Yang Yuanyuan: Piloting China's aviation growth

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China's aviation minister, Yang Yuanyuan, has orchestrated radical reforms in the country's aviation market. In this exclusive interview he discusses his vision for allowing more new carriers, pricing freedom and domestic and international liberalisation

Yang Yuanyuan is not your average Chinese government minister. Progressive, unassuming and, judging by the way he interacts with his staff, unintimidating. He speaks English, welcomes criticism and admits to shortcomings in his administration. Amazingly, he also finds the time to pilot Boeing 747-400s as a captain on commercial flights with Air China.

As minister for civil aviation, Yang Yuanyuan - or "Triple Y" as he is often referred to by a growing group of admirers - has led the way in terms of implementing sweeping change in China's aviation bureaucracy over the past five years. Under his watch the Civil Aviation Administration of China (CAAC) has signed much more liberal air services agreements with most of its aviation partners, has moved to open up the domestic market to new competition, has implemented test-case Open Skies regimes for certain parts of the country, has vastly improved flight safety with no fatal accidents since November 2004, and has generally steered the sector smoothly forward amid traffic growth rates that are among the highest in the world.

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But Yang is not one to boast of his achievements. Instead, he prefers to focus on what still needs to be done. And in a rare, exclusive interview at the CAAC's Beijing headquarters he was remarkably frank about the need to open up much more.

"Civil aviation is international, so we need to learn from the outside world what they are doing," says Yang through an interpreter, whose translation he occasionally corrects. "Different people have different views about the reforms, and we admit that we still have some problems in the process of the reforms. But the reform direction is correct. It has been proven that reform has allowed dynamism and enthusiasm for further development of the industry."

China's aviation sector has experienced massive change since the latter half of the 1980s, when the single CAAC airline was split into regional arms, and soon after many more new airlines were launched. It has gone through both good and bad times, with phenomenal growth rates overshadowed in the early 1990s by one of the world's worst aviation safety records. But safety improved dramatically after the CAAC put the brakes on airline expansion following a series of fatal accidents, and the industry has since gone from strength to strength.

It was Yang's predecessor, Liu Jianfeng, who oversaw the radical consolidation whereby 10 airlines under the direct control of the CAAC were merged into three mammoth groups, led by Air China, China Eastern Airlines and China Southern Airlines. The CAAC also went through a major restructuring which saw it give up ownership of airlines and airports and begin to focus entirely on regulatory matters.

Those changes laid a platform for a further opening up under Yang. Since he became minister in 2002, China's aviation system has been opened up greatly to more competition, and in some ways has led the way in terms of liberalisation in the Asia-Pacific.

Many in the industry first became familiar with the new minister in 2003, when he spoke at an ICAO conference in Montreal and outlined a staged approach to liberalisation in China. IATA director general Giovanni Bisignani was one of those present, and he remembers that the openness of the presentation caught him off guard. Since then he and Yang have been good friends and IATA provides regular guidance to the CAAC.

"It's a model case of how a big country can evolve in such a quick way, doing all the right things," says Bisignani. "I remember when I met him for one of the first times, at that ICAO assembly. The two of us were both quite new and he made a presentation on ­China's industry, on liberalisation, safety, and that sort of thing. I was so impressed that I remember saying to two other transport ministers who were there: 'Gentlemen, would you ever have imagined that China would make the most liberal and advanced presentation of any country here?'"

Since then, Yang has practised what he preached and liberalisation has indeed been a key focus area. Air services agreements have been steadily opened up, such as China's formerly restrictive bilateral with the USA which has been liberalised twice within three years - despite the fact that Chinese airlines are not even using their full entitlements.

On the southern island province of Hainan, a trial was launched in 2003 that saw it becoming an Open Skies zone, able to be served by any foreign carrier on a third-, fourth- and fifth-freedom basis. Cargo has been another focus for liberalisation and a number of airlines, including the Singapore Airlines freight subsidiary SIA Cargo, have for several years been able to fly beyond points in China to destinations in other countries, such as the USA.

New entrants
The CAAC has at the same time been balancing things at home by allowing new airlines to be established, some with foreign ownership, while giving several of the second-tier airline groups, such as Hainan Airlines and Shanghai Airlines, rights to serve more overseas destinations. Yang says liberalisation measures will continue to be implemented at a progressive pace. Although full liberalisation is still a far-off thing in China, one of his messages to the country's airlines is that they will not be protected forever.

"People have different views about liberalisation, especially the airlines who would like to get more protection from the government, and we will take some relevant measures on this. But we still believe that we should not only consider the development of the industry but also the development of the national economy and also the position of China's airline industry globally," he says.

"We believe that pure protection is not enough for the healthy growth and development of Chinese airlines. We believe that in the process of liberalisation, Chinese airlines can accumulate certain experience and learn lessons from their counterparts, and they will grow in the process of liberalisation. China will continue to take a very much active attitude toward liberalisation, but at the same time we will be very cautious toward full liberalisation since we believe the conditions are not right for full liberalisation."

Since 2005 several new passenger airlines have started operating domestically, such as Okay Airways, Spring Airlines and United Eagle Airlines, following an easing of restrictions allowing for privately owned carriers to be established.

Yang says more choice is good for the market, but he believes there could once again be too many carriers in the country. As a result, he reveals, no more applications to establish new airlines are to be accepted for the foreseeable future. "Currently there are 24 airlines in China. Based on my understanding, there are over 100 airlines according to Part 121 in the USA. We believe that 20-30 airlines in China would be a proper figure, and too much more we cannot accommodate.

"We still have a number of airlines in the process of applying to be formed and we just wrapped up a meeting to study how to deal with this situation. Up to 2010 we will gradually examine their applications because we want them to wait until the infrastructure is improved and until the CAAC has stronger oversight capabilities. We still believe it is a good thing to have airlines making investments in the airline industrybut we will control the number of licences we will issue. We will not accept new applications now. Maybe again later, but not now."

Market transformation
Yang sees the Chinese market eventually transforming itself into one with three main types of airlines: a select group of large full-service airlines with fleets comprising 300-400 aircraft each low-cost carriers catering to the opposite segment of the market and regional aircraft operators providing feed to the larger players. All the new passenger airlines that have started operating since 2005 have tried to adopt the low-cost model that has succeeded in many other parts of the world, but have complained that restrictions on which routes they can fly and what prices they can charge, as well as the high cost of operation at many airports, make it impossible to be a true low-cost carrier in China.

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CAAC veteran
Yang Yuanyuan, 57, became Civil Aviation Administration of China minister in May 2002, replacing Liu Jianfeng.

Yang began his aviation career in 1966 as a pilot trainee in the Chinese air force and graduated from the CAAC's Senior Flight Institute in 1969. As a first-grade pilot, he became a flight instructor and later was appointed deputy chief flight inspector with the CAAC's Department of Science & Education.

In 1988 Yang was transferred to the CAAC's Guangzhou regional administration and became deputy chief pilot. He later became chief pilot and vice-president of China Southern Airlines.

In 1998 he was appointed director general of the CAAC's Department of Flight Standards and in 1999 became a vice-minister in charge of flight safety.

Yang has held type ratings for all Boeing aircraft, with the exception of the 707 and the 727, and at present he is current on the 747-400. He pilots 12 commercial flights with Air China a year in order to maintain his licence.

Yang enjoys hiking, Chinese calligraphy and reading.

"The complaints are fair," Yang readily admits. "That is because we still have price regulations and still have restrictions for low-cost carriers and small airlines entering into trunk routes. The development of low-cost carriers in China is still in the initial stage, and we admit that some small airlines still have fair complaints that they cannot be successful because of some of the policies and regulations."

He adds: "I am quite familiar with [Malaysia's] AirAsia, and I am quite interested in the slogan of the airline, which is 'Now Everyone Can Fly'. In China, since we have a very large population, we cannot make air travel accessible to everyone, but our objective is for more and more Chinese people to be able to afford to fly. The CAAC is supportive of the development of low-cost carriers and we believe there will be excellent potential for the development of low-cost carriers, but we admit we still have a lot of difficulties and problems."

As with international liberalisation measures, Yang says domestic deregulation will continue taking place at a progressive pace. Key to this will be a domestic traffic rights deregulation programme that he hopes will be fully in place by 2010. In the past, Chinese carriers wishing to serve major domestic routes needed to have CAAC approval, but last year a trial project launched out of Wuhan, the largest city in central China, removed that restriction and instead airlines only report to the regulator for filing purposes.

"We are reducing the numbers of cities still needing CAAC approval and we have reduced it from 20 cities to 10 cities," says Yang. "In the future maybe only five cities will need approval from the CAAC and our objective is that by the year 2010 all the cities and all the routes will not need airlines reporting to the CAAC for approval, just reporting to us for filing."

He adds that the CAAC is also making reforms to airport fees. "Our objective is that in the next five to 10 years we can change the airport fee regimes so that they can be compliant with ICAO standards. But we believe that we cannot achieve that overnight."

Airfare pricing reforms will also continue to be rolled out, says Yang, to help with low-cost carrier operations. Changes have already been taking place and currently for routes operated by only one airline there is just a ceiling on fares, while for certain short-haul routes there are no pricing restrictions at all.

"For most of the routes we still have a floating rate: that is, there is a ceiling and a bottom level," says Yang. "In the future we would like to further relax our regulations concerning pricing, but we are still studying this. We still believe that such reforms should be carried out gradually."

In the meantime the CAAC is looking at opening up secondary airports for use by low-cost carriers. "The trunk routes are very much congested, so for the low-cost operators who would like to operate to large cities we are considering measures to address such problems," says Yang.

"We are exploring whether or not we can develop some secondary or tertiary airports near or around the large cities for them to use. For example, we have some military airports, and maybe we can make them for both military and civil purposes. In such airports the facilities will be much more simple and it will be good for the operation of low-cost carriers."

The CAAC has meanwhile been pushing airlines large and small to work on improving efficiency. One area has been to promote the use of electronic ticketing, which was virtually non-existent in China barely two years ago. After IATA's Bisignani expressed concern to Yang over the slow pace of take-up, the minister made e-ticketing a "national programme" and today it is effectively at 100% domestically.

Safety focus
At the same time the CAAC has been aggressively improving its air traffic control capabilities, supporting the development of many new airports, and continues to focus on improving safety by learning from the experiences of those elsewhere. But Yang the pragmatist still has many concerns, among them that China's airlines are not being managed as effectively as their counterparts elsewhere. He says that while this is changing, particularly as three of the country's airlines are due to join alliances later this year and as foreign investors have been buying stakes in Chinese airlines, there is much more to learn.

What worries Yang most, however, is how the industry will cope with growth rates on the personnel front, with domestic passenger traffic doubling every five years and the country's aircraft fleet forecast to quadruple in size over the next 20 years.

"One of the most significant difficulties in front of us is the lack of qualified personnel. Not only the professionals but also the managers - the managers for airlines, for air traffic control, and also the managers in the government. I hope our managers can have a better understanding of the international trends for the further development of our industry. To be frank, there are about 300,000 people working in the civil aviation industry in China and very few of them can read the English text of Airline Business," he says.

To get a better understanding of developments at the day-to-day operations level, Yang maintains his commercial pilot's licence by flying 747-400s at least once a month. This is perhaps indicative of the more open style that the straight-talking minister is trying to bring to the CAAC, as he insists he would rather hear of problems personally that need to be addressed than of accomplishments alone.

"When I fly, especially during the cruising stage, a lot of the pilots and attendants come to me and give me a lot of complaints," he says. "It is very helpful for me to have that understanding, as one of my responsibilities is to resolve the problems for them. The reform direction is correct but I can see there is still a lot that we need to resolve."