POSITION & HOLD

China's economic growth opens skies for bizjets

Prosperity promotes increased air traffic and permits Chinese execs to purchase private aircraft.

By Marvin Cetron
President, Forecasting International


Business jets line up at MFM (Macau, China). Business aviation in China is growing rapidly, with the fleet expected to expand from about 100 in 2010 to over 700 in 2020.

Asia today is where the story of business aviation tomorrow is being written. A continued boom in China would spur demand for bizjets and professional pilots alike. A bust could leave them grounded. The question is which it will be.

In May 2011, the Intl Monetary Fund (IMF) made a bold prediction. Its latest World Economic Outlook declared that China will soon surpass the US to become the largest economy on the planet. In 2016, its GDP will be $19 trillion, or 18% of the global economic output. US GDP will be only $18.8 trillion.

If so, this will be an extraordinary achievement. In 2010, China's GDP—again according to the IMF—was only $11.2 trillion, while America's was $15.2 trillion.

However, there is another possibility. Nouriel Roubini, the economist and investment adviser who foretold the implosion of American home prices long before most others took the idea seriously, warns that China faces a "meaningful probability" of a hard economic landing by 2013.

He points out that investment in that country already amounts to 50% of GDP, and overinvestment has led to crashes before. The East Asian financial crisis of 1997 is just one example.

Most onlookers already view China as the hot new market for corporate aircraft. Now picture its economy growing by 70% in 6 years at a time when Beijing is finally modernizing its airspace regulations. Demand for business aviation and professional pilots would skyrocket like nothing the industry has ever seen.

Even mainstream estimates of aircraft sales are exciting. Vice Minister Wang Changshun of the Civil Aviation Administration of China (CAAC) says that by 2025 the country will have 3000 civil aircraft.

Honeywell Dir of Business & General Aviation Aerospace (Asia Pacific & China) Rishiraj Singh estimates that China will buy about 100 business jets per year for the next 5 or 6 years. Boeing estimates that China will spend $600 billion on 5000 new planes in the next 20 years, including bizjets and airliners.

Bombardier predicts that bizjet builders will deliver 960 aircraft to China in the next 10 years and 24,000 by 2030.

This foretells good times for pilots as well as airframe companies. According to Boeing, the world will need 23,300 new pilots annually through 2029. Nearly 40% of those openings will be in the Asia-Pacific market.

Jason Liao is founder, chairman and CEO of the China Business Aviation Group, a Beijing-based company that offers solutions for aircraft buyers in China. Liao was one of the founders of the Asian Business Aviation Assn and serves as NBAA's chief representative for Asia. To date he has been instrumental in the sale of more than 100 business aircraft to Chinese executives.

China, the company estimates, will need 70,600 pilots. Airlines will supply much of that demand, but corporate fleets will draw from the same talent pool.

China will need many more pilots than its flight schools can provide, so the country will have to import them from other lands. And that will tighten the supply—and probably raise pay scales—throughout the world.

But what of the other possibility? Roubini tells of taking the high-speed train recently from Shanghai to Hangzhou. It cut the 4-hr trip to less than 1 hr.

But, he says, "The brand-new high-speed train is half empty and the brand new station is 3/4 empty. Parallel to that train line there is a also a new highway that looked 3/4 empty. Next to the train station is the new local airport for Shanghai. You can fly to Hangzhou." As he points out, "There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects."

In Roubini's view, that kind of unjustified investment is likely to end in broad economic crash. If he is right, business aviation will still grow in and to China, but not nearly so quickly.

So is China at the beginning of a long boom, or does a messy bust lie ahead? And what will that mean for corporate aviation?

We have been taking another look at China with those questions in mind. Predictably, the most likely scenario is not as good as the optimists expect. Neither it as bad as the pessimists fear.

Backstory

The global recession that began at the end of 2007 barely dented China's economic performance, but this does not mean it wasn't felt. In 2008, when the downturn was at its worst, China's GDP still grew by 9.6%.

However, in and around coastal Guangzhou province some 2400 factories closed. According to the Chinese Academy of Social Sciences, 670,000 businesses shut down throughout the country. More than 20 million workers in low-profit industries lost their jobs. Most returned to the farm regions they had left in search of work.

Beijing kept the economy afloat with stimulus programs. Between Apr 2008 and mid-2009, the government cut taxes on stock trades, home purchases, inheritances and gifts, and small cars. It also trimmed the value added tax on sales by about $23 billion. In Nov 2008, it committed $585 billion to major construction projects.

Two months later, China announced a plan to spend $123 billion over 2 years on a universal healthcare program. The Ministry of Civil Affairs gave 74 million people a one-time living subsidy totaling $1.3 billion. Beijing also loosened fiscal and monetary policies enough that Chinese banks lent out twice as much money as US banks did in the first half of 2009.

These efforts worked. In 2008, the Chinese economy had been cushioned by the profits on exports sold, but not delivered, before the recession set in. By 2009, that support was gone. The economy still grew by 9.2%.

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