China’s growing ranks of middle-class consumers love to fly, putting the nation on track to surpass the US as the world’s biggest airline market within the next decade.

But they won’t find many bargains. Budget airlines carry just 7 per cent of domestic flyers in China, according to CAPA Centre for Aviation, an aviation ­intelligence company, compared with two-thirds in India and Thailand.

Budget airline AirAsia is aiming to change that, hoping to shake up China’s aviation sector by exporting its no-frills model to the region’s biggest market.

In a regulatory filing last month, it said it planned to open a unit in Zhengzhou, the capital of Henan province.

But the Malaysian carrier could experience a bumpy landing in China, as the country’s big state-run airlines, Air China, China Eastern Airlines and China Southern Airlines, enjoy a stranglehold that limits opportunities of cheap competitors.

The incumbents commanded all the best landing slots and lobby against the awarding of operating licences and slots to cheaper rivals, CAPA analyst Will Horton said.

The government also tightly regulated aircraft purchases, limiting the expansion of potential rivals, he said, and airlines were barred from hiring pilots away from competitors to help them grow.

“It will take AirAsia a long time to build up and achieve its goals” in China, Mr Horton said.

Low-cost carriers such as Indonesia’s Lion Air, India’s IndiGo and AirAsia have zoomed past full-service incumbents when it comes to securing domestic and regional market share.

Cheaper carriers drive down prices by stripping out services provided by full-service airlines, such as in-flight meals and entertainment, check-in baggage and airport lounges.

For example, Chinese budget carrier Spring Airlines is offering a $US186 ($250) round-trip fare from Shanghai to Hong Kong next month, whereas full-service rival China Eastern Airlines charges $US258 for the same route on the same dates.

But while Spring Airlines and several other Chinese cheap carriers have emerged, regulations restricting both fleet expansion and the acquisition of good landing slots are holding them back. And no foreign airline, low-cost or otherwise, has ever managed to establish a Chinese base.

In its regulatory filing, Air­Asia said it had signed a memorandum of understanding with local partners China Everbright Group, a state-run financial services company, and the Henan government. The parties have a year to strike a deal.

The Malaysian carrier flies to 15 destinations in mainland China, but setting up a local base would help spur a boom in budget air travel, it said in the filing, and enable AirAsia to capitalise on surging Chinese demand.

Budget airlines are slowly gaining traction in China, said Andrew Cowan, chief executive of U-Fly Alliance, a grouping of cheaper carriers in China, Hong Kong and Korea, following 2014 reforms designed to encourage budget air travel.

Even so, AirAsia’s strategy of establishing a local unit was risky, Mr Cowan said. U-Fly Alliance was established to enable non-Chinese members to use Chinese partner networks without the need to risk investing in a Chinese base, he said.

By TREFOR MOSS
The Wall Street Journal

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