China’s airports face tough year

The Centre for Asia Pacific Aviation expects China’s airports to be challenged by strong growth rates and the need to find capital to fund expansion in the year ahead.The analysis is contained in a new research report in the Chinese airport sector published and available for download on the Centre’s new ChinaAviation.aero website.

“The CAAC has recently announced plans to develop 43 new airports by the end of 2010, for a total of 190, increasing to 244 by 2020. This scale of airport development is unmatched anywhere on the globe. But finding the funding will not be easy, with the burden likely to fall on the provincial governments”, said the Centre’s Chief Operating Officer, Derek Sadubin.

“There is also the reality that airport development in China in recent years has not kept pace with the official targets. The number of airports open to civil operations in China has stagnated in recent years - and the ambitious targets set by the CAAC could prove difficult to achieve”.

The Chinese airport sector’s financial health has improved lately, with a 31% rise in combined net profits to USD537.9 million in the 11 months to 30-Nov-07, on revenues of USD2.7 billion, or a net margin of just under 20%. But this disguises the fact that many of China’s regional airports are loss-making and often require subsidies from the bigger provincial capital-city airports.

“Most of the losses extend from high interest costs related to construction debts. The losses are a secondary consideration, however, as Beijing seeks to spread economic development to the poorer regions and improve transport accessibility for the population and to drive industry. But it does have an impact on the potential involvement of private funding”, said Mr Sadubin.

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China’s airports handled 385 million passengers in 2007, up 16% year-on-year, and could be well over the 500 million barrier by the end of the decade, if recent growth rates are maintained, according to the Centre’s research.

Another key bottleneck for Chinese infrastructure is in management of airways.

“Air traffic control congestion, particularly in the Yangtze and Pearl River delta regions, is the biggest potential threat to growth at China’s airports and must be a priority for the authorities in Beijing in this Olympics year”, he said.

The airports sector could also be impacted by potential consolidation of China’s airline sector, which is also reviewed in the report.

“China’s airline sector faces one of its most important year since decentralisation in 1985. The industry will be in the global media spotlight as Beijing hosts the August 2008 Olympic Games, while the investment community will be looking intently for indications on how the airline industry structure will evolve”, said Mr Sadubin.

The Chinese airline industry appears to be headed towards consolidation, although the outcome of Air China’s proposed takeover of China Eastern Airlines is by no means clear.

The new CAAC Minister, Li Jiaxiang, in his previous role as Chairman of Air China, expressed the need to establish a Chinese “super carrier” with the size and strength to compete with large foreign rivals.

“Mr Li’s appointment - at least on the surface - could be interpreted as a reflection of senior government support of Mr Li’s strategy of industry consolidation. Overall, as time passes, Mr Li is expected to be more protective of state carriers, which have expressed concerns about too much competition resulting from the rapid opening of the sector”, said Mr Sadubin.
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