Open Skies Can Clear China’s `Orwellian' Aviation Cloud

(Bloomberg) -- The Trump administration has condemned as “Orwellian nonsense” China’s insistence that U.S. airlines refrain from listing Taiwan, Hong Kong and Macau as separate countries. The words are strong, but its leverage is weak.

China’s aviation sector, once a global laggard, is on track to be the world’s biggest market. Its growth has empowered the nation’s regulators and airlines — and eroded the clout of traditional aviation powers such as the United States. For U.S. carriers keen to get a piece of this growing pie, that means flying by China’s rules. And for the Trump administration, that presents an increasingly common and difficult problem: how to rebalance an economic relationship that’s tilting away from the U.S.

In aviation, as in other industries, the tilt has happened quickly. For decades, U.S. passengers and airlines were the dominant force on routes between the two countries. To an extent, traffic reflected American tourist and business interests; money flowed from West to East. As recently as 2011, U.S. carriers flew almost twice as many flights to China as vice versa, and 70 to 80 percent of passengers were Americans. But in the summer of 2015, Chinese airlines surpassed U.S. competitors for numbers of flights and seats flown for the first time. These days, the passenger split is roughly equal.

In common with other sectors where Chinese upstarts are catching up with foreign rivals, two factors come into play. First, there are subsidies. In 2016, local government payments were equal to almost half the combined net income of the top four mainland airlines. Those cash injections — $1.3 billion in 2016 — have been particularly important in sustaining international flights between secondary cities such as Wuhan and San Francisco.

Second, and more important, China’s domestic market is growing at a blistering pace. Last year, the International Air Transport Association, the biggest airline trade group, predicted that China will surpass the U.S. to become the world’s largest aviation market around 2022. The key driver is Chinese tourism. Since 2012, the country has been the world’s largest source of overseas visitors.

But opportunities to access this market are few. Commercial flights are governed by bilateral agreements that cap routes. Even when U.S. airlines receive approval to fly a new route, infrastructure limitations at traffic-strained Chinese airports mean they’re often unable to obtain slots. Worse, China has long defied international norms for allocating slots (introducing competitive auctions, for example), leading to occasional accusations of protectionist behavior.

That hasn’t stopped major U.S. airlines from investing there. Delta Air Lines Inc. and American Airlines Group Inc. both own expensive stakes in Chinese carriers, and — along with United Continental Holdings Inc. — operate codeshare flights with mainland airlines via global alliances.

Those investments may, in time, prove savvy. But for now, they only add to the leverage that Chinese regulators have over U.S. airlines that want access. That leverage can extend to the pettiest of matters, such as sensitivities over how a foreign company refers to territory China claims as its own.

In April, Chinese aviation authorities informed dozens of international airlines that they must accept Beijing’s conventions for referring to Taiwan, Hong Kong, and Macau on their websites — prompting the U.S. government’s “Orwellian” rejoinder. Those that don’t comply could face significant, though unspecified, consequences.

In January, after the government criticized Delta for listing Taiwan and Tibet as countries, the company didn’t hesitate to “apologize deeply” and take “immediate steps to resolve” the Chinese concerns. It’s not alone: Firms in industries ranging from baby food to hospitality have taken similar actions in recent months.

The Trump administration has vowed to resist China’s corporate censorship efforts. But so long as foreign corporations (airlines or not) decide that doing so isn’t worth potentially being shut out of the market, that vow will have little currency at home or abroad. A better approach would be to seek an “open skies” treaty to widen access, such as the U.S. has with 120 other countries.

Such an agreement would remove government regulators from route-making decisions, and has long been under discussion. No doubt it would increase competitive pressures on U.S. airlines. But that’s better than having no chance to compete at all.

  1. Payments also went to foreign carriers.

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With View News On BloombergQuint