China ready for low cost airlines

China’s consumers could embrace the global low cost travel revolution in their droves, according to Derek Sadubin, General Manager of the Centre for Asia Pacific Aviation, addressing the China and North Asia Low Cost Airline Symposium in Macau this week.

The Symposium, with some 200 delegates in attendance from across Asia, North America and Europe, was coordinated by aviation industry consultants, the Centre for Asia Pacific Aviation.

Mr Sadubin stated that China’s population currently has a very low number of air trips per capita, “but even slight increases in the propensity for travel has massive implications for airlines, aircraft manufacturers, airports and tourism around the world - and particularly those countries just a short hop away”.

China’s aviation industry has entered an exciting new development phase, to be characterised by increasing openness and competition, particularly in international markets, according to Mr Sadubin. “China has entered what we describe as its sixth major development phase – Liberalisation and Deregulation. We forecast the coming phase will dwarf even the quantum steps made in 1985 to de-centralise the industry, in terms of accelerating market development”.

“China’s market evolution has occurred in a massively compressed timeframe – achieving in slightly over two decades what has taken many decades to achieve in most other aviation markets. Given this fact, we must all be mindful that the development of low cost airlines could occur even more quickly than we all imagine. China’s aviation market could surprise us all once again. There is no time for complacency”, said Mr Sadubin.

International access will become easier, as China’s negotiators sign more liberal air services agreements. Liberalisation will lead to significant market changes, including an increase in point to point-to-point services from an increasing number of airlines, particularly on Southeast Asian routes. “As the region’s liberalisation initiatives spread North – and we believe China’s moves especially will prompt movements in Japan, greater competitive opportunities between North Asian neighbours will arise. Point-to-point travel between the densely populated and affluent markets in China, Korea and Japan will mushroom in the second half of this decade”.

Services from the newly liberalised markets in Southeast Asia to destinations in China will commence with Valuair in just a matter of days and will intensify as new low cost airlines join the market later in 2004.

These new entrants, according to Mr Sadubin will operate on a point-to-point basis at around half the cost of its competitors, or up to 2.7 times cheaper to Hong Kong than Cathay Pacific. “While this provides some insulation for the low cost airlines, we are in for an extended period of deep discounting, and the ones with the deepest pockets will survive. But the market will get a taste of what low cost competition can offer – and they’ll want more, I guarantee it”.

“Full service carriers will have to learn to live with – and adapt to – lower fares. Further yield dilution, on key point-to-point Asian markets, is inevitable as more and more budget carriers enter in the second half of 2004. Incumbents will have to respond to this, through continued deep cost cutting, promotions, innovative new service concepts, new routes – or more aggressively by creating their own low cost units to tackle the issue head-on”.

One of China’s existing carriers is likely to develop its own low cost operation possibly as early as next year or 2006. Mr Sadubin stated, “it is inconceivable that this type of development will not be established by the time of the Beijing 2008 Olympics and 2010 World Expo in Shanghai, when the world’s eye will be on China. History suggests it could be best to start from scratch with a “clean” subsidiary, with independent operations and management. A joint venture with an established and experienced low cost airline could be a successful strategy”.

Mr Sadubin concluded, “the likes of the Ryanair investors, Virgin Blue, AirAsia, US Super Funds and aggressive investors like Temasek, fresh from the launch of other low cost entrants, could seriously knock on China’s door in coming years for a piece of its massive east coast market. With its major airlines privatised and airports increasingly corporatised and privatised, will Beijing knock-back a partially foreign-invested low cost airline? Maybe – but probably not!”