IN FOCUS: Chinese growth to reshape global aviation industry landscape

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Anyone who is still in doubt about the importance of the greater China air transport market only needs to look at the number of aircraft that are in service in the region, and the large numbers that are heading there in the next decade.

Much of the attention over the past few years has been on the Gulf carriers like Emirates, which have used their hubs and connectivity to rapidly increase their market share and force virtually every network carrier to rethink its business model.

The emergence of China's airlines will prove to be another seismic shift in the airline industry, according to Boston Consulting Group.

"China's rapidly emerging airlines are poised to further shake up the industry, as China becomes a viable and cost-effective midpoint stop for Europe-to-Asia traffic flows. Already among the top performers in terms of growth and profitability, carriers in China and the Middle East are poised to reshape the Europe-to-Asia routes, squeezing the business of legacy endpoint and hub carriers," it adds.

Growth continues apace

That is underpinned primarily by China's economic growth. By some estimates, China's GDP is forecast to rise on average by around 6.5% a year over the next 20 years. This is lower than the 8-10% annual growth the country chalked up over the past decade, but it is still much higher than the rest of the world as China's status moves from developing to developed country.

"As Chinese incomes converge toward those in the historical industrialised nations, an expanding middle class will expect to enjoy a comparable standard of living and consumption patterns," Boeing says in its 2012 Current Market Outlook.

Aviation connectivity will be critical as China increases its share of world trade from 10% to 15%, and the country is prioritising investment in airports and air navigation infrastructure, IATA chief executive and director-general Tony Tyler said earlier this year.

"The challenge is to keep pace with rapidly growing demand, based on the global standards which underpin safe and efficient global connectivity," he added. "Of the 877 million additional global air travellers expected to fly in 2015 than in 2010, more than 212 million will be on journeys within or connected to China."

Despite economic uncertainties, Chinese airlines continue to make money. In 2011, their revenues rose 18% to yuan (CNY) 360 billion ($57 billion), though profits slipped nearly 14% to about CNY28 billion largely due to fuel prices, according to IATA. Still, they made a profit of just over $4 billion, accounting for half of the global aviation industry's profits last year, it adds.

Airbus, in its 2012 Global Market Forecast, says Chinese domestic passenger traffic is expected to surpass that of the USA in 2031. China also continues to build strong economic ties around the world, driving up international traffic.

It adds that from this year to 2030, China is projected to receive 4,272 aircraft worth $634 billion. Boeing believes China will need 5,260 new aircraft valued at $670 billion. Regardless of whichever number you pick, the reality is that China will need a large number of pilots - and technicians - for these aircraft.

Pressing need

The Civil Aviation Administration of China (CAAC) says the country will need 40,000 pilots by 2015, up from 24,000 in 2010, translating into an average growth of 11%, or 3,200 a year. Looking ahead even further, Boeing says that China will need 71,300 pilots and 99,400 technicians up to 2030.

Data from Flightglobal's Ascend's online database shows that airlines in China, Hong Kong and Macau have 2,105 aircraft in their fleet and 799 on order. This includes both passenger and cargo aircraft of various sizes. Narrowbodies account for 1,271 aircraft, or 60% of the installed fleet and 447, or 56% of the aircraft on order.

Aircraft deliveries into the Chinese market continue to grow unabated despite the current uncertain economic outlook. Regardless of the size, many of the new aircraft are not just to replace the older ones in service but also to meet growing demand.

Order boost

Hong Kong's Cathay Pacific, for example, focuses on its hub status for lucrative medium- and long-haul routes. Over the past year, it has placed additional orders for Boeing 777-300ERs and Airbus A350s, including the -1000 variant.

On the mainland, China Southern Airlines is the first carrier to operate the Airbus A380 and Air China has ordered five Boeing 747-8 passenger aircraft. Most of the widebody orders, however, are for twin-engined aircraft that link cities around the world to the three main Chinese hubs of Beijing, Shanghai and Guangzhou. That will grow as China opens up more hubs in cities such as Chengdu.

Narrowbodies, however, continue to account for a significant proportion of the new orders as markets open up within China and in the region. "Single-aisle aircraft will be preferred for newly opening markets within China. Within Asia, a mix of single-aisle and twin-aisle aircraft will be needed," says Boeing in its report.

With low-cost airlines from outside the region gradually increasing their market share in Greater China, it is likely that the three main Chinese carriers and possibly even Cathay could respond. That could lead to a surge in new narrowbody orders in the coming years, possibly for the 737 Max and A320neo.

The number of regional aircraft, both turboprops and jets, could increase as China continues on its airport building spree. There are firm plans to have 230 airports at the end of 2015, up from 182 last year. There is also a plan to rebuild or expand around 100 of China's existing airports.

The growth, however, is already putting a strain on the existing infrastructure. Bottlenecks are common at airports, there is also a shortage of specialised air traffic management personnel, and air navigation remains a problem as China's military still controls the country's airspace.

IATA says it has worked with the Chinese government to open new entry points to Chinese airspace and create more flexibility in cooperation with the military, but adds that more can be done.

"The challenge is growing daily as travel demand increases, leading to frustration and delays for airline passengers. The more flexibility we have in how we use and share airspace with the military, as well as between domestic and international flights, the better we will be able to manage growth and meet passenger expectations," says Tyler.

The reality is that despite the growth of the past few years, China's airline industry is still in the early stages of its development when compared with other regions.

"As aviation continues to grow in China, airlines will adapt and evolve their business models to meet the needs of their customers," says Boeing.