Chinese airline shares soared on Monday after the Civil Aviation Administration of China (CAAC) on Friday last week announced new pricing rules for domestic flights. Under the new rules, Chinese airlines will be allowed to decide on their own prices on domestic routes—that is, if the same route is operated by at least five different airlines. Investors expect that this will help boost profitability among Chinese airlines, who until now have faced strict government control of fares.

The move follows a pledge by the Chinese government to become a more active player in Chinese aviation, with hopes to improve quality and efficiency in the country’s aviation industry.

The Chinese government wants to become a more active player in the aviation industry

According to CAAC, the updated regulations should apply to at least 306 routes, where five or more airlines are currently operating flights. In other words, a large majority of domestic flight routes operated from Chinese first and second-tier cities will now enjoy fare liberalization.

Chinese airlines and their investors welcome the new rules as they open up the playing field for raised fare prices on routes in heavy demand, such as flights between China’s first-tier cities. With airports in China’s first-tier cities increasingly congested, fare liberalization for such routes is particularly welcomed as airlines find difficulty in launching more flights between, for example, Beijing and Shanghai, due to airports already running over capacity.

Fare liberalization means more profitable routes between first-tier cities

As the move is expected to boost airline profits, CAAC may also indirectly be helping Chinese airlines to become less reliant on government subsidies for their bottom lines—which could prove critical in the event that local government subsidies to airlines start drying up across China. With a larger share of airline profits coming from actual business activities rather than government freebies, Chinese airlines will also become less exposed to the rising problem of spiraling local government debt.

While the Chinese government hopes that the move will improve quality and efficiency of Chinese airlines, it is unclear to what extent the new rules will be successful in achieving these goals. At present, the aforementioned local government subsidies are to a large extent responsible for Chinese airlines operating what would otherwise be unprofitable routes—primarily to and from lower-tier cities across China. Neither such (often international) routes nor such subsidies are targeted by the new regulations.

The new rules may help airlines diversify away from government subsidies as a source of revenue

A somewhat stronger case can be made that the new rules will help improve the service quality among Chinese airlines. With higher profitability, it would make sense that some of the airline windfall would be reinvested in initiatives that would improve customer service and comfort in the Chinese aviation industry. At present, Hainan Airlines is the only Chinese airline with a five-star Skytrax rating, with most Chinese airlines ranking notoriously bad in customer rankings.

However, perhaps the most important part of improving overall efficiency and service quality would be to improve the punctuality of Chinese airlines. In the latest punctuality report by aviation analyst OAG, the main beneficiaries of the new rules, state-owned carriers Air China, China Eastern Airlines, and China Southern Airlines ranked the bottom three among “mega” carriers globally.

Delays will likely remain a problem for the foreseeable future

Unfortunately, the new rules do nothing to address the root problem behind Chinese flight delays: airspace heavily controlled by the army, and airports that run far over intended capacity. If anything, the rules will encourage airlines to try to launch even more flights between popular (and congested) airports as such routes now hold the promise of larger profits.

While more liberalization in the Chinese aviation industry is certainly welcomed, the most recent changes are more about boosting the profits of China’s state-owned airlines than addressing more deep-rooted problems in the industry. One step at a time..?

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