State-driven model 'can't sustain fast-growing sector'
State-owned airlines are set to open to private companies, as a new rule on allowing private investment in China's civil aviation industry is scheduled to take effect on Friday.
While analysts hailed the move as another "milestone" in the government agenda of State-owned enterprise (SOE) reform to enhance efficiency and guarantee long-term growth, they also warned that domestic carriers need to be aware of potential issues in such mergers.
Under the rule issued by the Ministry of Transport, the "big three" carriers — Air China, China Eastern Airlines and China Southern Airlines — are allowed to introduce private capital that may account for more than 50 percent of their equity as long as those entities remain controlled by State-owned shareholders, news website sina.com reported on Wednesday, citing a spokesperson of the Civil Aviation Administration of China (CAAC).
The CAAC will also allow private entities to invest in airports, although airports that are designed as international or regional hubs or are of "strategic importance" must still be controlled by State-owned shareholders.
Limits on mutual investment by related entities in the aviation sector have been eased.
For example, transport airports and supporting companies can now own a maximum of 5 percent of shares in public air transport enterprises. And caps on the number of transport airports that civil airline companies are allowed to invest have been enlarged.
Commenting on the new rule, Wang Jiangmin, an expert with the Hefei-based aviation industry portal Civil Aviation Resource Net of China, said that it is the "right time" for the country to open its aviation sector.
"China is the world's fastest-growing aviation market. This burgeoning market has also driven the expansion of related industries such as infrastructure, parts production, maintenance and tourism… the potential market volume is so large that the one-sided State-driven model cannot sustain its long-term growth," Wang told the Global Times on Wednesday, calling the injection of private capital a further stimulus to the industry.
Qi Qi, an associate professor with the Guangzhou Civil Aviation College, told the Global Times that State-led investment in the aviation industry has led to a build-up in debt among local governments.
"Introducing private investors will help local government shed these debt burdens," Qi said.
He forecast that cargo services and general aviation would get the largest boost from the new rule.
China's aviation market is projected to exceed 300 billion yuan by 2020, according to a report issued by the CAAC in February. The market is expected to surpass the US as the world's biggest as of 2022, the International Air Transport Association has said.
The new rule did not specify limits on foreign investors' shares, but Wang stressed that "having foreign airlines' shareholding in Chinese airlines will give domestic carriers an unprecedented advantage in operating overseas routes, a booming market."
For example, domestic and foreign airlines could jointly run flights to cut costs, or domestic carriers could sign slot swap deals with foreign partners at a lower cost, experts said.
Because of their bureaucratic management, SOEs are generally slow to respond to changing market conditions and lack vitality compared with private-sector rivals, according to Qi.
"The entry of private capital will streamline procedures and raise State-owned carriers' effectiveness and improve their profitability," Qi noted, calling the move a milestone in the mixed-ownership reform of SOEs.
Wang offered as an example Air France, which struggled under government control but became profitable and survived the global financial crisis after it was privately owned.
But experts also cautioned domestic airlines over potential issues in flight safety associated with the reform.
"Resources in the aviation sector including pilots, airports and professional maintenance staff have been quite scarce in recent years. If a large number of private players swarm in, things will get much worse," Li Xiaojin, a professor at the Tianjin-based Civil Aviation University of China, told the Global Times on Wednesday.
As a result, pilots may work overtime and airports may have to handle traffic in excess of their maximum capacity, Li said.
For this reason, domestic carriers should keep a close eye on the level of private investment, he suggested.
