Too costly to take off

Shanghai Star. 2005-07-21

Zhang Junyu¡¯s trip from Shanghai to the seashore resort of Yantai in East China¡¯s Shandong Province would normally have meant spending 22 hours in a clicking train carriage or paying a stiff 630 yuan (US$76) for a flight on one of China¡¯s domestic air carriers.

Instead, Zhang got himself a ticket for just 199 yuan (US$24), nine yuan higher than the price of a train sleeper, on the maiden flight of Spring Airlines.

¡°With such a low price, I will be able to travel more by air,¡± said Zhang, a management consultant in Shanghai.

Shanghai-based Spring Airlines staged its debut July 18, when its Airbus 320 took to the skies. But the privately run carrier had caught the limelight even before the maiden flight, as it vowed to establish China¡¯s first budget airline.

Analysts say it will still take a few more years before a true-blue, no-frills carrier takes off and alters the landscape of China¡¯s aviation industry.

Frills eliminated

Besides the Shanghai-to-Yantai route, Spring has also received the go-ahead from the Civil Aviation Administration of China (CAAC) to operate routes from Shanghai to Nanchang, Mianyang, and Guilin.

Calling itself a no-frills carrier, Spring has tried to save every penny to cut costs.

Unlike traditional airlines, Spring doesn¡¯t provide in-flight meals in the price of the ticket and only offers a complimentary bottle of mineral water.

It stated that if a flight is delayed or cancelled when the carrier is to be blamed, Spring will not provide free meals and would offer lodgings only when the delay exceeded four hours after 10 pm.

In addition, the airline¡¯s maximum weight allowable for luggage is 15 kilograms, at least 25 per cent less than that of other airlines.

¡°With those measures in place, we will manage to bring all of our tickets to 20 per cent lower than standard,¡± said Li Weiming, spokesman for Spring Airlines.

According to a survey on www.searchina.net.cn, more than 60 per cent of the 3,600 respondents named price as the main factor that influences their choice of a flight while 56.3 per cent say they will take a budget flight as long as the ticket is available.

Li said that his company hoped to achieve a load factor of 85 per cent in the first year of operation with the low-price incentive. The average for regular Chinese mainland airlines is between 60 to 70 per cent.

Regulatory barriers

Spring¡¯s low price incentives proved to be successful in its maiden flight as all the 168 seats were sold out.

But shortly after the maiden flight, Ge Xuejin, executive president of Spring, said the dirt-cheap tickets of 199 yuan (US$24) would not be available for later flights since the low price, offered without approval from the CAAC, incurred opposition from within the industry.

Discounts in air fares, common among China¡¯s airlines, should be no more than 55 per cent of the standard price, according to CAAC regulations.

In an earlier announcement, Spring said most of its tickets would be sold at a discount of 20 per cent, which led to suspicion in consumers about whether Spring is the genuine clone of overseas no-frills carriers, which often offer deeper discounts.

¡°Besides pricing, there are still other regulatory obstacles for the emergence of budget airlines in China,¡± said Li Shurong, an aviation industry analyst with Shanghai-based Shenyin & Wanguo Securities Co.

In a public hearing held in June, Spring also sought to lobby for lower airport-landing and take-off fees, which are determined by the CAAC.

That effort failed as other airlines protested such preferential treatment.

¡°The takeoff and landing fees represent a big portion of operational cost, and such discounts are crucial for the emergence of low cost carriers,¡± Li said.

Liu Jieyin, president of the Tianjin-based Okay Airways ¡ª another privately-run airline established in March this year, considered it will take ¡°at least five years for the low-cost mode to mature in China.¡±

Liu made his comments as the newly established airlines, mostly invested by private capital, are confronted with great difficulty in recruitment.

According to a recent rule issued by the CAAC and four other ministries, an airline should pay 700,000 to 2.1 million yuan (US$84,337-253,012) to the former employer of pilots it recruits.

According to Liu the rule ¡°helps maintain the status quo and protects the interests of the major airlines,¡± which are still feeble compared with the global aviation giants competing with them on international routes.

Analysts say such regulatory obstacles could make operational costs even higher for new players trying to earn a name with low prices.

Okay Airlines, which offered price discounts as much as 60 per cent at the beginning, decided to raise its prices to the standard level after finding was unable to contain costs.

United Eagle Airlines, another private carrier approved by the CAAC, has said it won¡¯t adopt the low-cost mode.

Huge Potential

Though confronted with regulatory barriers, private capital is eagerly eying the opportunity to tap into China¡¯s once highly monopolized but promising aviation market.

More than 10 other Chinese enterprises are reported to have applied for licences to operate their own budget airlines since the government took the decision to restructure the nation¡¯s airline industry.

According to statistics from the CAAC, China¡¯s civil aviation sector registered a passenger turnover of 120 million yuan (US$14.5 million) in 2004, up 38 per cent year-on-year, while revenue for the industry hit 8.69 billion yuan (US$1 billion).

In addition, the CAAC also predicted that the annual growth of China¡¯s aviation industry will be above 15 per cent by 2007.



Copyright by Shanghai Star.