China’s Aviation Renaissance

China has shifted its economic plans to slow growth and emphasize domestic spending and consumption. This internal focus is expected to stimulate demand for air travel. As a result, China is undergoing a massive aviation renaissance including building new airports and buying and building planes to set the stage for continued growth. It may soon be the world leader in air travel.

China’s “hyper-fast growth rate during the last 10 years is unlikely to be replicated in the future,” according to Wang Feng, director of the Brookings-Tsinghua Center. China’s economy has been running at very high levels, averaging a GDP growth rate above 10 percent during the last two five-year planning cycles. In the backdrop of a slow world economy, this high growth rate is not sustainable.

China’s leadership is transitioning China from an export and investment-led economy to one based on domestic consumer-based growth. And while China’s economy may run at a slower speed than in the past, an important byproduct is expected to be increased demand for air travel.

So how and why will China’s current five-year plan stimulate demand? What infrastructure measures is the government taking, and how is it investing to set the stage for continued rapid growth in air travel?

Air Passengers In China Have Tripled from 2001 to 2012. Freight Has Grown in the Same Proportion as Passengers

Extreme Passenger/Cargo Growth In China China’s airports handled 75 million passengers in 2001. That number grew to 138 million by 2005 and more than doubled to 291 million in 2011. Air cargo has also climbed at a rate comparative to passenger volumes. The acceleration of growth suggests that institutional reforms and regulatory policies may have had important effects on airport development apart from economic growth and structural change.

The Central Planning Process

A centralized planning process has been in place in China for more than 60 years to provide social and economic goals for the country’s long-term development. Goals are mapped out in five-year cycles, termed five-year plans, to provide objectives and targets related to social and economic growth and industrial planning in key sectors and regions.

The backdrop for creating the current plan, called the 12th Five Year Plan (FYP) covering 2011-2016, includes the sting of the global financial crisis, rapidly rising property values and the risk of social unrest in China.

The impact of the financial crisis brought a sharp decrease in China’s exports and resulted in widespread layoffs of the country’s factory workers. In addition, continued high economic growth created large global trade and foreign exchange imbalances, leading to tension between China and its trading partners.

China’s central planners reacted by creating a five-year plan aimed at reducing China’s dependency on exports. This plan will move China toward a lower but sustainable growth rate by focusing growth through domestic consumption and ensuring that the benefits of economic growth will be spread to a greater proportion of the population. Key elements of the plan are to rebalance the economy, improve social inequality, and, following years of heavy pollution, protect the environment. China now leads the world in renewable energy investment.

The current FYP will attempt to bridge the large economic divide between urban and rural residents. Incomes in the developed eastern regions are significantly higher than in central and western China. To accomplish leveling the income disparity, the FYP focuses on promoting labor-intensive industries, raising the minimum wage by 13 percent each year. This will create development projects in Western China, constructing 10 million units of government subsidized housing among other measures including linking the country more closely by massive investment in transportation. The theory is that as incomes improve, consumption will rise. And as incomes rise, so will the demand for air service.

Airport Reforms Contributing To Passenger Growth

China’s airport industry has gone through two basic stages of reform:

  1. The first stage took place from 1995 to 2001 and was characterized by a change to joint-equity ownership of airports and transferring governance of airports to local authorities. During this time, 35 airports were transferred from central administration to regional authorities. For most airports, ownership was changed to joint-equity companies.
  2. The second stage of reform began in 2001 with the focus on encouraging local authorities to accelerate airport development and financing.

The reforms helped contribute to the rapid growth in air transport in China, especially during the second stage. The total number of passengers handled by China’s airports increased from 75 million in 2001 to 138 million by 2005 and then rocketed to 291 million in 2011. The volume of air cargo has also increased at a rate proportional to passenger volumes. The acceleration of air traffic growth from 2001 implies that institutional reforms and regulatory policies may have had important effects on airport development apart from economic growth and structural change.

Comparison of China to US & Europe Supports the Increase in New Airports

China Needs Airports Despite the fact that China has a much greater population and the same amount of land as Europe and the United States, it has only a tenth the number of airports compared to the United States and about two-tenths the number of airports compared to Europe. China generated less than half the number of passengers traveling by air compared to the United States or Europe. CAPA Centre for Aviation anticipates that China traffic will rise from 320 million passengers in 2012 to 450 million in 2015, 700 million by 2020 and 1.5 billion by 2050, nearly double the number of air passengers traveling today in the United States or Europe.

Airport Chicken And Egg

Do airports stimulate economic growth, or does economic growth stimulate demand for airports? The interdependence between airport activity and economic development is well known. The dilemma for China is what to do first — develop airports as a means to boost the economy, or develop the economy and then build airports.

The answer appears to be to do both. Justification can be found by looking at the numerous studies that have examined the importance of airport development to economic development, and the relationship between the development of aviation and economic growth. Here are some findings from economic studies:

  • There is a positive relationship between the level of economic development and air travel demand for both passengers and cargo.
  • The growth of demand for air travel is dependent on the growth of economic activity, or the growth of GDP.
  • The demand of air travel is related to population density. Demand for air travel is higher in a region if that region has a higher population density than another region.
  • The demand for air transport increases if the region becomes more open in terms of trade.
  • Economic structure can affect airport business. If a region is more dominated by services industries, its air travel demand will be higher than in other regions.
  • Institutions, regulations and government policies can help promote air transport development.
  • Air and high-speed rail transportation are substitutes.

Overall, these studies show strong evidence that airport development plays an important role in stimulating regional and national economic growth through job creation and attracting the inflows of capital and new businesses in regions close to airports. In addition, construction and expansion of airports can also change the structure of local investment and employment.

However, to some extent these studies can be misused in that they may induce governments to implement more ambitious airport development plans, investing vast amounts of capital into new airport expansion and reconstruction projects. That has been the case in China where many airports are losing money.

In 2011, about 130 airports lost more than 2 billion RMB (about US$320 million). Chinese officials made the argument that these airports were money losers because China had too few of them, not too many.

“It’s like planting trees,” said Li Jiaxiang, chief of the Civil Aviation Administration of China. “One tree will die, but if you plant more, it will become a forest, and the trees will grow higher and higher.”

According to government officials, China’s aviation market has the biggest potential for expansion in the world. China has between three to four times the population of the United States or Europe, the same land area as the United States and twice as much land as Europe and yet only a tenth the number of airports compared to the United States or about two-tenths the number of airports compared to Europe. China generated less than half the number of passengers traveling by air compared to the United States or Europe.

In addition, China has a low GDP per capita. Increasing the economic well being of China’s citizens, a fundamental element of the current FYP, combined with additional airline capacity should skyrocket China’s passenger numbers. CAPA Centre for Aviation forecasts China traffic to increase from 320 million passengers in 2012 to 450 million in 2015 then to 700 million by 2020 and 1.5 billion passengers by 2050. That would be nearly twice the number of air passengers traveling today in either the United States or Europe.

Location, Location, Location

For airports, just like in real estate, it’s all about location. For China’s airports, it can also be about competition and burgeoning demand.

In southern China, the Pearl River Delta has turned into a mega city with a combined metro population of 120 million, according to the 2010/2011 State of the World Cities report. There are five airports within 150 kilometers or less from each other — Hong Kong International, Guangzhou Baiyun Airport, Shenzhen Baoan Airport, Macau International Airport and Zhuhai Sanzao Airport.

Competition appears to be heating up between the two largest airports — in Guangzhou and Hong Kong.

China’s government indicated Guangzhou will be one of China’s three principal international gateways. It’s intended for Guangzhou’s Baiyun Airport to compete head-to-head with Hong Kong International. To make this happen, a major expansion of Baiyun will be needed. Baiyun Airport opened in 2004. It was designed for 25 million passengers. It handled 45 million in 2011. Work has begun to expand capacity to 80 million as well as add an additional runway. In addition to Baiyun’s expansion, there are studies underway for a second airport in Guangzhou to be located somewhere in the southern part of the Delta. China Southern, the airline located in Baiyun, is in the north.

Guangzhou’s competitor, Hong Kong, also plans to take action in order to grow. Hong Kong International Airport is the world’s 10th busiest airport, handling more than 53 million passengers in 2011. It is also the world’s busiest cargo airport. Hong Kong’s government has given approval to build an additional runway. Hong Kong’s airport is also well located. It is 135 kilometers from Baiyun and less than 60 kilometers from the other three Pearl River Delta airports.

In the eastern part of China, traffic is also bursting at the seams. Beijing should overtake Atlanta as the world’s busiest airport in 2012 or 2013. Nearly 79 million passengers were handled at Beijing in 2011. Due to limited capacity, a second airport is planned to be built in Daxing, 50 kilometers away from the current airport. China’s airlines are concerned they may have to operate from both airports, which would increase costs and reduce flexibility. This scenario took place in Shanghai, which originally had one airport, Hongqiao. When Shanghai-Pudong airport was opened in 1999, local officials convinced the central government to keep Hongqiao airport and also to expand it. Shanghai-based China Eastern must fly out of both airports.

FYP’s Impact On Transportation

The shift of business and development, especially in Western China, will dramatically change transportation. In addition to equilibrating incomes, investment in infrastructure improvements will impact how people, raw materials and finished goods are moved.

The 12th FYP will invest heavily in expanding China’s transportation infrastructure. China will act to relieve traffic congestion by increasing its high-speed railway network as well as constructing larger capacity roads and highways and expanding current port capabilities. Improvements to infrastructure will stimulate interregional domestic trade and facilitate the growth of underdeveloped inland regions. This will continue to fuel demand for air service.

China has experienced three decades of double-digit growth in passengers traveling by air. This increase in numbers has strained many airports beyond their design limits. Mr. Wu Zhouhong, deputy director general of the Department of International Affairs and Cooperation for CAAC, said that only 16 airports in China are capable of transporting 10 million or more annual passengers. Beijing, Shanghai and Guangzhou are already saturated, and others are rapidly reaching their design capacity.

“It’s like planting trees, one tree will die, but if you plant more it will become a forest, and the tree will grow higher and higher.”
—Li Jiaxiang, chief of the Civil Aviation Administration of China

China To Add New Airports

According to Huang Min, director of infrastructure at the National Development and Reform Commission, China will have 230 airports, up from the current 182, by the end of the current five-year plan.

Hot Spot For Airport Projects

The Chinese government has already acted to build airport projects. In anticipation of further high passenger growth, investment in airport projects will increase.

China is already the world’s hot spot for airport development. At present, more than two-thirds of all airport construction in the world is taking place in China. Thirty-three airports were built during 2006-2010, the previous FYP.

In July 2012, the director of the CAAC announced China will build 82 new airports and renovate or expand 101 existing ones, including construction of a second airport in Beijing.

By the end of the current FYP, China will have 230 airports, up from the current 182, according to Huang Min, director of infrastructure at the National Development and Reform Commission.

China will also sharply boost the size of its fleet of commercial planes. South China Morning Post reported there are about 2,600 aircraft operated by Chinese airlines today, and this will increase to more than 4,500 planes by the end of the FYP. The large size of this market has stimulated China to begin development of airplanes. Currently, China is working on a regional jet, the COMAC ARJ21, and a narrowbody COMAC C919 with the intent to capture not only its own domestic market, but also to compete against Airbus and Boeing. (See sidebar for additional information.)

In total, the government plans to invest 1.5 trillion RMB (US$238 billion) in developing China’s aviation industry.

In addition to aviation, high priority will also be given to continue developing the high-speed rail system during the current FYP. The length of track on the high-speed rail network is targeted to be 45,000 kilometers.

By the end of the 12th FYP, every city with a population of 500,000 will be connected by high-speed rail, and 80 percent of China’s population should have access to an airport within 100 kilometers of their home.

Loosening The Military Grip Of China’s Skies

With more crowded skies on the horizon, China will have to make changes in how it operates airspace. This will require investing in technology and modernization of air traffic management. China’s air traffic control is in the hands of the military.

“Everything about flying within China is subject to military control and whim,” said James Fallows, author of a book about China’s aviation boom, called China Airborne.

Military controllers often hold up departures. To dodge military airspace, routings of commercial flights are made indirect. Cruising altitude is sometimes restricted to a fuel-inefficient 10,000 feet.

“It’s equivalent to having to drive on a freeway in first gear,” he said. “It just is a terrible way to run airliners.”

China’s airlines complain that the military dominates 80 percent of national airspace. In the highly congested Pearl River Delta, the air force allows little space for civil use. China Air Traffic Management Bureau indicated that problems related to military airspace accounted for 71 percent of local traffic control delays in southern China. An additional 9 percent were related to air traffic controller shortages in 2009. In 2010, the CAAC reported the average delay of commercial flights were more than one hour.

In response, CAAC will adopt various measures to, “strengthen the coordination between military and civil aviation, encourage using large aircraft, increase the number of flights from hub airports to provincial-capital airports, and ease airspace congestion and time shortage issues.”

China’s air traffic management entities plan to rework airspace to set targets to improve efficiency and cut congestion levels. CAAC has set a goal to increase arrival and departure on-time performance to more than 80 percent. It is currently in the mid 70 percent range. To help CAAC meet its on-time performance target, military authorities plan to adjust timing of military flights to be better synchronized with civilian operations and move military flights away from peak commercial times.

However, China’s airlines appear to be the main cause of air traffic control delays. CAAC data indicates airline operations and schedule management were responsible for 42 percent of delays in 2010, followed by 26 percent related to air traffic control, 19 percent due to weather and 7 percent military. CAAC reports do not specify parameters to define a flight delay. Generally, if an airplane is late by more than 30 minutes, it is considered a delay.

Under China’s air traffic control system, an airplane is only assigned a time slot for take-off after the door closes, according to an article in South China Morning Post. That explains why pilots want passengers to be seated and the door closed as soon as possible even though the pilot often has no idea when the plane will actually be cued for departure. The authorities use the time when the gate closes for a flight as the cut-off to measure delays. In reality, there is often a huge lag between the closing of the gate and takeoff.

Airline growth is also a contributing factor to delays. Adding new service means that more flights must be managed in China’s limited airspace.

“Just like on the highway, more cars will cause traffic jams,” said Li Xiaojin, a professor at Civil Aviation at the University of China. “More planes flying in the sky will also produce congestion and delays.

Researchers for the Aviation Policy and Research Center of the Chinese University of Hong Kong have said that more runways do not necessarily provide more capacity if the airspace congestion issue cannot be resolved.

The Master Plan

China has developed a master plan for aviation development which, if properly executed, will be one of the important economic engines powering its economy. The plan involves construction of new airports and runways; upgrading, expanding and modernizing many existing airports; and growing China’s fleet of commercial planes. The plan will be multimodal, including continued expansion of the high-speed rail network as well as major developments in rail, highway and waterway projects.

For the plan to work well, additional measures must take place in parallel. These include:

  • Improving the efficiency of the air traffic control environment,
  • Improving operation management efficiency such as airport procedures, information technology, baggage sorting and transfer, multi-runway operation efficiency,
  • Ensuring safety.

By the end of the current FYP, China could very well be the center of aviation.

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