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Having largely overcome problems of maintenance, safety, aging fleets, SARS and rampant illegal ticket discounting, China’s aviation market is starting to do very well, with probably the fastest growth rates of any market in the world on the back of a huge and increasingly mobile population.

For passenger traffic, rising salaries and a relaxation of overseas travel regulations are helping, while improved infrastructure and China’s role as Factory to the World is adding new air cargo volume all the time.

Passengers using Chinese airlines alone are expected to top 100 million for the first time in 2004 (compared with 68 million in 2000), with projected growth estimated at around 8.3% per annum until 2022. Already the second biggest domestic market for air cargo in the world with 1.3 million tonnes moved in 2001, growth is expected to increase annually by 10.3% until 2021. With the industry set to outpace GDP rates by a significant margin, international players are busy on the ground and in the air exploring opportunities.

In 2003, the domestic industry completed a period of consolidation and rationalization that resulted in the creation of three core airline groupings Air China, China Eastern and China Southern. Both China Eastern and China Southern have stock market listings and Air China hopes to list in 2005. But the efficiency of these airlines remains low by international standards. Revenue per km per employee in 2003 for China Eastern, for instance, was around one third that of Hong Kong-based Cathay Pacific, and China Southern fares only slightly better. A number of factors impact on the poor efficiency ratio-high investment in new planes and personnel training, excess staff, and an inability to hedge against oil prices. Fuel alone accounts for 25%-30% of total costs, compared with a 10%-15% global norm.

The current government policy encourages the purchase of larger trunkline planes and the growth of domestic aircraft manufacturing by imposing higher import duties on regional plane purchases(23% duty compared with 7% for trunkline) as well as charging a single landing fee regardless of plane class. The result is that only 18% of Chinese planes are under 100 seats(compared with 35% in the US) leading to under utilization and wasted expenditure on most domestic routes.

With a total national fleet of only 655 planes in 2003, (American Airlines alone had 854) China is currently the world’s largest purchaser of new planes, projected to expand the fleet size to 2 050 by the year 2021. While the main battle for market share is between Boeing and Airbus( with Airbus slowly encroaching on Boeing’s 60% market share), niche markets do exist for smaller manufacturers as exemplified by Canada’s Bombardier Aerospace Group, which has supplied 25 regional sized planes to a number of Chinese carriers including Shanghai Airlines.