GuoLihong, Department of Techno-Economic Research of DRC Research Report No.009, 2005

In the medium and short-term (15 years), feeder airline and general-purpose airline are the two factors practically driving the development of China’s aviation industry. The cultivation of these two markets would cultivate China’s aviation industry, therefore, the following policy proposals are raised centering on expanding the capacity of these two markets.

Here we need to make some explanations about "feeder." In fact, in China or abroad, there is no unified definition for "feeder." The civil aviation sector and the aircraft-manufacturing sector have different understandings about the term "feeder." Generally speaking, to the civil aviation circles, "feeder" refers to flight routes not between air hubs, with a distance less than 800 kilometers or 500 nautical miles (about 926 kilometers). Such flight routes are called regional routes in foreign countries. For the aviation industry, however, "regional aircraft" refers to civil aircraft with smaller seating capacity, less than 100 seats or less than 70 seats, and the flying range could vary, long or short. In combination of the two, aircraft used for main routes could fly regional routes, and regional aircraft could also be used to fly main and long routes.

I. Demand Policy (civil aircraft)

For the demand policy of military aircraft, there are no other proposals to mention except for actively expanding their exports. This paper will mainly be devoted to discussing how to expand the market of civil airline.

1. Promoting the development of commercial aviation industry

(1) Loosening market access for regional airline companies

Of the 33 domestic airline companies once approved, 20 operate regional routes concurrently, but none of them exclusively operates regional routes. When the authorities decided not to approve any more main airlines, some local governments, for the purpose of obtaining approval, submitted their applications in the name of establishing regional airline companies, but they began to fly main routes once their applications were approved.

In Europe, there are 73 regional airlines with more than 1,100 regional aircraft, and in 1998, the airlines made 1.94 million takeoffs and landings; and in the United States, there are 97 regional airlines with 2,150 regional aircraft, making 4.33 million takeoffs and landings. In comparison, the proportion of regional airlines is extremely low in China.

As a move to support and boost the domestically manufactured Yun-12 aircraft, the former State Planning Commission mandated that all airlines applying to buy imported aircraft must buy a certain percentage of Yun-12 aircraft. This method of tie-in sales was not the right move in the market economy. The move could not necessarily help the aviation company build up its brand, but it would surely be detrimental to the aviation transportation companies in establishing their brands. The feasible method is to loosen the market access and to give freedom to new regional airlines to choose to buy domestically manufactured regional aircraft. On the one hand, it would help the airlines to be profitable in the future, and on the other hand, it would help realize the sharing of risks and benefits with domestic aircraft manufacturers, and they could build up their brands jointly, or damage their brands together.

When the market access is loosened, it is possible that some private regional airlines might appear. If the revocation of a license is applied as a penalty, it would be enough to keep them from rivaling in the already saturated market of main routes.

(2) Loosening market access for general-purpose airlines

In terms of regional civil aviation, some major airlines are operating regional air routes concurrently, but they are lagging far behind their foreign counterparts. But as far as general-purpose aviation is concerned, it is lagging even further behind foreign counterparts, and even worse, general-purpose aviation is in the process of declining.

Similar to relaxing the market access for regional airlines, the main goal for loosening market access for general-purpose aviation is to encourage private capital to flow into the sector. The two markets are all characterized by their high risks and high projections, and past experiences have proven that state capital and state-owned enterprises are not interested in that and are reluctant to get involved in the markets. Therefore, private enterprise should be given the chance to enter the market.

(3)Loosening controls on the service contents and prices of regional airlines

Yunnan Airlines made a detailed cost-profit estimate and evaluation on CRJ aircraft flying regional air routes with a distance of 500 nautical miles. Its conclusion was that the internal gains rate was a –7.3% and there was no chance of making a profit. Of all regional air routes opened by Yunnan Airlines, the only one that is profitable is the route to Mandalay operated with aircraft used for main routes. These arguments prove that it is hard to make profits from regional aircraft and regional air routes.

If private companies are operating regional routes, they could try to make profits on the following bases.

First, to choose domestically manufactured turbo-prop aircraft instead of imported regional aircraft so as to greatly cut down investment. As to whether passengers would choose to fly such aircraft, it would be a choice of passengers from among all options available.

Second, to raise airfares. In foreign countries, it is a common practice that the unit price of regional routes is higher than that of major air routes. The airfare policy of the Civil Aviation Administration of China for existing airlines, similar to those policies adopted by the former state departments for many sectors in which the state capital plays a dominant role, contains the fear of "absence of owners," therefore, its interpretation of "price self-discipline" is "sales at low price are not allowed." This practice runs counter to what it is applied in the foreign countries. First, private aviation companies would not give up to make profits; second, they face competition from the highway and railway transportation operators; and third, it is also restricted by the consumers’ willingness to pay. Therefore, it is completely feasible to loosen controls on airfares.

Third, to cancel some services, such as free meals and free drinks. If the consumers find it acceptable, they would still be willing to buy air tickets for such flights, and it is not necessary for the government to intervene. On trains, only hot water is provided free of charge, and the prices for other meals and drinks are higher than the market price.

In a word, government control of regional airlines should be exercised completely under the market principle, and it is not necessary for it to play the role of investor sometimes and the role of consumer in some other times.

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