Airlines look to China as recession puts industry in a tailspin

Tue, Jun 19, 2012, 01:00

ASIA BRIEFING:THE FIRST TIME I flew in mainland China was 20 years ago and the sign in Kunming Airport said, “We welcome our foreign fiends”.

The flight was delayed because someone had set up a stall on the runway selling food mixers and the whole cabin was full of people carrying these treasured white goods back home, along with various foodstuffs. There was one more person booked on the plane than there were seats, so two of the stewardesses had to double up.

How times have changed. Last week the International Air Transport Association (Iata) held its 68th annual general meeting and World Air Transport Summit. This year the meeting was in Beijing, capital of the rising star of the aviation firmament.

Air travel is booming in China. The country’s domestic aviation passenger market is the second largest in the world, while its international passenger market and international cargo market rank seventh and fourth respectively in the world. China’s airlines accounted for half of all global profits last year.

There are scores of airports being built around the country, none of which is likely to welcome “foreign fiends” but which will put the aviation infrastructure in many Western countries in the shade.

The boom in aviation offers opportunities for Irish companies too – Aer Rianta International will open its first Chinese outlets this year at the new Kunming Changshui International Airport in the southwest of the country.

Airport construction is part of the “mini-stimulus plan” the government has introduced, discreetly, to counteract slowing growth in China.

The expansion of the aviation industry in the past decade has been remarkable. Some 1.2 billion more people and 16 million more tons of cargo will fly this year than in 2001.

The meeting of the International Air Transport Association takes place at a troubled time for the industry, which is under pressure from high fuel prices and the impact of the global recession. The aviation industry faces a fuel bill this year of €164 billion, which is almost equal to the GDP of the Philippines or the Czech Republic.

“The biggest and most immediate risk, however, is the crisis in the euro zone. If it evolves into a banking crisis we could face a continent-wide recession, dragging the rest of the world and our profits down,” said Tony Tyler, the association’s director general and chief executive.

“The industry’s profitability is balancing on a knife edge. If the bottom line worsens by even the equivalent of just 1 per cent of revenue, our $3 billion [€2.38 billion] profit very quickly becomes a $3 billion loss.”

Asia-Pacific carriers make up 40 per cent of the world’s air cargo business and look set to make the biggest contribution to profits in the industry, at about €1.6 billion, but the outlook has been downgraded because of the slowing economies in China and India. It is also less than half of the profit the region reported last year.

Regional demand is expected to grow at 3.9 per cent, above the anticipated 3.3 per cent growth in capacity, providing some protection to airline profits.

China remains central to aviation industry growth. Wang Changshun, chairman of Air China and vice head of the Civil Aviation Administration of China, told the conference that the industry here would see stable expansion, although it faced an even more challenging economy than during the financial crisis of 2008.

“Chinese airlines will order 150 to 200 planes every year in the coming few years,” Wang told the conference. “I think the domestic routes offer better performance than international ones, and the growth of regional routes is faster than for trunk routes.”

European worries are there, as is sluggish US growth, but domestic Chinese consumption is growing. Air China, which has the biggest number of overseas routes among Chinese airlines, plans to order 52 aircraft in 2012, 56 in 2013 and 55 in 2014. Some analysts are worried about oversupply affecting capacities.

We have mentioned Joe McCarthy’s Swords- based Mach Aviation in this column before, and his belief in the potential of the private jet industry in China is shared by none other than Warren Buffett.

Buffett’s NetJets company is spending up to €7.62 billion to buy 425 jets from Bombardier and Cessna to exploit the booming Chinese market.

It is the largest order to date for business aircraft and is based on optimism about China’s prospects.

One sure sign of China’s growing aviation muscle has been the way it is playing hardball over Europe’s carbon charges on airlines.

China is leading the opposition to the European Trading System, which requires airlines that fly to and from Europe to buy permits for all the carbon they emit en route. India, Russia and 26 other countries also oppose the rules.

Beijing has barred its airlines from participating in the ETS and has put orders placed by its airlines with Airbus on hold.

China has also been swift to threaten rapid counter-measures that could include impounding European aircraft if the EU decides to punish Chinese airlines for non-compliance with the scheme.

China is the world’s biggest polluter and, as ever, when China complains about Western efforts to make polluters pay, you only have to look out the window to see why the developed countries have a point.

Aviation accounts for about 3 per cent of total carbon emissions, but is the fastest- growing source. China wants to wait until findings emerge from talks on a global system to regulate airline emissions, which have begun in the International Civil Aviation Organisation, a UN body. The EU has said it would be willing to reconsider its system if an agreement is reached.

If it wants to lose its status as a “foreign fiend”, and risk jeopardising Airbus’s position in China, it may have to come to an arrangement with the Chinese.