The aviation industry’s centre of gravity is moving east, in parallel with the global economy.
While the main hubs are located at the crossroads of Asia in the Gulf, the future growth in air transport demand will come from emerging and developing economies, from the Asia-Pacific region, according to the latest Airports Council International (ACI) World’s Airport Economics Report.
In 2016, airports located in those countries represented 45% of global passenger traffic across the world’s airports. In just over two decades, this share is expected to increase by more than 15%.
The Belt and Road Initiative Master plan
Five years ago, China, the economic powerhouse of the region, launched what is known today as the Belt and Road Initiative (BRI), a $1 trillion (Euro 808 billion) development project covering more than 60 countries, over 60% of the world’s population and a third of its economic output.
The initiative aims at developing overland and maritime infrastructures, attracting both public and private investments to create a broad web of connections between Asia, Europe, the Middle East and Africa.
While the most recent figures confirm the growing trend of the aviation sector in Asia, the BRI aims mainly at developing six economic corridors, four of which are land routes. But as a plan focusing on connectivity and cooperation, the BRI will still provide growth opportunities to both commercial and cargo aviation and an “Air Silk Road” is taking shape along the initiative, broadening the network of land and maritime connections.
“It will have a significant impact over time” said Marios Maratheftis, Chief Economist and Partner at Governance Creed. “China will be the largest economy in the world over the next ten years. It is already the dominant trade player in the world. So far, the attention on China when it comes to air route connectivity has been focused on cargo rather than tourism. This plays to China’s current interests. But I always saw globalization being based on three interconnected pillars that cannot be seen in isolation: freedom of goods, people and capital. All three are set to rise, with the main risk to all three being the threat of a global trade war with the U.S.”
More liberalization and common policies needed in the 60 roadside countries
In 2015, The Civil Aviation Administration of China (CAAC) proposed that all BRI countries, including China itself, adopt a more flexible policy with the view of introducing a progressive approach to liberalization and competition in the international market. According to the CAAC, there are over 50 strategic projects directly serving the Belt and Road initiative. China has signed bilateral air transport agreements with over 60 roadside countries, of which 43 have air links with China. In 2015, the airline passenger turnover of countries along “the Belt and Road” increased by more than 70%.
According to CAPA Airport Construction Database, there are four known airport projects in which China is involved in Kyrgyzstan and six in Kazakhstan, including in the capital Astana. Airport projects are also planned in Tajikistan, financed by Japan, and Uzbekistan, where financing for the new terminal of the capital’s airport comes from South Korea. Iran, while in need of external investments, is now battling against the renewal of U.S. sanctions and pressure from Washington on secondary countries who choose to trade with Tehran.
Li Jun, Chairman of China Air Transport Association, in an interview with the Chinese news agency Xinhua earlier this year said that by the end of 2017 China had 26 airlines operating flights to cities in 35 countries along the new Silk Road.
It is not always smooth sailing though. There are still issues such as low connectivity levels, limited cooperation and insufficient integration, he added, and China also needs to develop aviation logistics. Among China and the BRI land road countries, cargo flights operated by Chinese carriers are only 37 per cent of the total operated by all airlines.
“The local aviation business in the BRI region is often protected or at least requires a strong local partner,” according to Ben Simpfendorfer, founder and CEO of Silk Road Associates.
“Chinese investors may feel that the opportunities at home are greater than those abroad for now. Energy, industrial parks and real estate will be the preferred targets,” he added.
But China is not new at long term-planning. “Progress over the BRI will be slow and gradual, with gradualism being the key word on most policy topics in China,” said Maratheftis.
“From China’s perspective, there are three purposes to the BRI: To export excess capital, to utilize infrastructure know-how and I think third and perhaps most important is to promote China’s role and influence internationally -- influence and geopolitics feature much higher now on China’s agenda”.
Geopolitical interests and a more open and established business environment are among the reasons why in general Chinese investors are still mainly looking to Europe for airport-related investments. According to CAPA, it is Germany the country where some of the better examples of Chinese cooperation in the airport sector can be observed. The Frankfurt Hahn Airport, an important cargo distribution center, was taken over in August 2017 by HNA Airport and ten years earlier Beijing-based Link Global bought through auction Schwerin-Parchim airport, on the German Baltic coast.
But the BRI is also offering Chinese aviation enterprises the opportunity to expand overseas, both in aviation infrastructure and aircraft manufacturing. In 2015, China’s introduced its first homemade large passenger aircraft, the Comac C919, thus becoming one of the few countries that can develop and build large planes.
Financing the Air Silk Road
In view of the aviation boom in the region, financial services companies are becoming increasingly active in raising capital for investments in the sector. China’s Everbright, via its aircraft leasing unit is planning to launch a Silk Road Fund revolving specifically around aviation. According to Chen Shuang, the company’s CEO, the funds will be used to buy aircraft and make investments in related infrastructure projects such as airports and logistic parks.
The air cargo industry is placed to receive a major boost from China’s electronics industry. “Chinese manufactures have captured majority market share in most BRI markets,” said Simpfendorfer. “Many are also building factories in BRI countries, such as India and Indonesia. Whether it is the finished product or component parts, the large share will be shipped from China to the BRI region by freight”.
Some analysts fear the focus of the BRI on land and maritime corridors might deprive the air cargo sector of its market. According to Vladimir Zubkov, Secretary General of The International Air Cargo Association (TIACA), “The benefit of BRI, which is promising to work as an economic engine for most global economies, will elevate many of them to new heights and will stimulate global trade in even a more dynamic way. The overall profit pools should be large enough to sustain all modes of transport” (source: Air Cargo News)
China’s Western Silk Road Revival
In the air cargo sector, with airports like Shanghai and Beijing already operating at full capacity, the BRI is also boosting prospects of other hubs and regions, including Western China.
Xi’an’s Xianyang International Airport (XIY), in one of the main hubs of the ancient Silk Road, is multiplying efforts to ensure it is prepared to accommodate additional international freighter flights, in particular by planning to develop a 600,000-square-meter space east of the airport into a “Belt and Road” air cargo hub.
But other airports than those in the main cities might still be preferable to remote gateways like Xi’an. Zhengzhou Airport (CGO) for example is one of China’s fastest growing airports and has already emerged as a popular hub for cargo handling. In recent years, the Henan provincial government has tried to increase traffic by establishing a free trade zone (Zhengzhou Airport Economic Zone) and improve customs clearance processes.
At a recent forum in Beijing on the BRI, International Monetary Fund (IMF) Managing Director Christine Lagarde warned that countries along the route risk being saddled with too much debt and some investors have demanded better management risk.
“I would disagree with Mr. Lagarde in attributing this entirely to BRI,” said Maratheftis of Governance Creed. “BRI is not the main cause of the increase in debt levels. They are globally high and they have been rising since the global financial crisis. This is a challenge that we need to keep monitoring”.
Simpfendorfer of Silk Road Associates points out the problem might lie more with large projects: “The average BRI country has a GDP of just $60 billion and a large rail project can be worth $3 to $5 billion. However, there are fewer large BRI projects than popularly perceived. Equally common are road and power projects that positively impact growth”.
So the central theme, these analysts suggest, is that investment should be targeted at improving productivity, which in turn will be financially sustainable at the same time.