20 September 2019

China’s up-in-the-air civil aviation reform

What does China’s State Forestry Administration have to do with civil aviation?

Not very much, except that in a new set of initiatives promulgated by the State Council this January, this department was enjoined to give its full support to deepening the country’s civil aviation reform.

In fact, no less than 40 ministries, governmental agencies and state-owned enterprises including the Ministry of Education, the State Oceanic Bureau and China Railway Corp. were tapped to take part in the endeavor. With this in mind, one can’t help but think how whimsical and superficial the whole set-up can actually be.

The Civil Aviation Administration of China (CAAC) formed a reform task force this month after the central leadership laid out the broad policy brushstrokes, yet CAAC officials are said to be still quibbling over the plan’s details.

A China Southern Airlines (01055.HK, 600029.CN, ZNH.US) executive said he wouldn’t expect too much from the move as it was “merely a formality”. Virtually all ministries and bureaus will have to set up their own reform task forces to implement initiatives put forward at the Communist Party plenum at the end of last year, and the task force on aviation reform is just one of them, the executive told Southern Weekend.

Previous reform initiatives helped shape the current landscape of the aviation sector, and the last one, launched in 2003 and headed by the late Vice Premier Huang Ju {黃菊}, led to an industry consolidation that formed today’s giant carriers — Air China (00753.HK, 601111.CN), China Southern and China Eastern (00670.HK, 600115.CN, CEA.US).

The reform was a giant step towards creating a level playing field in the business and fueled the skyrocketing growth in overall passenger and cargo throughput over the past decade. Yet it dodged some fundamental issues like the monopolies enjoyed by China National Aviation Fuel Group, China Aviation Supplies Holding Co. and China TravelSky Holding Co. The “big three” control aviation fuel, airplane and parts importation, and air ticketing, respectively — lucrative businesses that are still largely closed to outsiders.

Observers say CAAC’s latest reform drive can hardly make a dent in the status quo. One major impediment is that these three behemoths are under the dual leadership of the CAAC and the State-owned Assets Supervision and Administration Commission (SASAC), and as has been seen time and again, red tape can debilitate any attempt at reform. SASAC, for example, may reject a proposal to spin off these firms as the commission’s key mandate is to increase the value of state-owned assets.

The big three also feel they stand on firm ground in defending their turfs. China National Aviation Fuel, for instance, argues that if foreign and private suppliers are introduced, national security may be compromised as aviation fuel is a vital strategic supply during emergency and disaster relief. China Aviation Supplies warns that Chinese airlines may lose their collective bargaining power if they negotiate individually with Boeing or Airbus.

Another inconvenient truth is that the price mark-ups on aviation fuel, reportedly among the world’s highest according to the International Air Transport Association, is CAAC’s main source of income to fund its airport construction spree. China Business News reports that 50 new airports, mainly in the central and western regions, will be built by 2015. The bulk of the hefty commission charges by China Aviation Supplies for importing airplanes are also turned over to the aviation authority to subsidize small airports.

In the ticketing business, Amadeus IT Group and Abacus International — two major airline global distribution system operators — have secured the green light for their China business earlier this year. But the National Business Daily revealed that TravelSky, with a little help from the CAAC, has been fending off rivals by forcing domestic airlines to sign exclusive contracts with the firm.

It would be unfair to say this early that nothing will come out of the latest aviation reform initiative. In fact, part of the reform is to open more air space to civil aviation, which undoubtedly will go a long way in alleviating the worsening flight delays. But it seems that eliminating monopoly won’t be on the CAAC’s radar.

– Contact the writer at [email protected]



EJ Insight writer