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Seminar - Chinese Aviation as a New Frontier?

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The Chinese aviation industry stands at a very nascent stage of development. Breakneck growth in the sector is forecast over the next two decades as Chinese air travel demand increases and infrastructure expands. China recently made aviation reform and development a top priority for the national economy. Aviation businesses wish to capitalize on the market potential, but the unique and often complex challenges in doing aviation business in China can obstruct their success. Despite the dramatic growth potential, heavy investment in the industry, and ever-expanding government reforms, many barriers and obstacles remain for those who are looking to conduct business in China.

For these reasons and many more, I will be presenting a complimentary seminar, “Chinese Aviation as the New Frontier?” on Saturday, May 30th at 9:00 a.m. at the Ann Arbor Airport (ARB) terminal conference room.

The seminar will benefit any aviation professionals, scholars, entrepreneurs, or enthusiasts who have an interest in gaining further understanding of the Chinese aviation industry, its business and policy environments as applied to the aviation sector, and the status of aviation reforms in China. It will especially benefit aviation professionals and enthusiasts who anticipate doing business or work in China, or who plan to engage with China’s aviation scene.

The seminar is free of charge and open to the public, but please send an RSVP message to [email protected] if you plan to attend.

 

 

China’s Mid and Long Term Plan for Civil Aviation - MIIT

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Contrary to popular discourse and what some may expect, Chinese national economic plans are fairly transparent. Communist governments are easily assumed as insular and opaque, probably due to historic precedent. Modern China, however, doesn’t suit that description. China’s economy today looks much less like a command-driven economy than it does a modern progressive one, albeit with the ever asterisked “Chinese characteristics”. Some legacies from the communist command economies do remain, such as the five-year economic plans. Incidentally, Chinese aviation recently received a big boost from policymakers when aviation was given special status as a key strategic industry for development in conjunction with the Civil Aviation Administration of China’s (CAAC’s) 12th Five-Year Plan. The Five Year plans are important and fairly explicit in the government’s goals for the national economy, and they are readily available for anyone who wishes to read them. It’s quite transparent.

The question then becomes, “Ok, so we have a Five Year plan, what about the longer-term plans and strategy?” Again, we still enjoy some transparency in this realm. As was pointed out in this blog earlier, the Chinese government has already stated their intentions for economic priorities and development through the year 2030 in a World Bank document called China 2030 which was approved by China’s National Development & Reform Commission and the Ministry of Finance. When it comes to aviation specifically, another valuable strategic guiding document was released by China’s Ministry of Industry and Information Technology (MIIT) called the Civil Aviation Mid- and Long-Term Development Plan － 2013－2020. This plan details the forward-looking strategy, priorities and goals for China as it seeks to achieve industrialization of its aviation industry by 2020. The document is published in Chinese, so for those who would like the details in English, I took the liberty to review and translate the document so we can discuss it here.

First it is important to note that the mid- and long-term plan wasn’t developed in a vacuum. The plan references broader development plans that the aviation plan supports and follows. These include China’s 12th Five-Year Plan, the Mid- and Long-Term Science and Technical Development Plan (2006 – 2020), and the “12-5” National Strategic Emerging Industries Development Plan.

The document makes it clear that China understands the gaps it needs to fill to become internationally competitive in the civil aviation industry. Like most modern official Chinese documents it initially pays lip service to communist party ideology and then characterizes the progress of economic and aviation reforms and development as a continuous process since the establishment of the People’s Republic of China under Communist rule. I’ll spare those details.

In one very brief statement, MIIT describes the global aviation industry as fast-paced and accelerating, fiercely competitive, and dominated by monopolies already established in the market.

One of the first tangible issues MIIT’s plan addressed is the issue of civil-military integration. It is an important topic to address because China’s military has historically been extremely hesitant to cooperate with the civilian aviation sector. MIIT’s plan makes it clear that increased civil-military integration is needed in research & development (R&D), resource sharing, and development of the industry. This should come as no surprise since one of MIIT’s primary roles, in fact, is to “promote civil-military integration as well as the coordinated development of advanced technology and industry.” (see US-China Economic and Security Review Commission Report: China’s Defense Industry on the Path of Reform) In addition to increased domestic civil-military cooperation, MIIT also calls for increased international cooperation.

Several development goals were outlined in the plan. Here is a brief summary:

Major Goals

  • Perfect modern aviation industry systems
  • Enhance sustainable development capabilities
  • Make major leaps in civil aircraft industrialization
    • Complete C919 development, production and delivery
    • Complete ARJ-21 development, production and delivery
    • Complete turboprop aircraft development, production and delivery
      • MA-60 (50 seat) and MA-700 (70 seat) projects
    • Produce rescue aircraft
    • 15 medium helicopters
    • High end business jets
    • Medium-power turbines
    • Narrow-body aircraft reach 5% domestic market share by 2020
    • Civil aircraft annual sales income to exceed 100 billion RMB

Both the C919 and ARJ-21 programs have been plagued by continual delays, but the projects finally appear to be coming to fruition as final assembly of the first C919 flight test aircraft is underway as of November, 2014. The latest target date publicly announced by COMAC for the first production C919 delivery is 2018…assuming everything goes well during the flight testing and airworthiness certification processes. That’s certainly not a guarantee. On paper China seems to be delivering well on all the above goals, but the 5% market share by 2020 might be a challenge if additional delays continue in China’s civil aircraft development. The following are some key areas MIIT identified as requiring added attention:

Important Areas and Tasks

  • Expedite Civil Airliner Production Processes
    • Accelerate ARJ-21 development and establish production volume
    • Accelerate development and produce MA-60 and MA-700 aircraft to meet short-term market demands domestically and internationally
    • Ensure C919 is internationally competitive
    • Promptly develop a double-aisle wide-body aircraft to fulfill international hub and intercontinental flight goals.
  • Actively Develop General Aviation (GA) Industry
    • Develop GA aircraft including:
      • Emergency rescue aircraft
      • Multi-purpose and specialized aircraft to meet needs of cities
    • Helicopters
      • Increase quality of products / lines
      • Encourage international cooperative development of heavy helicopters
      • Accelerate development of modern multi-purpose helicopters
    • Business jets
      • Make customizable modifications to regional jets
      • Encourage international cooperative development of high-end transcontinental business jets
    • Expand GA Industry Chain
      • Develop GA aircraft and consolidate GA development simultaneously
      • Expand GA industry chain
  • Promote Independent Development of Propulsion
    • Support civil-military integration
    • Establish independent aviation propulsion industry/system
    • “Reverse the backward situation in propulsion”
    • Develop medium-power turbine engine; mass assembly & production in 2015
    • Produce a number of mature engine models by 2015
    • Produce large aircraft engines within about 10 years
    • Promote and support development of small engine market including small turbofan, turboprop and piston engines
  • Accelerate Development of Aviation Equipment, Systems and Related Industries
    • Avionics development
    • Modernization of ATC, navigation, communication, surveillance systems
    • Improvements in flight training, maintenance, airport support, other equipment
    • Strengthen development of aviation-related materials such as composites, alloys, steels, etc.
    • Improve development of onboard computer software and hardware
  • Optimize the Layout of the Aviation Industry
    • Prevent redundant construction
    • Promote healthy and orderly development of the industry
    • Civil transport aircraft layout
      • Bases to include Shanghai, Shanxi and Tianjin
    • GA and helicopters
      • Harbin, Shijiazhuang, Zhuhai, Chengdu, and Jingmen as advantageous regions for medium-sized GA, business jet and specialized aircraft development
      • Jingdezhen, Harbin and Tianjin as advantageous regions for medium helicopter development
      • Encourage development of small light GA aircraft and helicopters
    • Upgrade existing medium-sized engine development capacity and encourage small enterprise development
  • Vigorously Promote the Progress of Science and Technology
    • Key areas where major breakthroughs in engineering and technology are targeted:
      • High-precision aerodynamic design
      • Composite structure applications
      • Flight control technologies
      • Efficient engine development
      • Energy conservation and noise reduction
      • Avionics
      • Systems integration
      • Operational support and technology
    • Strengthen basic research with a focus in following areas:
      • Advanced aerodynamics
      • Thermodynamics
      • Mechanics and flight mechanics
      • Ergonomics
      • Acoustics
      • Propulsion
      • Technology
      • Information control
      • New energy
      • New materials
      • Other aviation-based science and technology
    • Strengthen the technology base and exploration of new technologies
    • Promote application of digital technology
  • Strengthen Infrastructure and Capacity
    • R&D capabilities and test facilities
      • Aircraft and engine research
      • Testing-wind tunnel, strength testing, engine test stands, etc
    • Improve capacity for airworthiness certification & testing
    • Improve testing infrastructure

When it comes to China’s civil airliner production, the ARJ-21 is certainly moving forward as a key player in China’s domestic market. However the goal stated above in achieving international competitiveness in the airliner market is probably not realistic with either the ARJ-21 or the C919. Both are heavier, less efficient, and less trusted brands than their global competitors. It will probably not be until after 2020 that China reaches that goal. However, the key issue of developing aircraft to meet China’s own transcontinental demands is very realistic and achievable by 2020. Domestic airlines will be pressured, incentivized, or even strong-armed into purchasing the domestic aircraft and they aircraft will get the job done. At the rate China’s demand for air travel is growing, any aircraft with seats aboard is helpful. And as in all international transactions involving aircraft sales, it doesn’t always come down to which aircraft is actually the best or most fuel-efficient airplane. Politics and negotiations have a large influence over international aircraft sales, so we should expect to see Chinese-built airliners in the international market as well despite their shortcomings.

In GA, China’s worst enemy is its own regulatory environment. Policies inhibit effective use of business, GA and even rescue aircraft across the country. Very low altitude airspace has only opened slightly (up to 1,000 meters), and China’s aviation scene is still inhibited by extreme rigidity in its airspace and other operational regulations. MIIT can call for movement on these tasks, but until MIIT’s friends in the State Council, Central Military Commission, and other government organizations take additional steps to reform aviation policies in China, particularly in the area of airspace control, progress in these areas will be sluggish all the way up to 2020 and beyond. That all said, things are getting better in China, albeit very gradually, and numerous opportunities are found for domestic and foreign interests to capitalize on the upward trajectory of GA in China. Helicopters in particular are a key area of rapid development where China will likely firmly deliver on its stated goals.

Independent aircraft propulsion development is still a challenge for China. Progress hasn’t been as quick as MIIT hoped, but the first signs of quality propulsion technology coming out of China are just now emerging at the Zhuhai Airshow. Joint venturing with foreign firms has been a key priority for China to reach these goals and it seems to be working. Foreign firms understand that by JV’ing in the engine business they are essentially training their future competitors, but the expanding market in China is too lucrative to ignore. Plus, as a general figure, while western leading engine manufacturers are investing as much as a few billion US dollars annually in propulsion R&D, China’s major aircraft engine producer is only spending about $300 million annually. It will be a long while before China reaches the MIIT benchmarks; probably sometime after 2020.

You can see from the sections on organizational layout and engineering priorities that China’s goals are indeed quite transparent when it comes to civil aviation development. The deliberate clustering strategy is an important characteristic of Chinese aviation development that shouldn’t be overlooked. Clustering affords significant competitive and comparative advantages when its done right, and China’s approach to building its capacity for aviation excellence seems to be on the right track. Historically China’s aviation industry was tormented by dozens of separate state-controlled organizations competing against one another across numerous provinces and regions in fairly insular research and development environments. Today China is restructuring its aviation industrial bases and achieving synergies in the process. MIIT’s overview of the major industrial clusters for aviation shows the areas where most of the work, interests, money and support is found in China for each respective aviation segment.

Now on to the major projects:

Major Projects

  • Large aircraft projects
  • Regional and GA aircraft industrial engineering
    • Implement Strategic Emerging Industry Development Plan
    • Achieve breakthroughs in key technologies to enhance safety, economy, comfort and environmental protection
    • Accelerate regional aircraft development and quality improvement
    • Develop GA aircraft, helicopters, trainers, UAVs, simulators
    • Large-scale promotion and use of GA aircraft
    • Establish maintenance, support, security, training, leasing and other services
  • Civil aircraft industrial base support plan
    • Create civil aviation equipment and systems integration capabilities
    • Provides for industrial development of civil aircraft
    • Develop systems integration technologies and core equipment R&D technology
    • Encourage enterprises to establish quality control systems, technologies and testing facilities to improve quality management system
    • Focus on product quality
    • Develop quality certification, assessment, validation institutions
    • Develop aviation accident analysis research institutions
    • Establish air quality information management platform

Ok, so China wants to do everything, but the specifics are lacking. This is typical of an official government document in China, but important since policy decisions, project approvals, and even funding itself is often contingent on finding a link to central government or local government development goals, even if the method for achieving the goals aren’t explicitly specified. Still, we run into problems with some of these goals when they meet reality. One example, again, is the goal for “large-scale promotion and use of GA aircraft.” A China where large-scale use of GA aircraft can be a reality doesn’t yet exist. Eventually China will get there, but for now the goal is unachievable due to restrictive aviation policy that is still in the slow process of reformation. What is heartening is that even a non-aviation-focused ministry in the Chinese government seems to “get” what’s needed to strengthen the aviation industry in China. If China effectively delivers on all of these projects it will quickly become the envy of the global aviation economy. And here is how China thinks it can prevent spoiling its potential:

Safeguards

  • Institutional Mechanisms
    • Accelerate transformation of government functions
    • Innovate management methods
    • Cultivate a good market environment
    • Adjust structure of aviation industry organizations
    • Integrate existing research efforts
    • Strengthen research
    • Promote investment diversification
    • Achieve international competitiveness
    • Guide and encourage social capital and aviation development
  • Establish sound system of regulations, standards and industrial policies
    • Develop civil aviation industry related laws and regulations
    • Improve industry management rules and regulations
    • Promote development of regulatory system for protection of the industry
    • Research to develop management and technical standards
    • Actively participate in international standards development and coordination
    • Gradually establish a standards system compatible with international system
    • Study civil aviation industry policies
    • Strengthen regional and general aviation airport construction
    • Promote national airspace management system
    • Accelerate opening of low-altitude airspace
    • Improve pilot training
    • Establish civil aircraft airworthiness management system
    • Standardize investments
    • Prevent redundant construction
    • Promote healthy and orderly development
  • Establish and improve the airworthiness system
    • Research and develop capacity for airworthiness certification
    • Improve airworthiness management system
    • Bring China’s national airworthiness standards in line with international standards and specifications
    • Improve airworthiness research, education, training
    • Promote international bilateral cooperation
  • Accelerate development of qualified personnel
    • Strengthen university aviation-related disciplines
    • Improve colleges, enterprises and personnel training mechanisms
    • Improve professional standards of talents
    • Encourage introduction of foreign talents
    • Increase intensity of recognition awards
  • Comprehensively promote international cooperation
    • Deepen intergovernmental aviation dialogue
    • Expand the aviation industry in developed countries
    • Expand in international aviation organizations
    • Support aviation industry companies and research institutions in carrying out international cooperation in research and technology
    • Support enterprises in use of subcontract production
    • Support enterprises in division of labor and risk sharing
    • Support international, bilateral, multi-lateral cooperation and exchanges
    • Support international exchanges and coordination of technical standards, policies and regulations

Those are some fairly honest assessments as to where MIIT believes its country stands, some very thoughtful, deliberate and sound judgments about what China needs to do to develop its aviation industry, and a plausible general plan for moving the industry forward through 2020, peppered with some ambitious goals. Execution is the difficult part, but since 2013 China has been plugging away at this plan usually quite effectively.

Aviation interests, whether domestic or foreign, would be well served to review these goals and perceptions and consider how their own business or organization can find mutual interests. While the progress in China’s aviation sector may have slowed in some areas such as business and general aviation, it is still moving forward and numerous opportunities present themselves in this development plan. The transparency as found in this development plan and others is helpful to the industry both domestically and globally.

Headwinds for Business Aviation in China Despite the Hype?

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If you’re an aviation professional or enthusiast you can’t help to be excited about China’s direction in aviation and all the opportunities that come with it. If you’ve been following China’s aviation industry you’ve heard about the massive investments in aviation infrastructure, reform and opening up of airspace and routes, and the very strong growth forecasts for selling planes and all other aviation-connected products and services. After all, China has already climbed to becoming the world’s second most lucrative market for aircraft sales. Why wouldn’t you be excited!?

Well, herein enters that “P” word. That’s right. Politics. Business aviation in China is facing some significant resistance due to the current international and Chinese domestic political context despite all the warranted hype surrounding aviation growth opportunities in China.

Some good insight comes from Aviation Week’s Check 6 Podcast interview of Kevin Michaels from ICF International back in May. Kevin provided a very frank and honest assessment of where things seem to be at in the Chinese business aviation sector. Here is a summary of the problems he highlighted:

  • Infrastructure: Although a lot of airports are being built, many of those new airports are being constructed away from main business/economic/population centers.
  • Airspace liberalization: The only major reform and opening of airspace for general aviation use has been at 1,000 meters and below. That doesn’t help business jets which need to cruise at much higher altitudes.
  • Politics: The ongoing anti-corruption campaign has had a negative effect on business aviation since officials and business elites (business aviation customers) are the aim of the crackdown. In other words, nobody wants to become a target by looking like they’re basking in lavishness.

Because of all this Kevin forecasted that China won’t overtake the U.S. as the number one market for business aviation for several decades. On a separate note as recently reported by Wall Street Journal, global political dynamics such as sanctions on Russia, economic problems in Brazil, the Ebola outbreak in Africa and the rise of ISIS in the Middle-East combined with China’s anti-corruption crusades seem to be combining to act as a drag on the global business aviation industry. For a market that was finally starting to rebound from the global recession, these new challenges threaten to delay the rebound even longer.

That all said, Kevin himself admits that there still exists a “reasonably healthy stream of deliveries” to China and suggests that while the issues of today are going to delay China’s momentum in the industry for the short-term, the long-term outlook still looks lucrative. Steve Taylor of Boeing Business Jets admitted there are challenges but pointed out that there are challenges everywhere and noted they received 10 orders this year globally compared to four last year.

Its a positive sign that aircraft sales in China still look “reasonably healthy” even in the midst of anti-corruption campaigning. It could mean there is a degree of pragmatism in the minds and attitudes of Chinese government officials and business elites when they think about business jet purchasing and usage. Or it could be a sign that business aviation customers in China have reason to believe that the anti-corruption campaign issues and complications are temporary and there will be a more normal atmosphere eventually.

Regardless of how correct one prediction or explanation might be over another, the one issue that truly matters in this discussion is how well the business aviation community is able to communicate the value, efficiency, productivity and other utilities that business aircraft ownership brings to a company, government agency, or other organization. Too often business jets are seen as luxuries instead of tools of trade; not just in China, but everywhere. However China is unique since there is very little domestic experience with using business jets as they were intended to be used. Much of the market has revolved around purchases by high-wealth individuals and other customers making statements of status, but as the market in China matures that will transition more and more to purchases made for the purpose of furthering productivity and business. There is still very little history and experience domestically in China with using business jet aircraft in the way they were intended to be used for furthering business and increasing competitiveness. Additionally the aviation infrastructure and airspace is in China makes it difficult to use business jets the way they were intended to be used.

Government officials and other influential persons in China need to see the positives in business aircraft usage that result in higher productivity, increased Chinese competitiveness, and increased GDP growth. Unfortunately a connection seems to be made in China (and everywhere else for that matter) that a business jet equals lavishness. So the real problem is not necessarily that there is an anti-corruption campaign going on in China. The problem is that the purchase or usage of a business aircraft is easily construed as corrupt. Of course this is not a situation unique only to China, but the anti-corruption campaign exacerbates the misconceptions. The industry would always do well to make a focused effort in educating officials and other leaders in China about how business aviation advances the Chinese agenda, but in times like this it seems all the more important.

Aviation Economics - What’s in it for China?

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Why should anyone care about aviation in China? Perhaps a better question would be why should China care about aviation? People who know me probably understand why I’m making a big deal about Chinese aviation. I love aviation and I love China! But what about everyone else? Why should we care?

A classic answer suffices here: “Its all about the money.”

Oxford Economics published a study in 2011 entitled “Economic Benefits from Air Transport in China” succinctly explains how important China’s aviation sector is to its economy as well as the rest of the world’s.

Here are just a few takeaways from this important study. First on the overall economic impact to the economy and jobs environment:

“The aviation sector contributes ¥329 billion (0.8%) to Chinese GDP…

The aviation sector supports 4.8 million jobs in China…

¥26.9 billion in tax including income tax…, social security contributions and corporation tax… It is estimated that an additional ¥28.2 billion of government revenue is raised via the aviation sector‟s supply chain and another ¥14.3 billion through taxation of…spending of employees of both the aviation sector and its supply chain.”

As a geographer I found the study’s discussion of the importance of “connectivity” very intriguing. One of the over-arching theories in the discipline of geography is Tobler’s Law. In a nutshell the theory explains that everything is related to everything else, but nearer things are more related to each other than distant things. It may seem intuitive, but distance really can be a make or break obstacle to a business or an economy. Transportation, therefore, is crucial. It can connect businesses with more consumers and other business partners, and even open access to entirely new markets and economies. Air transport effectively makes distant things nearer, and that in turn can fuel further business and economic activity that might otherwise be impossible of too costly or slow to conduct. The Oxford Economics study showed just how important aviation connectivity is to an economy. The following are some selected highlights:

“China‟s integration into the global air transport network transforms the possibilities for the Chinese economy by:

  • Opening up foreign markets to Chinese exports
  • Lowering transport costs, particularly over long distances, helping to increase competition because suppliers can service a wider area and potentially reduce average costs, through increased economies of scale;
  • Increasing the flexibility of labour supply, which should enhance allocative efficiency and bring down the natural rate of unemployment;
  • Encouraging Chinese businesses to invest and specialise in areas that play to the economy’s strengths;
  • Speeding the adoption of new business practices, such as just-in-time-inventory management that relies on quick and reliable delivery of essential supplies;
  • Raising productivity and hence the economy’s long-run supply capacity. It is estimated that a 10% improvement in connectivity relative to GDP would see a ¥25.4 billion per annum increase in long-run GDP for the Chinese economy.”
The study also explains that increased connectivity made possible by aviation improves the productivity of the wider economy by providing “increased access to foreign markets, and increased foreign competition in the home market, and through the freer movement of investment capital and workers between countries.” I would also add that given China’s current stage of development, connectivity is important to China not just trans-nationally, but also between its own provinces domestically. Many parts of China, especially in the west, remain relatively remote and unconnected to the wider Chinese economy. Increased domestic connectivity will also increase China’s productivity in much the same ways that the trans-national connectivity does. Therefore it should be no surprise why China’s government is currently building, reconstructing or expanding about 100 airports across the country! My favorite bottom-line statement about the marvelous connectivity that only aviation offers was given by Ed Rolen of the National Business Aviation Association (NBAA) when he said:
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“2 miles of waterway takes a boat 2 miles; 2 miles of road takes a car 2 miles; 2 miles of railway takes a train 2 miles. But 2 miles of runway will take people anywhere in the world.”
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On the note of productivity, its important to understand how influential productivity is to an economy. The more productivity in an economy or business, the more benefit the economy or business realizes as a result of the expenditure of limited time, resources, labor, talents, energy and capital. More productivity translates into more profit for a business, and more GDP for an economy. Oxford’s study showed how Chinese aviation has such an important and positive effect on China’s productivity and economy as a whole. I won’t delve into the more obvious aspects of how aviation can boost productivity here. Instead, I should point out two more subtle but very important benefits aviation brings to the Chinese economy:
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“…The aviation sector generates more GVA per employee than the economy as a whole, raising the overall productivity of the economy…

…[the] average air transport services employee [is] around 6.4 times more productive than the average in China.”

“GVA” is “Gross Value Added”. GVA is a measure of the output value of all goods and services produced minus the input values of all costs of intermediate goods, materials, and other inputs required to produce the output. Its a good measure to see how much a given sector is actually adding effective value to the overall economy/Gross Domestic Product (GDP). So Oxford’s finding that GVA per employee is higher in the Chinese aviation sector than the economy as whole is very important. It means that if China wants to grow its economy (which requires increasing productivity), it can and should look to its aviation sector for more output and devote less inputs to sectors with less GVA. This is one crucial reason why aviation should be (and for many officials *is*) a national industrial priority.

Going back to the questions “why should China care about aviation, and “why should we care about aviation in China?”, we can look back on this post and see why. Billions in economic input. Millions of jobs. Increased connectivity, increased access to markets, reduced costs, increased productivity and increased GVA/GDP. Chinese aviation is important because all of that is important to the Chinese, Asian and global economy.

Oxford’s study is a pretty convincing case that aviation is a crucial sector in the Chinese economy. I recommend downloading and reading the study in full here. As aviation moves forward in China it will be these kind of facts and figures that can make a difference for those who are advocating further development, positive reforms and increased investment in China’s aviation sector. So this read is a really good foundation for understanding why aviation matters in China. Enjoy!

Types of Chinese Aviation Law and Regulations

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faUnderstanding Chinese aviation policy starts with understanding the foundational legal framework for law and regulation in China. For this reason I decided to summarize a few key points about Chinese aviation law in this post. China’s aviation regulatory environment consists of five key areas: 1) The Constitution, 2) Laws, 3) Regulations, 4) Rules, and 5) Extra-legal policy.

Besides the Constitution, China’s Civil Aviation Law is the foundation and legal framework for Chinese civil aviation. All aviation regulations and rules hinge upon this law (enacted in 1995). Laws in China are formalized by the National People’s Congress (NPC) (China’s legislative body). There are 16 chapters in the Civil Aviation Law that govern Chinese domestic aviation including topics ranging from airworthiness, aviation infrastructure, liability and navigation, just to name a few. For complete detail, read the full Civil Aviation Law here.

At the next level down from Chinese law are the administrative regulations that are enacted by China’s State Council. The State Council is essentially the central government’s administrative apparatus. It is led by high-ranking Chinese Communist Party (CCP) officials and includes numerous administrative ministries such as the ministries of national defense, foreign affairs, commerce, justice, and other administrative departments. State Council aviation regulations generally address how the Aviation Law is implemented among the key players in Chinese aviation. For example, one State Council regulation regulates how the management of civil airports should work, while another one regulates airport obstacle clearance issues. In both of these cases it is easy to see how multiple government agencies need to be involved to address the issues at hand in the regulation. The State Council therefore directs and manages those type of regulations. Due to the nature of aviation, especially in China where airspace is so tightly controlled by the military, State Council aviation regulations are often jointly formulated with the Central Military Commission (CMC).

The final official level of aviation regulation in China is what can be considered the rules, or more commonly known as the China Civil Aviation Regulations (CCARs). The CCARs are issued by the Civil Aviation Administration of China (CAAC) and are the most practical, familiar and widely used regulations for aviators, operators, owners and other business or legal aviation practitioners in China. The CCARs are very similar in structure and content to the Federal Aviation Regulations (FARs) in the United States. In fact they are so similar that the numerical references for chapters in the regulations follow very paralleled convention as the FARs. For example, FAR 61 is about airman certifications, and CCAR 61 is also about airman certification. Along with the CCARs are other CAAC-issued regulations and policies such as advisor circulars. Despite the similarity in naming convention and structure there remain very stark differences between FARs and CCARs when you begin examining the contents.

Beyond the official regulatory structure of China’s aviation environment are the various extra-legal customs, policies and procedures that dictate how businesses, operators, and even policymakers get their jobs done. This is especially the case when more localized government officials operate fairly autonomously and sometimes even in conflict with central government policies and goals. A recent article in Foreign Affairs captured this phenomenon well:

“In 2010, Beijing introduced subsidies to promote the sale of clean-energy cars, with a goal of 500,000 sales by 2015. But provincial officials, attempting to protect local auto interests, allowed only domestic cars to qualify for the subsidies. As a result, fewer than 45,000 clean-energy cars have been sold to date, a far cry from the initial target.”

In the advent of domestic aviation cluster competition in China and increasing domestic aircraft production we see similar extra-legal complications surface from time to time. Aviation practitioners that want to do business in China should know the unwritten lanes in the roads and rules of the game to successfully maneuver China’s aviation policy environment in addition to the foundational law and regulation. Although its important to understand central government law, policies and regulations described above, local knowledge is absolutely key. There’s an awful lot of local policy that isn’t written anywhere and may even conflict with central government regulation or policy, but those unwritten policies can make or break an aviation business or operator.

I hope this serves as a good intro to anyone interested in following this blog or the topic of Chinese aviation in general. Knowing the foundation for policy and regulation in Chinese aviation should help make for easier understanding as we continue discussing aviation policy reforms on this blog and elsewhere at the Alta Center for Chinese Aerospace Studies.

For those who might be interested in further study, I recommend the book “Essential Air and Space Law” by Zang and Meng as a great starting point and reference for reading the foundational laws and regulations that I discussed in this blog post. Both English and Chinese readings are included.

IATA 2012 - Doing Business in China Panel

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The International Air Transport Association (IATA) Annual General Meeting (AGM) in 2012 included a panel on “Doing Business in China” that included some valuable insights from a few business practitioners with extensive experience in China, moderated by CNN’s Kristie Lu Stout. The panel included Tim Clissold, CEO of Peony Capital; Liu Shaoyang, President of China Eastern; Christian Murck, President of the American Chamber of Commerce in China; and Helen Wong, President & CEO of HSBC Bank (China). IATA posted the whole video for your viewing pleasure here:

IATA 2012 - Doing Business in China Panel (Video capture credit - IATA, 2012)

IATA 2012 - Doing Business in China Panel (Video capture credit - IATA, 2012)

If you have 45 minutes to spare (I hear you laughing) and doing aviation business in China interests you, you might want to watch this one start to finish. For those who are more like me and find 45 minutes of “free time” in any given day pretty hard to come by, you might want to just keep reading below to get my key takeaways that are relevant to doing aviation business in China and not necessarily well understood by the global aviation community (I even provided the time hacks!):

Long Term Strategy and Government Relations

Successful business is rooted in creating win-win situations, so it’s no surprise that Tim Clissold’s experience led to sharing this important wisdom:

4:30 — “The most important thing about doing business in China is first of all finding an area that will benefit the country the country long term…so that you’ve got some sort of tailwind behind you… In the end it all comes down to government. Everything comes down to how to actually deal with individual situations in China.”

Tim Clissold and Helen Wong mentioned a few other pointers about taking a long-term strategy in China and adding value to the China and achieving its goals that you can see at about 35:45 on the time hack.

So the natural question would be how do you know what would benefit China for the long-term? Or how would you find out what is important to the Chinese government? Christian Murck’s advice can help you get started:

5:40 — “I would go right to the World Bank website and download China 2030….Not just a World Bank report but it was also approved by the NDRC, Ministry of Finance…it represents a point of view of a number of Chinese officials as well as analysts in the World Bank and it charts an overarching/fundamental…changes in the Chinese Economy.”

Here is a link to that China 2030 document for your convenience. Keep in mind the fact that the China 2030 document was approved by the NDRC (National Development and Reform Commission) and that is a very significant endorsement. Dr Kenneth Lieberthal (one of my favorite China scholars) characterized the NDRC as “the most powerful force among all the ministries.” (For more on the NDRC, see this great article, China’s Economic Policy Factory: The NDRC in Bloomberg Businessweek.) So the China 2030 document certainly is worth a read as Christian suggests and offers valuable insight into what is important for China’s future and what the government will value. It’s not an end-all, but definitely a good starting point. Later in the panel discussion Christian also brought up another important point:

39:00 — “At the level of objectives, the Chinese gov’t is actually extremely transparent…the objectives are very clear. The execution is an issue. ..there is a level of regulatory or administrative risk.”

Airspace Reforms and Slotting Improvements Needed for Aviation Growth

In line with the general feeling across the global aviation community, both Christian Murck and Li Shaoyang commented very positively about the promise for aviation business growth in China, but admitted that airspace reforms and slotting improvements are key to achieving the kind of growth that will be needed to meet the rapidly increasing demands for aviation in China:

33:15 — “Medium and long-term investment piece is very strong…I’ve spent time in secondary cities in Yunan and Hunan Provinces, and when you get out into those areas you find that there is perhaps more growth momentum than you see in Beijing, Shanghai Guanzhou…and the reason for that is partly that they are beginning to see the benefits of the massive investments in transportation infrastructure, roads, highways, airports that have been made in the last 10 years and they suddenly find themselves addressing much larger markets. China’s 4th largest airport by capacity will open in Kunming at the end of this month…they’re going to be able to take a lot more flights in and out of Kunming than they ever did before. So I would say that as you look at population that continues to urbanize at a rate of about 1% a year with that expected to go on for 20 years, that’s 14 million people moving to an urban area every year, so 1 and ½ times NYC being built every single year, I think if you look at these long-term trends you can see that the growth prospects are excellent. The question is, what are the growth prospects for me, in my sector, in my company? If you look at the airline industry, very clearly there will be enough airports, and Boeing and Airbus and COMAC are going to build enough airplanes. There might be an issue with training pilots and staff, but I think that can undoubtedly be addressed. The key is whether the airspace, currently heavily restricted by the military will gradually be liberalized and shifted to civilian availability. And my own view of that is it will happen because of the rising pressure of demand. China will become more like the rest of the world in this respect. And that means the airline industry and air transportation will grow very, very dramatically.”

And here are Li Shaoyang’s thoughts on growth and needed reforms:

[Interpreter] “Let’s take aviation for example. Last year, China provided services to over 300 million passengers, but 2 decades ago every year we flew only 2,000 or 3,000 passengers. For over 2 decades we have kept growth rate at over 10%. During the past 3 decades, the first decade was about clothing, Chinese people don’t want to lose face, so they want to have nice clothing. The 2nd decade was about food. The 3rd decade was about housing. Housing is a very big issue in China. But in the next 2 decades it will be about traveling. When Chinese people get richer they want to travel more, they want to fly to other parts of the world. In the future this will be a very good growth in consumption.”…

 

At about 23:00 he talked about a need for structural reform and opening up of airspace, and also discussed the following:

[Interpreter] “China has liberalized its airspace. Also if Chinese airlines want to come to the Chinese market they can do it. They can get slots in a quite fair manner. International airlines pay a lot of attention to the Chinese market. Of course there are some problems. For example in Beijing we don’t have enough slots. In Shanghai there is the same slot shortage. China’s air traffic has a short supply. Being with China Eastern Airlines I would like to apologize to the audience here for all the delays you suffer. It was not the airline’s problem. In China the delays can be quite serious… I think China is opening up to the outside world… China’s investment policies are quite familiar to foreign investors. For example Boeing airlines invested in domestic small airlines in Guangzhou…operations were not very good so they went bankrupt. So they have the exit mechanism. They can get out when they want. Our policies are opened up as much as developed countries. China is still a developing country anyway, it is not very rich, so the growth potential of the market is quite strong, so we welcome international airlines to come to China.”

The airspace topic has been a popular one and despite recent reforms that were made after this conference it still remains a major challenge to aviation interests in China. Slotting is in part influenced by the airspace issues since more effectively and efficiently run airspace permits smoother traffic and therefore increased capacity, but it is also influenced by numerous other factors such as infrastructure and air traffic controller training. Airspace reforms and slotting improvements are two key areas to continue paying attention to as aviation takes off in China.

Overall if you’re new to China and interested in both generalities of the Chinese economy and its trends, as well as how some of that relates to doing aviation business in China, this is a good panel discussion to get your mind thinking about a range of important issues. Experienced folks probably won’t find many big surprises here, but my hats off to IATA for addressing this very important issue at a time in the aviation world when so much attention has turned eastward towards China. Thank you IATA for posting the video!