Consistently strong growth figures for China’s aviation sector over the past decade are set to continue, offering huge potential for investment. Authorities are likely to open up areas such as aircraft manufacturing, airport development and transport infrastructure serving both the domestic and international markets to further foreign investment. Despite the strong outlook, however, restrictions on complete aircraft manufacturing, commercial airspace use and the unpredictability of military-initiated airspace closures will continue to pose operational challenges for airlines, and could hamper growth in the sector.
According to market assessments by US-based Boeing and industry organisations such as the CAPA Centre for Aviation, China is expected to see 7-10 percent annual growth in the aviation industry over the next 20 years, which will entail huge investment in aircraft manufacturing, airport development and other ground-based aviation and regional transport infrastructure. The IATA stated that some 70,000 flights operate in and out of mainland China each week and by 2034 the country is forecast to be the world’s largest passenger market. According to the Aviation Industry Corporation of China, this will include some 4,583 civilian airliners comprising 3,682 jumbo jets and 901 regional aircraft, increasing China’s share of the global aircraft fleet to as much as 15 percent. US aerospace company Boeing estimates that the value of aircraft deliveries to China until 2032 will be worth some USD 780 bn. In September 2015, Boeing announced a deal to sell 300 aircraft potentially worth up to USD 28.8 bn to Chinese airlines and set up its first aircraft assembly plant outside the US, signalling a significant commitment to meet demand in the Chinese market.
Airport and related regional transport infrastructure development is expected to increase significantly by 2020 to cater for growing passenger numbers, opening up opportunities in the construction sector. By the end of 2015, Chinese airports are expected to number 230, spurred by construction under its 12th five-year plan, with at least a further 14 expected to be constructed by 2020. Meeting these targets will be eased by a decline in government intervention in the aviation sector, as Beijing seeks to unlock the economic potential of its second- and third-tier cities, and move to diversify air traffic that is currently concentrated on China’s east coast between Beijing, Shanghai and Guangzhou. Recent measures have included the exploration of private-public partnerships for airport development, and the easing of foreign investor restrictions on airport development and the manufacture of aircraft parts in 2015.
Despite considerable liberalisation, foreign investors will continue to face restrictions in entering the sector. Investment in complete aircraft production and ownership remains restricted under government guidelines. State-owned Commercial Aircraft Cooperation of China (COMAC) is also developing two aircraft to rival the Boeing 737 and Airbus A320, and Beijing hopes the company will become a serious competitor in global aircraft manufacturing by 2020.
Restrictions on airspace use will also create operational challenges and likely reduce the sector’s potential growth. The People’s Liberation Army controls China’s airspace, and between just 20-34 percent of the country’s airspace is available to commercial aircraft. By comparison, in most European countries the majority of airspace is open to civilian aircraft. These restrictions make civil aviation corridors particularly narrow and give large airports limited approaches, causing severe congestion and a higher likelihood of delays, which are a commonly cited problem with flights in China. The restrictions also make it difficult for aircraft to adopt alternative routes in case of poor weather prior to take-off, which leads to an increased number of delays and cancellations that could be avoided with a more liberal approach to re-routing. These issues are further exacerbated by China’s Air Traffic Management system and safety processes, which increase the minimum distances between approaching aircraft and lower the available capacity at airports, compared to similar systems in other major markets such as the US.
The military also has a history of closing airspace over major cities without warning during military exercises, a gross departure from the norm in advanced markets where such events seldom cause disruption. China also lacks an effective military-civil aviation collaboration mechanism that would allow better coordination of airspace closures. Such a mechanism is also unlikely to be developed due to the military’s historic control and economic interests connected to airspace, with unconfirmed reports in Chinese media and industry websites suggesting that some military officials use their positions to sell access to airspace on an ad hoc basis.
China’s wider economic slow-down could impact the rate of aviation sector growth, and partnerships with local operators can present challenges for investors regarding intellectual property protections. China’s official economic growth figures, set at 7 percent for GDP growth in the second quarter of 2015, have come under increased scrutiny by economists, although encouragingly for investors, the slow-down has made the government put greater emphasis on securing foreign investment in previously protected sectors. Unnecessary infrastructure projects and so-called ‘ghost cities’ have previously been constructed to maintain growth momentum and could jeopardise investments. Despite these challenges, China’s aviation sector will still see considerable growth and presents lucrative opportunities to investors if managed carefully with an understanding of the risks involved.