Home' Asian Aviation : AAV April 2010 Contents 18 AsianAviation | APRIL 2010
Despite China being the world's
second biggest aviation market,
the country is no hotbed of
activity for low-cost carriers
Since the launch of the rst
LCCs in China, Okay Airways in March 2005 and
Spring Airlines in July the same year, only the latter has
sur vived the market's dog-eat-dog competition intact.
China's domestic air routes have long been dominated
by large, state-owned carriers, whose strength has
proven too great for some start-up carriers.
Okay operated from a base Tianjin's Bihai
International Airport, introducing its rst ser vices to
Changsha on 11 March 2005. Less than eight months
a er its launch, the carrier was forced to ditch its
low-cost business model and switch to conventional
operations as a full-service airline.
Seven other companies that had either applied for
the air operating certi cate (AOC) or were in the
process of applying to operate LCCs abandoned the
idea in the wake of Okay's troubles. e Tianjin-based
carrier's experience highlighted numerous regulatory
barriers that prevented it from controlling costs in
many areas, making it di cult to emulate the success
of the LCC model in other markets.
Maximizing aircra utilization and choosing to
operate to airports that charged lower fees was not
su cient for the airline to remain a oat as an LCC.
Even the selection of routes to be operated and
the timing of aircra orders are governed by state
regulations. Airlines are furthermore burdened with
import charges and value-added-tax on new aircra .
e cost of fuel is especially burdensome in China,
where oil is about 17-28 percent more expensive than
in international markets. Chinese airlines estimate
that fuel costs account for 30-35 percent of their
Carriers also have to also contribute 5 percent of
their revenue to the China Airport Construction and
Development Fund (CACDF) which is managed by
the Civil Aviation Administration of China (CAAC),
with no exemption for budget airlines.
Unlike the Low Cost Carriers' Terminal at Kuala
Lumpur International Airport, Changi's Budget
Terminal or Diosdado Macapagal International
Airport in the Philippines, no Chinese airport has a
dedicated budget terminal, nor are there any plans to
build one in future. Such terminals have been a vital
element of low-fare airlines' success in Asia, helping
reduce operational costs dramatically.
To cap it all, LCCs and private airlines have to
follow a fare structure set by the CAAC, which
prevents them from having the fare flexibility
available in other markets.
Spring Airlines received its AOC on 26 May
2004 and launched operations on 18 July 2005. e
carrier is based at Shanghai Hongqiao International
Airport and started operating with the introduction
of ser vices to Yantai.
e company reported its rst pro t of US$2.6
million in 2006, then expressed an interest in selling
a stake to a strategic international partner. However,
this proposal was rejected by the authorities, which
a year earlier had blocked Singapore Airlines' e orts
to acquire 40 percent of the carrier.
Spring Airlines has been able to survive the
crunch thanks to the nancial backing of its parent
company, Shanghai Spring International Travel
Ser vice (SPITS), one of the largest travel agencies in
China -- and the most pro table. SPITS, which was
set up in 1982 by its owner Wang Zhenghua, has an
annual turnover of about 4.2 billion yuan (US$617.6
According to Zhang Lei, an o cial at the travel
agency, close to 80 percent of Spring Airlines' revenue
is from passenger sales and group tours provided
by the agency. Had it not been for the 20 million
yuan (US$2.93 million) CACDF refund made by
CAAC in 2008 to help Chinese airlines weather the
global nancial crisis, the carrier would have found it
extremely di cult to break even, he adds.
Spring Airlines has now been granted approval to
launch international ights. e airline's immediate
plan is to y to Hong Kong and Macau, adding
destinations in Japan, South Korea and Russia at a
e carrier operates a eet of 14 Airbus A320-200
single-aisle jetliners, with a network of 23 domestic
Spring Airlines last year expressed interest in
exploring partnership opportunities with AirAsia
X, but the Malaysia based low-cost long-haul carrier
backed away from talks.
A Spring Airlines o cial says that unless regulations
become more exible and more routes open to LCCs,
it will take a long time for the low-fare segment of the
air travel market to mature in China.
While the CAAC has said that it is looking into
issues raised by the country's LCCs, progress remains
slow and much remains to be done. ●
William Dennis / Beijing
China's troubled LCCs
highlight regulatory problems
Okay Airways was forced to drop its low-cost business model
because of competitive pressure and a tough regulatory environment.
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