Tom Ballantyne

China's airlines are getting their first taste of capitalism as the country's carriers drastically slash their air fares and liberalisation hits the region.

The Civil Aviation Administration of China has given its 27 CAAC-approved airlines the go-ahead to cut prices by up to 40 per cent in a bid to lift traffic growth, which has fallen short of projected levels during recent months.

The fare reductions are the first serious discounting measures taken by China's airlines and mark another significant step in the gradual liberalisation of Chinese aviation.

The CAAC started easing previously tough pricing restrictions last year when it eliminated the differential between ticket prices charged on domestic routes for foreigners and locals. Previously foreign visitors had paid up to 20 per cent more for domestic tickets.

Now both overseas and domestic travellers flying within China, including domestic legs of international flights, can get discounts of between 5 and 40 per cent, says Hai Liancheng, director of CAAC's financial affairs.

Airlines will have the final say on the level of discounts, based on market conditions and routes. 'The effort is to satisfy consumer demand and provide more choices for travellers, taking full advantage of the potential of civil aviation and making airlines more competitive in the transportation market,' adds Hai.

Local airline officials predict that the price war is set to intensify as airlines are forced to cut fares to cope with sharp capacity increases.

Analysts warn that if traffic growth is not sustained at current high levels or there is any serious fallout on the Chinese market from Asia's current economic woes, some carriers could be confronted by over-capacity problems, given the large numbers of jets on order by China's airlines.

In 1997, the CAAC ordered 97 new foreign aircraft, scheduled to go into operation during 1998 and 1999. Over 300 new planes will be purchased between 1996 and 2000. CAAC's investment in new aircraft reached US$12.9 billion between 1996 and 1997.

However, analysts add that the number of Chinese airlines will decrease over the next two years as the industry consolidates and loss-making operators are forced out of business or have to merge with more successful, larger players.

As loss-making operators are ousted, the rest of the industry is benefiting from a inpouring of cash. According to the CAAC, China invested a record US$1.3 billion last year in its aviation industry, including $945 million on airports and $354 million on technology.

Spending on expansion looks set to continue at a similar pace in 1998. Domestic carrier Hainan Airlines, 21 per cent owned by US financier George Soros, has announced a $770 million banking facility to fund the purchase of 10 Boeing aircraft, three B767s and seven B737-800s.

The facility was offered by the Bank of China in the form of bank guarantees and loans for one year with an option to extend for a further 12 months, says Ma Wenliang, the airline's deputy planning and finance director.

The aircraft will be delivered by 1999, lifting Hainan's fleet numbers to 30. Hainan, which recorded net income of $12 million in 1997, expects turnover of some $150 million this year.

Meanwhile, CNAC-Zhejiang airlines made China's first firm aircraft order of 1998, when it ordered three Airbus A320s in January. The first two A320s will be delivered in the second half of 1998, with the third for delivery in 1999.

Source: Airline Business