Contrails

IATA Director General Giovanni Bisignani told media last month that “Asia is the most profitable region in the world and of the 800 million new passengers who will fly by 2014, 360 million will be in Asia-Pacific and 214 million of those in China.

Late in February Li Jiaxiang, commissioner of the Civil Aviation Administration of China (CAAC), told media in Beijing that the country would invest CNY1.5 trillion ($229 billion) between 2011 to 2015 acquiring 700 more aircraft and building 45 airports.

Li said that by 2015, China will have 220 civilian airports and the fleet of commercial planes will rise to 4,500. Last year there were 267 million air passenger trips in China in 2010, up 15.8 per cent from the previous year.

And last month Airbus projected the Asia/Pacific airlines will take delivery of around 8,560 new aircraft valued at $1.2 trillion over the next 20 years, representing 33 per cent of new aircraft deliveries worldwide over the forecast period.
One of those airlines with a shopping list is China Eastern with aggressive plane to build its fleet by 74 per cent by 2015. According to CEA Chairman Liu Shaoyong the airline’s fleet will number 588, comprising 531 passenger aircraft, 30 freighters and 27 utility aircraft up from the current 338 aircraft.
Last year Chinese airlines earned a record net profit of CNY35.1 billion ($5.28 billion), owing in large part to surging domestic growth, although Liu suggests that 2010 was “a special year and won’t be repeated again in the future.”

In January Air China projected it will earn a net profit of more than CNY10 billion ($1.51 billion) for 2010, doubling its net income of CNY5.03 billion in 2009, while in March Cathay Pacific announced a record profit for 2010 of HK$14.04 billion ($1.8 billion) from a HK$4.69 billion profit in 2009 on a 33.7 per cent rise in revenue to HK$89.52 billion.

At the same time it ordered another 25 aircraft to bring its outstanding orders to 91 – all wide-bodies.

Against that avalanche of bullish news the Minister of Infrastructure and Transport Anthony Albanese’s announcement on March 8 that Australia and China were moving toward an “Open Skies” was timely and sobering indeed.

In the interim up to 8,000 extra seats per week will be made available to the airlines of both Australia and China after signing of a new Memorandum of Understanding.

The current cap is 14,500 seats a week between Australia’s major gateway airports and China, and immediately that will rise to 18,500 seats, and from next February, 22,500 seats – an increase of more than 50 per cent.

Even more seats – up to 2500 – are available on routes into and out of Sydney, Melbourne, Brisbane and Perth as long as those additional flights make stopovers at a regional airport such as Cairns, Broome or Darwin.

For Qantas, Jetstar and V Australia there is also the opportunity to fly to China via an extra four intermediate points and to operate services beyond China to four more destinations of their choosing.

Last year, more than 1.7 million people travelled between Australia and China – an increase of 21 per cent on the previous year and the value of inbound Chinese tourism is put at $3.1 billion.

The prospect of Open Skies raises a raft of questions, questions that will challenge Australia’s unions. How do we compete with the full force of Chinese airlines?

Last month Bisignani warned the Japanese airlines and government that its labour costs of $25/hour are ten times more expensive than China and the purchasing power parity of the Japanese yen is 25 per cent overvalued and the Chinese Yuan is 70 per cent undervalued. The Australian ratios are not that dissimilar.

So it’s likely that Jetstar will play a major role in the China market, simply because there is really no option in an Open Skies environment. We may also see Jetstar in a JV and with Chinese born and trained pilots with Chinese flight attendants – that is the face of the new normal.