Get 40% Off
💰 Buffett reveals a $6.7B stake in Chubb. Copy the full portfolio for FREE with InvestingPro’s Stock Ideas toolCopy Portfolios

China's domestic travel boom brings rush of start-up airlines, jet orders

Published 31/10/2016, 23:34
© Reuters. A plane flies over the setting sun in the sky at Beijing International Airport
BA
-
AIR
-
USD/CNY
-
EMBR3
-
0753
-
0670
-
1055
-

By Brenda Goh

ZHUHAI, China (Reuters) - China's appetite for planes and pilots is building up, whetted by a slew of new airlines launched in the last three years as local governments, private firms and larger carriers fight for a share of the country's fast-growing domestic travel market.

More than 10 Chinese carriers have begun flying since Beijing's aviation regulator relaxed a six-year suspension on new airlines licences in 2013. They now operate or have ordered at least 100 jets made by Europe's Airbus Group (PA:AIR), U.S. giant Boeing Co (N:BA) and Embraer SA (SA:EMBR3) of Brazil.

Such breakneck expansion might give cause for alarm in mature aviation markets. But China's new breed of carrier is focusing on second and third-tier Chinese cities that have gleaming, newly built airports that helped stoke an 8.2 percent rise in domestic China passenger traffic in 2015, according to the International Air Transport Association.

While state carriers like Air China <601111.SS> (HK:0753), China Eastern Airlines <600115.SS> (HK:0670) and China Southern Airlines <600029.SS> (HK:1055) dominate for now, the newcomers have deep-pocketed backers like conglomerate HNA Group, plus support from local authorities as well as Air China itself.

"By 2020 we want to have 40-50 planes," said Lan Yu, brand manager at Guangxi Beibu Gulf Airlines, a newcomer set up by the government of southwestern Guangxi province and Tianjin Airlines in 2015. Tianjin Airlines is a unit of HNA, an aviation and shipping giant with more than $100 billion in assets that itself is expanding fast into the hotel trade overseas.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Guangxi Beibu will fly 13 Embraer E190 regional jets and three Airbus A320s to 28 Chinese cities by the end of 2016, Lan said. With average seat occupancy of more than 90 percent since flights began, Lan said the carrier was already profitable.

Aircraft makers like Boeing (N:BA) welcome the newcomers, provided they are financially sound.

"We obviously look a little more closely at new airlines to make sure we account for the risk, but we're not seeing any issues with the ones that have started up in China," said Darren Hulst, Boeing Commercial Airplane's managing director of marketing for Northeast Asia.

"We assess the funding that they have, the access to financing that they have, and then from a going-concern perspective, some of these carriers that have started, how are they performing, are they generating profits?"

PRICE WAR?

As well as the newcomers already up and running, at least another 10 airlines have applied for air operator certificates, according to company statements and local media reports. At the end of last year, China had 48 passenger airlines, up from 36 at the end of 2012, according to data from the Civil Aviation Administration of China (CAAC).

Along with racking up aircraft orders, the new airlines are also advertising pay packages up to 50 percent higher than their established rivals as they find it tougher to lure staff, said general manager of Hong Kong-based crew recruitment firm Smile Aviation Sherrie Luo.

Hongtu Airlines, based in the southwestern city of Kunming, is offering Airbus A320 pilots monthly salaries of up to $25,500, according to advertisements on Smile Aviation's website. Pilots heading to China Eastern can expect up to $18,500 a month.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Some industry experts caution that China's blossoming aviation market runs the risk of a price war, as the CAAC relaxes restrictions to allow airlines to set ticket prices for more routes.

"Some of the airlines may lower their pricing drastically to get the competition out of the route so they can maintain market share," said Bjarki Arnason, head of Shanghai-based consultancy AviAsia. "The competition can be pretty fierce in this environment."

Still, Arnason said, Beijing will be vigilant to protect its growing industry. "I doubt that the government will actually allow that (a price war) to happen."

($1 = 6.7367 Chinese yuan renminbi)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.