At the start of December, Okay Airways, China’s first privately owned airline, suspended all passenger services indefinitely, stranding thousands of travellers and ending a brief and unprofitable chapter in the country’s aviation history.
The airline’s maiden flight in March 2005 had been heralded as the start of a new era of reform and competition as a clutch of other private operators followed in its wake.
But the pioneering Okay became the first to succumb to a pronounced downturn in the sector that has mirrored the global economic crisis and is expected to decimate the ranks of the country’s overcrowded airline market.
China still has at least 23 airlines operating domestically, including a variety of start-up private carriers and smaller players controlled by regional governments.
But many analysts expect that number to shrink rapidly as losses mount and the government pushes for consolidation, which will ultimately benefit the state-owned players – China Eastern, Air China and China Southern – known collectively as the “big three”.
“Airlines in China proliferated in the early 1990s as the government relaxed control, but that led to chaos and so Beijing clamped down and pushed through a series of mergers,” according to Peter K N Lok, Hong Kong’s former director of civil aviation and an adviser to the Chinese government on aviation matters.
“We’re at the same point in the cycle now after a few years of proliferation and can expect to see a big round of government directed consolidation again.”
China Eastern and China Southern have already received Rmb7bn ($1bn) and Rmb3bn respectively from the government to balance falling passenger numbers and huge hedging losses from the plummeting price of oil.
State-controlled Hainan Airlines has also received Rmb500m, according to state media. Industry insiders expect Air China to get as much as Rmb10bn from the government to help it through the hard times.
That sort of assistance is definitely not on the table for smaller players like Okay, which might not ever get its six passenger jets back in the air.
However, for now it is still flying three cargo planes in a tie-up with US logistics company Fedex.
“It would be incredible if we could have made money given all the difficulties we faced as a private airline,” said Han Jing, a spokesman for Okay. He estimated the company’s total losses at about Rmb200m since its maiden flight.
Okay’s apparent collapse and the large subsidies provided to the big three state carriers, which are expected to report combined losses of nearly Rmb10bn this year, has led many in the industry to whisper about a government policy known as guo jin min tui, roughly translated as “the state advances as private industry recedes”.
Beijing has denied it intends to reassert control over large swathes of the economy, but the subsidies to large state groups are likely to have that effect in the aviation sector regardless of the intent.
“The government’s focus is clearly on the survival of the big three and perhaps turning them into the big two,” said Peter Harbison, chairman of the Center for Asia Pacific Aviation.
“Carriers like China Eastern are really in deep debt, and the Chinese airline industry probably needed to be reorganised at least nine months ago.”
As the global crisis worsens and the sector prepares for more turbulence, the outlook is increasingly bleak for the remainder of China’s private and smaller carriers.
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