Carriers starting budget services amid slowing profits

There seems to be a growing number of signs that Chinese companies have chosen the right time to start budget airlines.

On Wednesday, the Civil Aviation Administration of China (CAAC), the nation's aviation watchdog, again vowed that it would improve the environment for the air industry to develop budget airlines.

The announcement came days after China Eastern Airlines Corp launched its budget airline China United Airlines on July 2, making it the first State-owned carrier to tap the low-cost air travel sector which has long been dominated by privately-owned Spring Airlines. It is the fourth budget airline in China after Spring Airlines, West Air and 9 Air.

In May 2014, 9 Air, a Guangzhou-based low-cost subsidiary of Shanghai Juneyao Airlines Co, purchased 50 Boeing 737s for operation.

China Express, a regional carrier operating in the southwest, shifted its business to low-cost operations and launched fares ranging from 8 yuan ($1.28) to 188 yuan in May.

Annual growth and challenges

Budget carriers in Asia are expected to see annual growth of more than 10 percent in the next 20 years, and China, which accounts for the lowest market share in the global low-cost carrier market, could see fast growth, Darren Hulst, marketing director for Northeast Asia of Boeing commercial airplanes said in Beijing in June.

To encourage the development of budget airlines, CAAC released guidelines in November 2013 and earlier this year, and said the demand will come from the third- and fourth-tier cities. Meanwhile, the regulator said it will also improve the airport flight time slots for budget airlines.

"The boom is mainly due to market pressure such as the slowing economy and declining high-end travel demand," Zou Jianjun, a professor with the Civil Aviation Management Institute of China, told the Global Times on Wednesday.

Zou was echoed by Lin Zhijie, an independent market watcher, who said on Wednesday that by the end of May, the gross profits of domestic airlines had decreased by nearly 70 percent year-on-year, which is "rare to see," and mainly due to the depreciation of the Chinese currency and an oversupply in passenger seats.

"The budget airlines could be seen as a way to improve the airlines' business performance," Lin added.

However, insiders warn that the development of budget airlines still faces challenges as the air travel industry is still dominated by State-owned carriers, such as Air China, China Eastern and China Southern, and there are still strict regulatory requirements about new airplane operation and flight time slots.

In an earlier interview with Zhang Wu'an, the spokesman of Spring Airlines, he said that the company still finds it hard to get prime airport time slots for its flights.

High-speed rail threat

Also, the expanding high-speed railway could pose a threat to the further development of low-cost carriers.

On July 1, China's railway regulatory body enacted a big adjustment of the nation's train service, the second since 2007, expanding lines and starting new routes to bring faster train connections to more cities.

According to the China Railways Corporation (CRC), starting from July this year, 4,894 trains will be running across China, including 2,660 high-speed rail trains, accounting for more than half of the nation's trains.

The high-speed rail network could witness passenger growth of 3.8 percent from July 1, making its daily passenger capacity increase by 70,000, according to the CRC.

Twenty-seven main Chinese cities are now connected by the high-speed rail network, largely overlapping with the civil aviation network.

Furthermore, more long-distance rail lines with a range of more than 2,000 kilometers, will be started, bringing the railways and airlines into more direct competition.

"The aviation industry could face strong competition from the high-speed railways as the rail networks have gotten more expansive and frequent, however the airlines now face more challenges such as the slowdown of the economy and declining demand for business travel," Lin said.

CAAC predicted in 2011 that the high-speed railway service within 1,500 kilometers could grab 10 to 15 percent of domestic travel volume from airlines.

Guo Xiao, a resident of Shanxi Province, told the Global Times that in the past, the flight from Beijing to his hometown Yuncheng, which is less than 1,000 kilometers, could take about 2 hours and cost about 900 yuan, but going on the high-speed railway takes only about six hours, and the price is less than 300 yuan.

"I will of course choose the high-speed rail," Guo said.