China air travel booms, airports struggle
By David Fullbrook
Despite the boom in air travel, only a handful of Chinese airports are making profits right now. Foreign investors and consultants are already at work, but much of the change could simply come from new local-government owners learning the ropes, seeking profits and arranging better national and international connections.
With financial pressures growing daily, change is unavoidable. Reports say airports earned 17% of Chinese aviation's 8.7 billion yuan (US$1.05 billion) profit in 2004. However, much of that came from only a handful of airports.
"I think there are only about 10 airports in China that are profitable, and some of them only in terms of cash flow," says Peter Harbison, managing director of the Center for Asia Pacific Aviation, a consultancy based in Sydney.
Construction costs are one factor. Over-investment in new airports is not uncommon. "That partially depends on how expensive they are, how much they cost to build. It's very hard to determine. The only airports we really know [about] for sure are Shanghai's new airport and the new airport in Guangzhou," says Jim Eckes, managing director of consultancy Indoswiss Aviation in Hong Kong.
That said, many of the 170 airports nationwide are old, their costs long forgotten. With good management to whip their operations into shape and fast-growing traffic, steady, though not spectacular profits might not be too difficult to achieve. "Overall, Chinese airports have pretty good potential to make some money," says Eckes.
Managers have their work cut out for them. Lucky ones will be overseeing new airports. China will open 50 airports by 2010, making the total of 220. However, Russia has 1,500 airports and Taiwan has dozens, suggesting there is room for many more airports in China.
Ahead lie turbulence and many bumps, though none of them are terribly difficult if the savvy and will are there. Retail is embryonic. Shanghai's shiny white Pudong airport, for example, hints at a retail marvel inside similar to Hong Kong International Airport (HKIA). However, the reverse is true: prices are sky-high, choice limited, quality wanting.
Most airports need to renovate their terminals or build larger ones. Domestic transfer desks must open. Currently passengers transferring between domestic flights must exit the terminal, then re-enter to check in again. This absurd arrangement contributes to the long queues typical at major airports. It cannot continue when the numbers of passengers are rising rapidly - 38% last year, to 120 million.
Aerobridges, restaurants, advertising, parking, runway lighting and navigation are just some of the many areas with scope for huge improvement. Developing retail is crucial, because airports can only borrow so much, and their income from fees will likely fall in time as industry liberalization continues. Competition may force them into offering airlines rebates and other incentives, gnawing at the bottom line.
Growing competition in an increasingly open and bubbling industry is giving foreign airport operators and consultants cause for glee. Foreign firms combined can own more than half the shares in an airport, as long as the largest single shareholder is Chinese.
"Airports won't come in for a big stake. The typical shareholding these airports want is very small - they just want enough to demand a management contract and to participate in the profits," says Harbison of the Center for Asia Pacific Aviation in Sydney.
French airport operator Aeroports de Paris is playing a major role in the huge expansion of Beijing Capital International Airport (BCIA), after buying a 9.9% share in 2000. Sir Norman Foster, architect of HKIA, is designing a signature terminal for BCIA, which is preparing for a huge passenger surge during the 2008 Olympics.
Copenhagen airport picked up 20% of Hainan's Meilan Airport in 2002. Meilan plays an important role in the Hainan island province's attempts to stoke its tourism industry, which will not get very far if many more airlines do not add flights to "China's Hawaii".
HKIA's owner, Airport Authority Hong Kong (AAHK), recently expressed interest in taking a stake in Hangzhou International Airport. Wealthy Hangzhou, near Shanghai, is popular with Chinese tourists and a haunt for the Yangtze River Delta's rich. It can also compete with airports at nearby Nanjing, Ningbo and Shanghai.
With only one airport in Hong Kong, AAHK is champing at the bit to cut deals in China. That will be easier as it moves from government agency to corporate organization on the road to privatization during the next few years.
Foreigners, however, will earn more money and play a bigger role in Chinese airport modernization through supplying equipment and technology. "Probably the best way to get in is to be a supplier of the products Chinese airports need, in design work and materials. It's probably a much more active way of getting involved than as a consultant," says Eckes.
As airports grow they are going to become catalysts pushing regulators to cut red tape. "They'll start to become a force for change, for regulatory change allowing domestic and international airlines to operate more freely," says Harbison.
One or two, with perhaps BCIA's owner Beijing Capital Aviation Group the leading contender right now, will almost certainly emerge as international players, eyeing opportunities in other developing countries where air travel is growing rapidly, particularly India, Indonesia and Vietnam.
Last year the Civil Aviation Administration of China (CAAC) gave the 70 airports under its control to local governments, because it wants to be a pure regulator, similar to the European Joint Aviation Authority. That followed the transfer of airlines to other government departments, and their partial privatization.
"This reform [makes] a better market environment for aviation. Before that, CAAC [controlled] both airlines and airports, like a father who has two sons. This relationship is very harmful for fair competition between the different airlines," says Li Wei, deputy fleet planning director at Shenzhen Airlines.
It is unclear whether airport transfers included debts. Just how big they are, and where they exist, is a matter for speculation. Moving the airports to local control is akin to privatization. New owners enjoy more freedom. Most want more flights, because this generates revenue and, they hope, brings investors in while helping to ship exports out.
In densely populated parts of central and eastern provinces, airports rub shoulders, in effect functioning as secondary airports for neighboring cities. With roads and railways improving fast, cutting journey times, their catchment areas are growing.
It is inevitable that they will end up competing. In the Pearl River Delta, foundry for China's capitalism, airports are already stepping on one another's toes. "You have a unique situation: two great airports in Guangzhou and Hong Kong, an interesting one in Shenzhen, an under-utilized one in Macau, and a beautiful but hardly used one at Zhuhai" in Guangdong, says Eckes of consultancy Indoswiss Aviation in Hong Kong.
These airports have been saying sweet things to one another over the past few years, but little has come of it. Guangzhou's gleaming new hub, which opened last year, is a serious cut-price competitor for HKIA, where fees reflect its US$5 billion price-tag. "The new airport in Guangzhou is going to really take some traffic from Hong Kong, once they get up to speed in a year or two," says Eckes.
However, beyond the Pearl River Delta lies a different China. Airports did not come with manuals, or instructions on where to drop oil and apply grease. At this juncture, there is more head-scratching and chin-rubbing as the airports' new owners work out how these money-making machines work. But action is probably just around the corner.
"I've got no doubt they will be learning very quickly. There'll be growing pressure from the airlines, from their own budgets and from each other," says Harbison.
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