Following last year’s unprecedented policy change, China’s budget carriers are poised to soar and may hold the key to the future of aviation in the mainland, an analyst told CNBC.
“The future growth of aviation in the mainland will be budget travelers, as well as tourists looking to travel domestically and within Asia via low-cost carriers,” said Jonathan Galaviz, partner at Global Market Advisors.
“The Chinese central government clearly indicated that they are looking for companies like China Eastern to… service customers like AirAsia or Southwest Airlines [do] in the U.S.”, Galaviz added, referring to state-run carrier China Eastern’s decision to convert a subsidiary into a low-fare unit early this month.
Beijing’s decision last year to lift a six-year ban on the formation of new airlines jumpstarted the low-cost carrier (LCC) market. Incentives including a cut in airport charges and simplifying approvals provided a further boost earlier this year. Budget carriers, led by Shanghai-based Spring Airlines, currently account for 5 percent of China’s total air travel, according to Reuters. The untapped potential in China’s aviation market – the world’s second largest – attracted a wave of new entrants including HNA Group’s West Air and Jiuyuan Airlines.
Explosive growth in the sector raised concerns that growing competition could hurt profitability but Global Market Advisors’ Galaviz is optimistic.
“As long as China’s population remains 1.3 billion and more, there will be huge opportunities for airlines, tourism and travel. For example, the entry of Chinese tourists into Macau can be a very big play for budget airlines with the domestic market strategy. So this is a very ripe market and overall, the opportunity is very strong.” said Galaviz.
Domestic air routes, including Hong Kong and Macau, saw an 11 percent on-year increase to over 690 million passengers last year, statistics from the Civil Aviation Administration of China showed. Competition may also come from other transport means amid reports that China’s growing high-speed rail network has seen the termination of some shorter flight routes.
However, Will Horton, analyst at Sydney-based Centre for Aviation told CNBC: “There is limited overlap between high-speed rail and airlines. The former is not across every route, or even a majority as of yet.”
Challenges remain for China’s low-cost carrier segment:
“The biggest challenges at present are establishing a low-cost base and seeing what exactly the regulatory environment will permit LCCs to do. We’ve yet to see a new LCC launch with a thorough low-cost offering since last year’s reforms,” Horton said. “Chinese passengers like the rest of the world want cheap air fare but they demand quality so airlines will need to communicate what they offer. China’s LCCs will not in the short-term dominate short-haul travel the way AirAsia does in Southeast Asia or Ryanair does in Europe but this genie is not going back in the bottle. There is a well-reasoned national imperative to support this development,” he added.