Regulatory turbulence
Regional jet market faces sales issues amid slow new airline approvals
The Chinese regional jet market is struggling to lift off the ground as authorities slow down approvals for new airlines, industry executives say, dashing hopes that recent policy changes would drive aircraft sales up.
Foreign companies such as Canada’s Bombardier Inc, Brazil’s Embraer SA and Franco-Italian ATR had cheered a 2016 policy that required passenger carriers to operate at least 25 city-hopper jets before graduating to bigger aircraft.
It appeared to all but assure sales of such small planes in the world’s fastest-growing aircraft market, currently dominated by wide-body jets, as the regulator tried to boost flights in China’s smaller cities.
But there is a problem. Executives say that the Civil Aviation Administration of China (CAAC) has only approved two new airlines since the “Rule 96” policy went into effect.
“The truth is that almost two years have passed and I have not succeeded in one single deal,” said one executive from a Chinese aircraft lessor speaking on condition of anonymity, who added that he had met with numerous start-ups to promote regional aircraft.
The executives added that although the slowdown was probably wellintentioned – prompted by regulators’ concerns over safety and quality – it meant that there was a queue of at least six Chinese airlines waiting for approval.
The policy had stoked optimism among regional aircraft makers, as Chinese airlines have for years mostly focused on growing their fleets of Airbus and Boeing narrow-bodies rather than buying smaller jets for short-haul flights.
Out of 3,311 commercial aircraft flying in China at the end of March, just 5 percent were regional jets, the CAAC said in April. By comparison, regional jets in 2016 took up 30.6 percent of the 7,039-strong fleet of aircraft in the US, according to data from the US Federal Aviation Administration.
“The intention is that [the regulators] want to push, but they have enhanced the entry barriers so they have very high standards for the investors,” said Wang Qi, chief China representative for turboprop manufacturer ATR, which is renewing its Chinese certification.
Chinese airlines in general have a good safety record.
The CAAC did not respond to requests for comment.
Patience and frustration
For many, Rule 96 underlines China’s intentions to improve regional air transport. And the country’s 13th Five-Year Plan for 2016-20 included 500 new airports.
But only Tianjiao Airlines in North China’s Inner Mongolia Autonomous Region and Air China subsidiary Beijing Airlines, which converted from a private charter operator to a passenger airline, were approved in 2017.
An executive of Tianju Airlines, which is waiting for the green light to start carrier operations from Northwest China’s Shaanxi Province, said regulators have grown more cautious.
But he said the airline hopes to start flying in 2019, after four years of preparations and at least one change to its proposal to adjust to CAAC policies.
“We currently fulfill all conditions,” said the executive, who only gave his surname as Li because he was not authorized to speak to the media.
AirAsia Group, which is working with local partners to establish a low-cost carrier in China, has looked at options like buying an existing air operator’s certification to speed things up, according to two sources familiar with the plans.
The company, which in 2017 signed a memorandum of understanding with China Everbright Group and the government of Central China’s Henan Province, declined to comment.
Optimism
The only aircraft that meet Rule 96’s seat limits of 100 or less and are certified to be sold in China are Commercial Aircraft Corp of China Ltd’s ARJ-21, AVIC Aircraft’s MA60 turboprop and Bombardier’s Q400 and CRJ 900 models.
Bombardier and Embraer said they remain optimistic about their prospects in China.
“The situation under Rule 96 continues to evolve,” Bombardier Commercial Aircraft’s President Fred Cromer said in an interview with Reuters at the company’s Montrealarea factory in the Canadian province of Quebec.
“The fact that we have a plane that’s well known by the authorities there and an operator that operates quite a few works in our favor,” he said in reference to Bombardier CRJ 900 operator China Express.
Embraer said in an email that it expects its E175 jet to obtain CAAC certification by September.
But Corrine Png, chief executive of transport consultancy Crucial Perspective, said Chinese airlines were still more inclined to buy larger jets to meet surging travel demand amid a shortage of landing slots and pilots.
“It would be costly to maintain a small number of regional jets in China which may not be economically efficient from the Chinese airlines’ standpoint,” she said.
Homegrown competition
Industry insiders are also concerned that China may be promoting the country’s domestically produced aircraft over more advanced models.
COMAC put the ARJ-21 regional jet into service in 2016 and has delivered just five so far. But it has orders for 450 planes, dwarfing the numbers for Bombardiers and Embraers in China.
Tianju Airlines said it had considered Airbus’ A320 and Embraer E190 jets but decided to buy the ARJ-21.
“We think it’s the most suitable model for us,” said Li, who declined to comment further.
ATR’s Wang said the turboprop maker planned to look beyond regional jets and consider general aviation, which China has also pledged to support with infrastructure investment.
Any firm can buy an aircraft and begin operating it for charters, for instance.
That means ATR could reconfigure its 42-seat model into a 30-seat offering for such businesses, he said. “That category has very low barriers and there are potential investors for ATR.”