Sino-US pact gives incentives to carriers
By Wang Yu (China Business Weekly)
Updated: 2004-07-14 14:26

The stock prices of major listed Chinese carriers, such as China Southern Airlines and China Eastern Airlines, kept falling from June 18 to late last month after the landmark Sino-US aviation market-liberalization accord was hammered out.

During the same period, major United States airlines, especially those with business links to the Chinese market, saw their stocks surge.

Why does an apparently mutually beneficial pact resulted in totally different market situations?

Aircraft from major Chinese carriers at Shanghai Pudong International Airport. The recently agreed Sino-US aviation pact will benefit local airports and the Chinese economy in general, while putting pressure on domestic airlines currently flying to the United States. [photocome]

"It appears that the pact is based on an equal footing, granting aviation enterprises from both sides equivalent access to the US and China markets," said Ning Xiangdong, deputy director of China Economy Research Centre of Tsinghua University, said last week.

"However, because of the wide strength gap existing between US aviation giants and their Chinese counterparts, the market-opening deal will offer, in practice, much more space and chances for business expansion in the Sino-US aviation market to US carriers than to their Chinese rivals,"

"I guess that the final signing of the agreement is actually a compromise made by the Chinese side, seeking a balance between the overall Sino-US economic exchange and trade and the aviation market sector," Ning commented.

Endorsing Ning's point of view, Wang Ronghua, director-general of the Department of International Affairs and Co-operation of the General Administration of Civil Aviation of China (CAAC), was quoted as saying by Caijing Magazines: "In the negotiation, we put the country's interest in the first place, while consumers' were second. The aviation industry's ranked third, and individual enterprise's came last."

Meanwhile, Wang reckoned that once the market opens, local air firms will face severe competition from their much stronger US counterparts.

"When we started the talks, the US representatives assured us that they could satisfy all of our demands. But the point is this: US airliners and the whole industry can endure the opening of their market, but we cannot," Wang said.

To protect local firms from sudden and heavy blows, the Chinese aviation watchdog tried every means possible to slow down the pace of market opening.

"What we can do is strive for more time for our firms to get prepared. We will let those 'wolves' in one by one, rather than as a pack," Wang stressed.

The "wolves" mentioned by Wang refer to those US carriers recently allowed to fly to China.

Double-edged sword

Agreeing with Wang, experts commented that the impact on local air firms will be obvious.

However, considering this from a broader perspective, the overall Chinese economy will actually benefit from the opening of the aviation market.

"There is surely an actual inequality in the agreement, given the strength gap between aviation companies of the two countries. Local carriers are losing money by flying to the US because of low load factor, less cargo transporting capacity and less business chances. But US firms are embracing success in the Sino-US market. If the market opens further, they will grab a greater market share by launching more flights," said Gao Feng, partner with Grandall Legal Group (Beijing).

"But I think the opening of the market is beneficial to the overall Chinese economy. It is good for consumers, good for local airports and the opening of the market will spur local airliners to catch up."

According to Gao, China will first of all, benefit from the opening of the US-China air cargo sector.

"Once China grows into an international cargo hub, it will provide much more convenience for local manufacturing industries and put a big shot in the arm to the local economy," Gao said.

The new agreement contains a key provision that allows US cargo carriers to establish hubs in China once specific criteria are met.

"Moreover, If the market never opens up, those less competitive local carriers will still face no true pressure to drive forward and thus have no chance to grow up," Dong Nianqing, professor with Civil Aviation Management Institute of China, said last week.

According to the aviation expert, by competing face to face and increasing co-operation with foreign counterparts, Chinese airlines can improve their service and products, and more importantly, sharpen their sales and marketing expertise.

Nowadays, some local air firms would rather leave seats vacant, but do not sell them at flexible prices before taking-off.

"Adopting flexible pricing mechanism, stringent cost-control system and adjustable marketing strategy is key to success for major local carriers," Dong suggested.

However, since the domestic aviation market is far from mature, lacking enough and effective laws and regulations to govern and address all aspects of the industry, it will be hard for carriers to follow the example of their overseas counterparts.

"Take the pricing as an example, a vicious price war will be unavoidable once the authority totally relax it controls," Dong added.

Open attitude

Ren Shengli, a senior press official with Air China, China's flag carrier, said the airline will embrace the opening of the Sino-US aviation market with an open mind.

"We acknowledge the distance between us and global giants. But the opening of the market will be an avoidable trend. We will deal with both these challenges and chances with a positive attitude and actions," Ren stressed.

"After all, the market opening also give us chance to step out and strive to expand," Ren said.

The market-liberalizing Sino-US agreement was reached in Washington last month after four rounds of talks starting last February.

The last agreement to expand US-China air services was concluded in April 1999, when each country's carriers were allowed to increase their weekly flights from 27 to 54, and each side was allowed to designate one additional airline, for a total of four, to serve the market.

Nowadays, four local carriers -- Air China, China Southern Airlines, China Eastern Airlines and China Cargo Airlines, are flying only 48 flights per week on the Sino-US route.

The new agreement will allow five additional airlines from each country to serve the US-China market.

The United States may name one additional all-cargo airline, while China may name either a passenger or cargo airline, to start a service later this year.

The other four new-entrant airlines may be either passenger or cargo carriers, with one new carrier entering the market in 2005, 2006, 2008 and 2010.

The agreement also will allow for an additional 195 weekly flights from each side -- 111 by all-cargo carriers and 84 by passenger airlines -- resulting in a total of 249 weekly flights at the end of a six-year phase-in period.

"This agreement recognizes the critical role of commercial aviation in the rapidly growing US-China trade relationship," Norman Mineta, secretary of the US Transportation Department said.

"This agreement represents a giant step forward in creating an international air transportation system that meets the needs of the new global marketplace."

At present, FedEx, UAL Corp's United, Northwest Airlines and UPS are the only US carriers currently allowed to fly to China. They want to expand service into the Chinese mainland, and other carriers, notably AMR Corp's American Airlines, would like to begin offering services.

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