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China’s nascent low-cost airlines

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Written by editor

Despite being the world’s fastest growing commercial aviation market, China is not a hotbed for low-cost carriers.

Despite being the world’s fastest growing commercial aviation market, China is not a hotbed for low-cost carriers.

Okay Airways and Spring Airlines, two Chinese private airlines, launched their maiden flights in 2005 and believed that the low-cost model would help them secure a slice of the market dominated by their State-owned counterparts.

But in less than eight months, Tianjin-based Okay Airways gave up the model.

“The cost structure of Chinese airlines are different from their foreign counterparts,” said Li Lei, an aviation analyst with CITIC China Securities.

“There is very little room for Chinese airlines to cut costs because about 80 percent of their costs are beyond direct control,” Li said.

These “uncontrollable” costs include import duties and VAT (value added tax) of airplanes and components, jet fuel, landing and take-off fees paid to the airports, aircraft maintenance and repair costs.

The “controllable” costs, namely human resources and management costs, only account for about 15 percent of their total costs. But to foreign airlines, such costs take up 40 to 50 percent of their total spending.

In terms of infrastructure, China does not have budget terminals at major airports, which is usually vital to the success of low-cost airlines.

But China, the world’s most populous nation, has strong market demand for low-cost air travel. Shanghai-based Spring Airlines has maintained an average 95 percent occupancy rate, well above the industry average of 70 percent.

The airline said the high load factor, made possible through offering lower fares, helps it survive with a small profit margin.

The airline is also backed by its sister company Shanghai Spring International Travel Service, one of China’s largest travel agencies. The travel agency was established by Wang Zhenghua, chairman of Spring Airlines, in the early 1980s and has annual sales of about 4 billion yuan. Travel tours used to contribute 80 percent of Spring Airlines’ business.

Spring Airlines realized profit of 21.04 million yuan in 2008, said Zhang Lei, Spring’s spokesman. But the airline could have hardly broken even if the Civil Aviation Administration of China had not returned the 20-million-yuan aviation infrastructure fund to it, Zhang said.

The Chinese government at the end of last year dished out a series of policies to help airlines weather through the economic crisis.