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New Airline Route Policy

08-08 17:17 Caijing

July 30, a long-awaited document called "Regulation of Domestic Investment in Civil Aviation (Test)," was finally published

by staff reporter Li Qiyan

On July 30, a document called "Regulation of Domestic Investment in Civil Aviation (Test)," long-awaited by aviation industry insiders, was finally published. Because it deals with the issue of private investment in China's civil aviation industry, it received a lot of attention.

In the first half of this year, impatient domestic private airlines like Aokai Airlines and Spring Airlines entered the civil aviation industry rapidly; Sinotrans Group Company also leapt into the once-closed civil aviation circle by buying 49 percent of Sichuan Aviation Group. Even more important for Aokai, Spring, and Sinotrans is the fact that the General Administration of Civil Aviation of China (GACAC) is considering new airline route and aviation oil policies.

Yang Yuanyuan, chief of GACAC, first announced the changes. In a televised national civil aviation meeting held on June 28, he indicated that the GACAC would draft an "Administrative Regulations of Domestic Route Management," the new route policy, based on the principles of gradual deregulation, equality, fairness, and openness.

The New Policy

The GACAC's Division of Transportation is responsible for drafting the document. Caijing acquired a draft in which the GACAC updated its strict examination and approval system for awarding authorization to operate routes; the new policy is one of "registration system first, approval system second."

According to the present draft, the registration system applies to the following: routes between an airline's base province and anywhere else in China; routes between provinces hosting an airline's sub-base (approved before January 15, 2005) and anywhere else in China; and freight routes. The GACAC and its sub-bureaus will handle registration for all airlines with these routes.

Routes to which the registration system does not apply will use the approval system - airlines must apply for routes, and then the GACAC and its sub-bureaus examine the applications and award authorization to operate each route.

Caijing learned that on July 15, the GACAC held an internal meeting on the new route policy. After the discussion, the draft was to be sent to the Department of Policy and Regulation for further revision. The chief of the department told Caijing in an interview that the reform would have "great impacts," it would deal with the details "cautiously," and "there won’t be big changes" in the revision process.

On the market side, the China Aviation Oil Holding Company (CAO), the monopolist domestic airline oil supplier, is also feeling the effects of reform. In late July, the GACAC published the "Civil Aviation Oil Regulation." The oil regulation was intended to ensure flight safety, but actually took steps toward opening the aviation oil supply market. Insiders have seen two reports on aviation oil system reform - one from CAO and one from the National Development and Reform Commission (NDRC). An insider told Caijing that "the CAO report mainly addresses the price hike, while the NDRC report stresses the introduction of a competitive mechanism and the deregulation of the oil price."

The Significance of Reform

The door to China's civil aviation industry is gradually opening. In this 158.6 billion yuan (US$ 19.56 billion) market, how much can newcomers earn? The route management and oil supply regulations currently under revision will likely be very decisive in answering that question.

China's first private airline, Aokai Airlines, started by operating the route from Tianjin to Changsha, which had no previous flight service. As a result, the examination and approval process for this route went very smoothly. Aokai's chairperson, Liu Jieyin, was aware that the market did not predict the route to be profitable; Changsha is neither economically developed nor a tourist city. No matter how high the fare discount, the passenger load would at most reach 50 percent of capacity. However, if the route could be extended to the hot tourist city of Kunming, the company stood to make money.

Overcoming many setbacks, Aokai finally received "special approval" to fly from Tianjin to Changsha and then to Kunming.

A special approval was necessary because, according to the GACAC's present regulation, routes that carry fewer than 100,000 passengers a year can only be serviced by two airline companies. As the third company to fly this route, Aokai would ordinarily need the approval of its previous two competitors, a condition Aokai thought "very unreasonable." With the special approval, Aokai no longer needed the permission of its competitors.

The GACAC tightly controls route operation rights, making it difficult for any private airline to obtain permission to fly the most popular routes.

"This is really a big power. It holds airline companies' lifelines," a senior insider said.

A research report from JP Morgan Chase shows that in 2002 the twenty routes with the biggest passenger flows in mainland China and Hong Kong represented 10.7 percent of China’s civil aviation market. Those routes only cover 13 cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Haikou, Kunming, Hangzhou, Xiamen, Chengdu and Hong Kong. Among them, Beijing takes up nine routes, Shanghai six, and Guangzhou four.

The airlines with the rights to operate those twenty "golden routes" have a chance of making profits. Traditionally, those routes have been in the hands of China Eastern, China Southern and Air China.

However, the draft of the "New Airline Route Policy" reflects the GACAC's drive to reform and the principle of gradually loosening market access; most routes will use the registration system instead of the approval system. The GACAC and district administrative organs will each establish domestic route authorization commissions.

The domestic route authorization commission will be composed of the GACAC's senior leaders and the heads of its related departments. It will be responsible for determining the standards and principles for granting route operation rights and determining whether particular routes fall under the registration system or the approval system.

Li Shurong, aviation analyst at the Shenyin Wanguo Securities Research Institute, said that the new policy encourages the development of lateral lines and relaxes route authorization.

One chief of the marketing department at China Eastern Airlines related his own understanding: "Although it relaxes route approval, after an airline gets its routes, it still has to go to the Air Traffic Management Bureau to apply for flight time; if it cannot get the flight time, [the routes are] meaningless."

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English Version by Lei Yongjian

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