stability and support the national development policy and strategy.'

The mainland's regulators have to be largely applauded for the way in which they have handled the liberalisation of air transport. But given that many of China's main carriers and airports are listed, one has to wonder how they square that dogma with the revenue growth and earnings expectations of shareholders.

Clearly the industry's present operating environment is particularly hard on Chinese carriers, not least China Southern, which continue to be weighed down by historical obligations that have no place in a modern market.

And that will continue to be bad news for Baiyun and most mainland airports with limited international services for the foreseeable future.