Chinese LCCs Hope for More Favorable Business Conditions

 - July 9, 2019, 11:59 AM

Although not yet known for a business-friendly environment for low-cost carriers, China expects LCCs to assume a far more influential position over the next decade, as the country’s 14th and 15th five-year plans take hold from 2021 to 2030. According to an official at the Civil Aviation Administration of China (CAAC) in Beijing, Liu Shu, the regulatory body already has received several business proposals for the establishment of LCCs, approvals of which allow for would-be startups to apply for air operating certificates (AOC).

Liu said the new LCCs would be Chinese-owned domestic and regional operations involving provincial governments and/or joint ventures with local carriers. He declined to identify the airlines or which provinces would participate; however, he noted that authorities would allow only one LCC at each airport.

Ten LCCs now operate in China: Spring Airlines, China United Airlines, Beijing Capital Airlines, 9 Air, West Air, Ruili Airlines, Colorful Guizhou Airlines, Urumqi Air, Jiangxi Air, and Lucky Air. Still, Liu acknowledged that it has taken a long time for the low-fare segment of the market to mature in China. While Spring Airlines has managed to overcome structural barriers with the financial backing of parent company Shanghai Spring International Travel Service (SPITS), one of the largest and most profitable travel agencies in China, most of the other LCCs occupy a tenuous competitive position.

Okay Airways and Spring Airlines started operations in March and July 2005, respectively, but only the latter survived the competition with domestic airlines. In less than eight months after its launch, Okay—based at Tianjin Bihai International Airport—gave up its low-fare aspirations and switched to a conventional, full-service business model. Seven other companies that had either applied for the AOC or began the process of applying to operate LCCs then abandoned the idea. Those companies took heed of Okay’s competitive difficulties and the regulatory barriers it encountered. Even reducing its aircraft utilization and selecting airports that charge lower fees didn’t do enough to make the low-fare model viable. Chinese LCCs, like local private carriers, face a long list of regulatory barriers that hinder their plans to tap the huge growing aviation market. Regulatory policies govern even business decisions, such as what routes to operate and when to order aircraft, while airlines must overcome the burdens of import charges and value-added tax for new aircraft. The CAAC even dictates fares through an official fare structure.

Meanwhile, the cost of fuel in China runs about 17 percent higher than that in international markets. Chinese airlines estimate that fuel cost account for about 30 percent of their expenses. Separately, LCCs, like full-service airlines, must contribute to the China Airport Development Fund every year.