For many decades, most airlines in North America and Europe were owned by states and were protected from their foreign competitors by regulations that guaranteed competitive benefits. Each nation protected its airline as its primary connectivity to the rest of the world. Therefore, they were considered basic facilities just like electricity and water. However, in the 1980's, most of these airlines were privatized in line with neoliberalist economic measures, which were gaining popularity in the west (Wang et al. 3). As a result, privately-owned airlines began to dominate the international market while the few remaining state-owned airlines reduced their scope from strong international presence to simply connecting their home countries. As privately-owned gained competitiveness, the aviation industry in the western countries witnessed a revolution that inspired the privatization of state-owned airlines in many other parts of the world. It was not until recently when the state-owned airlines began to find new importance in the industry again. Some of the popular examples of state-owned airlines that have demonstrated exemplary growth in the 21st century are Qatar Airways, Etihad Airways, and Emirates, all of which are gulf carriers from Asia (Flight Global 1). More recently, the growing market dominance of Chinese state-owned airlines has been an interesting development in the world aviation industry. Unfortunately, as the state-owned airlines continue to grow in China, most of their privately-owned counterparts have not been able to compete favorably due to conservative government policies that favor the state-owned airlines over private ones in many areas of authorization. Despite de-monopolizing its civil aviation industry, the Chinese government will not realize the maximum potential of the sector unless it abolishes its conservative aviation policies for non-partisan regulations.
In the year 2005, China made history in its air travel sector when it, for the first time, abolished monopoly of the industry, opening it up for private companies. The move attracted significant positive response as several privately-owned airlines took the opportunity to explore the huge Chinese market. Among the new market entrants, East Star, United Eagle, Spring Airlines, and Okay Airways were the most leading competitors. By then, the numbers of air-travel passengers were booming steadily, as rising incomes and industry growth hit their peaks. Passenger numbers have doubled in the last decade to 500 million annually (Charlton, 1). China built airports in every part of the country in anticipation of more airlines, which were expected to enter its market (Charlton, 1). The expectation was that the private airlines would transform the aviation sector radically because they brought efficient business models. At the same time, the Chinese government feared that the sleek and efficient private companies would threaten the success of their dogmatic and inefficient state-owned airlines. Unfortunately, the industry has not changed until now because most of the promising private airlines that entered China soon failed. For instance, the by 2009, East Star had become bankrupt, and United Eagle had been sold to Sichuan Airlines after making many losses (Flight Global 1). Similarly, by this time, Okay Airways remained inconsistent to the extent that they had to halt their operation at some point. As a result, the entry of the new industry players did not pose enough challenge for the existing state-owned airlines to improve themselves and maximize their potentials.
Although there was global economic distress at the time when most of these airlines failed, there is proof that their poor performance was caused by many other factors. When they entered the market the four leading privately owned airlines brought 40 aircraft, which operated around 80 routes. Comparatively, China's three state-owned airlines - China Southern, China Eastern, and Air China were operating more than 1600 routes by then (Flight Global 1). Over ten years after starting strongly in the Chinese market, the impact of private airlines remains negligible. The government policies confine them to such a small share of the market that they can't compete favorably. The companies were not able to overcome monopoly in the industry because the environment made it impossible for them to grow organically. The Chinese government restricts private airlines in accessing two crucial resources, which are routes and capital. With these essential requirements beyond their control, the ability of the airlines to grow is greatly limited. It was not enough that the Chinese government opened up its aviation market; it is also necessary to build a policy environment where private competitors can grow fairly.
Although the privately owned airlines realized that they needed larger capitals than the minimum $11.7 million that the Chinese Civil Aviation Administration requires, all the available avenues to infuse more money into their businesses were marred with bureaucratic limitations. First, banks were reluctant to lend them money because being new in the market; they did not have good security for loans. Without support from the lending institutions, the most viable option that the private airlines had was mergers and acquisitions. Unfortunately, as a policy, all acquisitions in the sector have to be authorized by the Chinese government. Moreover, the Chinese government changed the private airline's high additional VAT exceeding 20% on each aircraft bought outside China. For aviation equipment and supplies, the Chinese changed the private airlines a VAT of 17% on each import. Further, the government charged income tax of not less than 10% of all payments for leased aircraft (Flight Global 1). Thus, it is evident that private airlines in China could not acquire enough aircraft because of the increased costs, high taxes, and government regulations that restrict purchase. In comparison, state-owned carriers got many billions in capital injections from the government. Between the year 2008 and 2010 alone, Air China, China Eastern, and China Southern received a combined government capitation of 15 billion yuan (Jiang 22). At the same time, the airlines owned by the local governments also got huge capitation from public coffers. On the other hand, China watched as the private airlines failed due to restricted access to capital.
As a result, the market has been so turbulent for privately owned airlines in China that many have since gone out of operation. Only a few resilient companies with the best management approaches have been able to make through the turmoil. A good example is Spring Airlines, which is the only carrier that offers low-cost fares in China. However, it has been operating in less lucrative routes, where it complements the state-owned airlines. It has its own unique target customers, and the level of its services is different from that of the leading airlines. Through its thrifty market approach, Spring Airlines has been surviving despite not being permitted to fly between the largest cities of Beijing and Shanghai (Jiang 13). Notably, China recently began to respond to this crisis by relaxing its regulations on route permits, although, to a large extent, they are still controlled by the state. The government still restricts the access of major airports for private airlines. Also, it has also adopted the market-based ticket prices and fairer allocation of the time slot with the hope of promoting competition. However, with the many regulatory impediments still existing in the market, fair competition remains unattainable (Chan 1). Due to the present volume limit in the leading Chinese airports, there is a chance for new market entrants to get slots and permits to use most of the lucrative routes. Furthermore, the Chinese government prohibits exchange, transfer or sale of routes and slots. Therefore, it closes all avenues for the privately-owned airlines to access them. Also, the smaller airports where the private airlines are permitted to operate are not enough to enable them to break even. At the same time, the airports cannot offer the airlines attractive fees and conditions because the government regulates all airport fees. That further means that the private airlines cannot start new routes into other airports.
In conclusion, despite the growth in the number of local air travelers in China, the country's aviation industry has not reached its optimum potential because the state-owned airlines continue to monopolize it. The government, out of fear of losing control of the market, has maintained regulations that make it difficult for private actors to compete with its big three airlines. The main problem with the uneven playfield in the Chinese aviation sector is that it will continue to lag behind the rest of the world in adoption of current technology and innovative business measures due to lack of competition. By giving the state-owned airlines financial capitation, the government encourages its main industry players to remain complacent and inefficient. They do not have the motivation to maximize efficiency through innovation because of their financial security. Consequently, despite their success in the home market, most of the Chinese airlines would not be able to compete for their privately-owned counterparts in the international market. To manage these negative effects, the three main state-owned airlines have had to seek new partnerships with well-managed competitors based in the United States to gain from their expertise. The Chinese government has also adopted the market-based ticket prices and fairer allocation of the time slot to promote competition. However, these measures have not been able to bring the anticipated revolution in the Chinese aviation market, indicating that only complete deregulation of the market will bring out the maximum potential of the industry.
Chan, K. "China's strict aviation rules limit flight options for travelers." Skift, [Associated Press], 27 Sept. 2012.
Charlton, E. "China is building eight new airports every year." 24 Aug. 2018, www.weforum.org/agenda/2018/08/these-five-charts-show-how-rapidly-china-s-aviation-industry-is-expanding/.
Flight Global. "Focus: China's private airlines." 18 2010.
Jiang, C. "China's Private Airlines Still Face Unfriendly Skies." Time, [Beijing], 20 Oct. 2010.
Wang, J., et al. "Air deregulation in China and its impact on airline competition 1994-2012." Journal of Transport Geography, vol. 50, 2016, pp. 12-23, doi:10.1016/j.jtrangeo.2015.03.007.
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