China is now the largest airline market in Asia after flying past Japan last year and second only to the United States in terms of people flying out. By 2007 China will replace the United States as the largest originator of world tourists.

Chinese aviation, linked to the country's overall economic performance, is booming and the growth is to continue. Factors such as joining the World Trade Organisation (WTO), the successful bid for the 2008 Olympic Games in Beijing and the 2010 World Expo in Shanghai, will continue to fuel the economy. Gross domestic product is forecast to increase at a minimum of 8 percent per year over the next decade and air travel by 10 percent.

Last year, the number of countries the Chinese can visit increased to 90; including Britain, where the first tour party is set to arrive in July. The British Economist Intelligence Unit says that in 2005 28.5m tourists will fly out of China.

Countries such as the US and UK are upping their number of flights to China to cope with the expected demand; they are free to do so after the negotiation of new air service agreements. Last week, British Airways launched its inaugural direct, five times a week service to Shanghai. The airline has been serving Beijing for 25 years. As well as boosting passenger numbers, the new route is expected to double BA's cargo traffic to the Shanghai, which used to be known as the Paris of the Orient. The airline holds rights to fly to four other cities in China and may add Guangzhou as its next destination, chief executive Rod Eddington said last week.

Twenty-five years ago there were 180 air routes in China, 18 of them international. Only 3.43m people flew annually. Last year the growth in Chinese aviation was particularly strong, the number of people departing shooting up by 22 percent, perhaps as demand which built up during the SARS crisis was released. The number of passengers travelling topped 103.8m. Inbound tourism also grew, exceeding 100m visits last year and surpassing Germany and the UK in the process.

Despite the huge growth, much of the country's potential as an air travel market remains untapped. Flying is affordable for only about 100m Chinese in a population of more than 1.2bn. Airlines operations have developed primarily in the large metropolitan areas of Shanghai, Beijing and the province of Guangzhou.

These top three regions represented 46.5 percent of departing passengers in mainland China in 2004. By contrast, the large regions of the western part of the country including Xinjiang, Tibet and Gansu account for just 0.8 percent of departing travellers in 2004, according to consultancy Airclaims. As trade and markets develop in the rest of China, pressures will increase for direct international services.

The Chinese aviation market is shaping up as big but less obvious is the eventual structure of the domestic airline industry. Since a wave of consolidation in 2000, it is largely state-controlled and dominated by three big carriers: China Southern, China Eastern and Air China.

Some believe it is inevitable that low-cost carriers will emerge to challenge the trio. Some are predicting a thriving low-cost carrier segment within two years. The emergence of no-frills carriers could see Air China, China Southern and China Eastern adopt low-cost operations or regional subsidiaries, a move which would address the current mismatch between aircraft type and capacity and thin demand associated with secondary airports.

China's first privately owned carrier, Okay Airways, a Beijing-based carrier which bills itself as low-cost, took to the air on 11 March. Spotting an economic opportunity and mindful of the threat from low-cost carriers originating outside China such as AirAsia, the Chinese aviation regulator has granted aviation licences to Spring Airlines in Shanghai, United Eagle Airlines in Chengdu and Huaxia Airlines in Gansu Province.

But no one knows when or if the government will deregulate the domestic industry. Within China the cost of fuel is high as are en route and airport charges, the prices of aircraft and taxes; only labour costs are low. A big question is the extent to which Beijing is prepared to cede control of the air transport sector to the marketplace. It may try to build a new Chinese Wall.

Source: The Business, London