China's Airlines Fly the World Riding on $1.3 Billion Subsidies

(Bloomberg) -- China is set to become the world’s biggest aviation market in five years thanks in part to hefty subsidies from local governments beseeching airlines to fly mainland tourists overseas.

Local governments, especially those outside mega cities like Beijing, Shanghai and Guangzhou, spent at least 8.6 billion yuan ($1.3 billion) subsidizing airlines in 2016, mostly for them to start direct services to far-flung places such as New York and Paris, according to data compiled by Civil Aviation Data Analysis. These payments, to both Chinese and foreign carriers, equate to close to half the 19.49 billion yuan in profits earned by the top four mainland-based airlines last year, according to the consultancy known as Cadas.

“In addition to a growing need for international exchange resulting from China’s economic development, local governments’ increased subsidies are driving Chinese carriers’ global route expansion,” Shanghai-based Cadas said in a report released Thursday.

As economic growth and rising incomes led China to become the largest source of outbound travelers, major airports in Beijing and Shanghai have been stretched beyond their capacity. The top three state airlines -- Air China Ltd., China Eastern Airlines Corp. and China Southern Airlines Co. -- have depleted their quota for direct services to foreign destinations from major Chinese cities, and countries including Australia and the U.K. have allowed more flights to and from China.

The battleground for long-haul flights has shifted to lower-tier cities, where state and private carriers like Hainan Airlines Holding Co. are offering international flights at low fares. Such flights would hardly make any money without government subsidies, according to Cadas.

‘Unsustainable’ Handouts

Several carriers have expressed concern over the handouts. Air China’s finance chief Xiao Feng has said heavily-subsidized direct flights from lower-tier Chinese cities are “unsustainable.”

Foreign airlines have also started to pull out of smaller cities, citing unsatisfactory performance. British Airways Plc canceled direct flights to London from the Chengdu in western China after three years of service. United Continental Holdings Inc. ditched Hangzhou and scrapped its seasonal flights between San Francisco and the western Chinese city of Xi’an.

“Airlines still face significant operational risks even if their long-haul international flights from second-tier Chinese cities are subsidized,” Cadas said. “Rather than bringing in more foreigners to China, local governments are subsidizing Chinese outbound travel, with little positive economic impact on local economies.”

To contact Bloomberg News staff for this story: Dong Lyu in Beijing at dlyu3@bloomberg.net.

To contact the editors responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net, Lena Lee

©2017 Bloomberg L.P.

With assistance from Dong Lyu