The Chinese business jet market
[nonmember]Everyone knows that China could be the world’s most important business jet market but regulations and import taxes make it a difficult jurisdiction for business and general aviation aircraft. Mark Bisset, a partner at law firm Clyde & Co, is optimistic that the use of business jets in China will grow quickly.::join::[/nonmember][ismember]
No one can be unaware that in the past 30 years China has achieved a remarkable rate of economic growth standing at over 9% each year. Since Deng Xiaoping commenced economic liberalisation in 1978, the PRC country has rapidly grown to become one of the world’s largest economies, with a huge demand for imported goods and services. The population of 1.3 billion, considerable land area and rising income levels means that there is a significant market for commercial aviation. Furthermore, the Chinese government has repeatedly confirmed that development of the country’s transportation infrastructure must be given a high priority to support its growing economy.
Chinese Aviation Industry
Before examining the business jets market in china, it is worth looking at the impact that Boeing and Airbus have had on the Chinese aviation industry, in order to place the business aviation market in context.
The global financial crisis and recession has had a limited affect on the Chinese aviation industry which made a net profit of $1.8 billion in 2009. By international standards, Chinese airlines already operate a large number of Western built passenger aircraft
In September 2009, Boeing predicted that China will require 3,770 new planes valued at $410 billion over the next two decades, making it the world’s second-largest aircraft market after the US (about 20% of global demand).
|Source: Financial Times|
General aviation (GA) covers all aviation outside scheduled and charter airlines and military usage. This includes private business and personal travel, aerial photography, news gathering, fire fighting, crop dusting, and forestry services, among others.
World-wide, there are approximately 336,000 GA aircraft as compared to approximately 60,000 aircraft used in scheduled passenger and cargo services. In contrast, there are reported to be currently as few as 900 GA aircraft operating in the PRC. This is quite remarkable given the size of the population, especially as the United States has 231,000 GA aircraft but one-quarter of the population. It is also remarkable given that, as mentioned above, scheduled and cargo services in the PRC are heavily dominated by Western built aircraft. However, and as might be expected, the number of GA aircraft is predicted to grow rapidly in the near future. An Invest China article reports that the Chinese aviation industry predicts that the PRC will need as many as 12,000 GA aircraft by 2020. This would be an astonishing rate of growth in a very short period of time.
There are comparatively very few business aircraft in mainland China – estimates vary but there do not seem to be more than 90 in the region. However, with the fast moving expansion of the Chinese economy, the number of Chinese companies and individuals who can afford to purchase their own aircraft is similarly growing. Boeing has forecast that the Chinese business market will grow to a value of more than $9 billion within 10 years, with the total number of business or private aircraft expected to rise by more than 600 in that period. According to Bombardier, the Chinese business aircraft market (including mainland China, Hong Kong, Macau and Taiwan) could grow to 2,100 new aircraft over the next 20 years. Table 2 sets out a comparison of business aircraft coverage (jets and turbopops) in 10 selected countries.
|Country||Number of business aircraft|
Source: BART International
Recent “firsts” in the Chinese Business Jets Market
Consistent with this predicted surge in growth, there have been a number of exciting “first” in the Chinese business jets market, for example:
- in July 2009 Bombardier delivered its first Global 5000 for operation in mainland China;
- in March 2010 Dassault delivered its first Falcon 7X into mainland China;
- in March 2010 Beijing-based Deer Jet took delivery of China’s first Boeing Business Jet (BBJ), increasing its fleet to 23, with 35 aircraft planned for year-end;
- in April 2010 Bombardier announced that it had delivered its first Learjet 60XR and Challenger 850 jets to customers based in mainland China; the Challenger 850 will be operated by Lily Jet and will be available for charter when not in use by the Benshan Media Group; and
- In June 2010 Cessna delivered its first Citation Mustang.
Expansion in China
So, given that there appears to be an increasing level of demand for business jets in mainland China, what are the main impediments to the current and further development of business jets usage in China? And what is the Chinese government doing to lift such restrictions?
First, airspace usage is very restricted.
According to the Basic Rules of the People’s Republic of China on Flights, all airspace is controlled and restricted and flights must be approved in advance by the PLA Air Force or the relevant flight control government authority. General-purpose aviation flights (including business jet flights), are subject to the same restriction and also to the Regulation on Control of General-Purpose Aviation Flights.
Experiments in relation to the opening up of airspace have already been carried out in some parts of China. In October 2009, the Civil Aviation Administration of China (CAAC) approved the opening up of flight airspace below 2,000 meters and within a radius of 20km in Pu Cheng General Aviation Industrial Park of Xi’an Yanliang National Aviation Hitech Industrial Base, in Shanxi Province. In December 2009, the CAAC issued the Measures on Accelerating the Development of General-purpose Aviation Flights. In March 2010, the first draft of the new PRC Aviation Act aimed to open up flight airspace below 1,000 meters. The North-East and the Zhujiang Delta Area (Southern part) of mainland China has become the experimental venue to open up flight airspace below 1,000 meters.
These developments suggest increasing liberalisation of airspace restrictions. However, as business jets operate at much higher altitudes the changes that have been introduced so far will, in themselves, do little to stimulate business aviation.
Secondly, many commentators have remarked upon the amount of time that it takes to obtain permission to operate any particular flight.
In China, the different flight planning lead times depend on whether the aviation operator is domestic or foreign (regardless of whether it is a China or overseas registered aircraft).
Generally, it requires at least seven working days for foreign air operators (including Hong Kong and Macau) to do the flight plan filing; this will be approximately 3 to 5 working days for Chinese air operators. Further, a foreign registered aircraft has to pay a US$4,400 visa fee for each flight plan while this can be waived for domestic aircraft.
The CAAC confirmed in September 2009 that it is relaxing the lead time for flight plan filing from 6 days to 3 hours, though only for Chinese-registered business aircraft. This affects any B-numbered aircraft, including those registered in Hong Kong and Macau.
However, this is only an experiment, not a permanent change. The relevant regulations are the so-called “Regulations on Control of General-Purpose Aviation Flights and Administrative Measures on Advance Flight Planning of Civil Aviation”. This change has certainly been very widely reported without any intonation that the change is temporary (for example, South China Morning Post on 4 September 2009 ran a lead article announcing that “Beijing has cut the approval time for private flight plans from up to six days to as little as three hours”).
Currently about 2,000 private flights per year are operated in China, mostly from Shanghai and Beijing. The mainland has three private airports – in Shenzhen, Shanghai and Beijing. In addition, the Hong Kong Business Aviation Centre handled 4,025 business jet flights in 2009.
However, aviation Infrastructure in China is far behind some other countries. Regarding airport facilities, there are only about 160 civil airports in China, which cannot be compared to around 4,263 airports in Brazil, 1,260 airports in Russia and 1,834 airports in Mexico.
Of these 160 airports in China for civil aviation transportation, only 70 may cater for business jets. Further, there are less than 10 airports that may cater for private jets. The Chinese government has recognised the need to expand GA infrastructure to meet future GA requirements and is therefore funding the construction or renovation of 42 airports by the end of 2010 and planning a further 97 airports by 2020.
China’s third airport for private jets opened in 2010 in Shanghai’s Hongqiao airport ahead of the World Expo, which runs from 1 May to 31 October 2010. It expects to handle 6,000 movements a year by 2015.
In November 2008, the Chinese Government announced an economic stimulus plan in order to spur economic growth in China during the period 2008-2010. According to the stimulus package, a total amount of RMB 4 trillion (US$ 586 billion) would be invested in key areas of the economy, including transportation. Reportedly, in 2009 around RMB 60 billion (US$ 9 billion) were allocated to the construction of aviation basic facilities. Further, according to the 2010 Chinese Aviation Plan, RMB 90 billion (US$ 13 billion) will be invested in aviation capital assets in 2010.
In 2007 investment in capital assets in the civil aviation industry in China amounted to RMB 35 billion. By the end of 2007, there were a total number of 152 civil aviation airports in China. According to the “National Civil Airport Layout Plan” approved by the State Council in earlier 2008, in 2010 the total number of civil aviation airports shall reach about 190 and the financing requirements for such constructional will be around RMB 140 billion (US$ 20 billion). By 2020, the total number of civil aviation airports will reach about 244 and the investment needed may reach RMB 450 billion (US$ 65 billion).
Landing fees, navigation fees
It is also the case that landing fees and navigation fees are lower for aircraft that are registered inside China (by about 40%). However, in February 2008, the CAAC and the National Development and Reform Commission jointly issued the Reform Measures on Civil Airport charges and the related Implementation Measures, both of which entered into force in March, 2008. These regulations aim to eliminate such difference; however, the Implementation Measures allow a transitional period until 2012.
It was estimated in 2008 that there was a shortage of around 10,000 pilots, which the Chinese authorities and business are actively trying to address. However, there is no minimum number of pilots required for business jet operators.
Import Duties and Taxes
The importation charge on a business jet is 23% (made up of VAT and import duty). Since October 2007 the CAAC has contemplated the reduction of charges of aircraft including business jets to 6%, but no concrete proposals have been put forward to date.
Macau and Hong Kong
In Hong Kong, there is no charge on the importation of business jets. Further, there are no regulations on airspace restriction and control. Prior clearance and a permit are required from the Director General of Civil Aviation for the operation of charter and private flights (whether profitable or not) to and from Hong Kong. In particular, for non-profitable private flights, an application must be submitted to the Director-General of Civil Aviation at least three working days before the anticipated arrival/departure date of the flight to/from Hong Kong.
In Macau, there are no customs duties or charges on import of business jets. Airspace is generally open to Macau-registered aircraft subject to Regulation 37 of the Macau Air Navigation Regulation. Air operators wishing to use Macau International Airport or Heliport to operate non-scheduled air services must obtain a permit from the President of the Civil Aviation Authority. Once the permit has been obtained, no prior approval is required for non-scheduled flights to or from Macau for transportation of passengers.
Business Jet Operations
All business jet operations in China must be conducted under a CAAC-issued Air Operator’s Certificate (AOC), regardless of whether the flight is for commercial or private purposes. How many AOCs have been issued to business jet operators is not publically available information.
Special permission is required from the CAAC to operate business jets in China which are registered outside China. There is no public information available on this issue; however, the East China Civil Aviation Administration Bureau based in Shanghai has informed Clyde & Co that in the Eastern part of China there are no business jets habitually based and operating in China that are registered outside.
Table 3 sets out details of some of the most active operators in the Chinese business jets market, so far as we are aware, together with information about some lesser known operators.
|Beijing Capital Airlines (formerly Deer Jet)|
|Beijing/Shanghai||Subsidiary of HNA Group, China’s 4th largest commercial aviation group (parent of Hainan Airlines). It changed its name from Deer Jet following a capital injection by the Beijing government. Deer Jet operates a mix of aircraft: 22 A319s, one Boeing Business Jet, three|
Gulfstream G550s, two Gulfstream Vs, four Gulfstream IVs, three Gulfstream
200s, one Hawker 900XP, one Hawker 850XP and four Hawker 800XPs.
Deer Jet says it will own 35 aircraft by the end of 2010, including its first Airbus Corporate Jetliner (ACJ) which will be based in Beijing.
At EBACE 2010 Deer jet and the Swiss operator Comlux signed an agreement jointly to develop VIP charter markets in Asia and Europe, allowing the two charter operators to draw on each other’s fleets. Comlux’s fleet includes 5 Bombardier Global Express and two ACJs.
|Business Aviation Asia||Beijing||Acquired AOC from Shenzen Airlines. Managing fleet owned by Simon Low of New World Property.|
One of its G200s is being made fully available for charter under new brand Red Diamond Aviation.
Red Diamond is taking a second G200 from Middle East UHNWI and a G450 from Taiwan.
|Air China Business Jets||Beijing International Airport||Early mover – established in November 2003. Air China Business Jets manages two G450s and one A318 Elite. A Falcon 7X is expected to join the fleet.|
|Shandong Airlines||Ji’Nan Yaoqiang|
Airport, Ji’Nan City,
|Set up Rainbow Jets in 1999 with two Challenger 604s. It has since sold these jets and does not now appear to be operating business aircraft.|
|Broad Air||Changsha City,|
|Subsidiary of Broad Air Conditioning, operates one Hawker 400.|
|Asia United Business|
Aviation Limited (AUBA)
|A subsidiary of Hong Kong listed Mongolia Energy Corporation and|
Shenzhen Airlines. Authorised to operate CCAR135 charter operations in September 2007, when its first operated aircraft was a Gulfstream 200. It has one Airbus A318.
|EFS Asia Pacific Co Ltd||Shuangliu|
|Jointly established by Sichuan Airlines Co., Ltd., European Flight Services and|
Shanghai Tianchou Investment Management Co., Ltd. The first business jet operator based in
Chengdu City in the South-West part of China. Being EFS’s representative in Asia-
Pacific area, it has benefitted from EFS’s international clients in China.
It intends to offer the Legacy 600 as its main fleet type.
|China Eastern Business|
|Established in 1995 as a subsidiary company of China Eastern Airlines.|
It is a member of the US National Business Aviation Association (NBAA).
In legal terms, the aircraft financing structure in China is reasonably familiar to Western financiers and lessors. The main concern expressed by financiers and lessors with regard to the aircraft finance market in China is that there is no publicly recognised experience of repossession in China in the scheduled passenger market, let alone in the business jet market. The following points may also be of concern or interest:
â— A foreign law mortgage will not be recognised over a PRC-registered aircraft; however, Chinese law specifically provides for the creation of aircraft “mortgages”.
â— There is a 20% withholding tax on interest payments made to foreign enterprises in respect of a loan made available to Chinese borrowers (currently reduced by half by a State Council concession).
â— Possession by a mortgagee requires judicial process in the Intermediate People’s Court and a disputed claim may take 1-2 years before coming to trial.
â— Prior written authorisation for repossession must be obtained from the State Administration of Foreign Exchange (SAFE).
â— A foreign court judgment is not automatically enforceable in China.
â— All leases which provide for payments to be made in foreign currency must be filed at SAFE.
â— There is a 20% withholding tax on rent payments. One point of comfort (or not necessarily, depending on your view) is that the Cape Town Convention has been ratified by China and came into force on 1st June 2009. The CAAC has designated its Civil Aircraft Rights Registration Department as an authorizing entry point. If parties wish to register an interest in a Chinese aircraft with the International Registry, they must first (similar to the FAA system) obtain an authorization code from the department.
As has been seen, there have been fairly substantial impediments to growth of the business jet market in China: flight planning lead times, taxes, fees, infrastructure. All these four are substantial impediments to demand for business jets in China; however, with the relaxation of flight planning lead times, the greatest impediment now seems to be the shortage of infrastructure.
The imponderable question that is being asked by a number of Western business jet manufacturers is: would the easing of these impediments in China be enough to stimulate pent up demand, or are there other factors that affect demand e.g. the political environment or public perception of private jet usage in what is, let us not forget, a Communist country.
All signs at the moment are that GA and business jet usage is being encouraged by the Chinese government, and that owning private aircraft is becoming increasingly recognised as an indispensable business tool.
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Further advice should be taken before relying on the contents of this summary. Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary