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Okay Airways, China's first private airways, has ditched its low-cost business operation model due to various difficulties.
"Given the current conditions, it's impossible for Okay to really succeed as a low-cost, budget airline," Liu Jieyin, president of Okay, told Xinhua on Tuesday.
Liu said Okay would have to adopt a more conventional business model to survive.
The maiden flight of the airways in March was regarded as a landmark event that rocked the monopoly of the state-owned airlines, attracting wide attention to the carrier's strategy of low-cost business operations.
Okay has taken a series of measures to reduce costs since its official beginning seven months ago, including cutting costs of aircraft utilization, selecting airports that charge low landing fees and feeder airlines, Liu said. Okay also tried new measures for operation and management. Currently, major airline companies in China arrange more than 200 crew members for each plane, Okay has less than 80 crew members.
"However, there are too many costs that we cannot control, which makes it difficult for us to reduce costs in a large scale," Liu said, adding "This is the major reason that we ditched the low-cost business model."
Currently in China, about 80 percent of the costs are not controlled by carriers and the so-called cost-cutting only rests with the fees related to personnel and management, which makes up a very small proportion of the total operation cost.
Chinese private carriers like Okay also face many regulatory barriers behind their efforts to tap the huge civil aviation market of China, said Zhou Liqun, a professor with the School of Economics of the Tianjin-based Nankai University.
Due to monopoly and a unified pricing system, Chinese carriers can not make freely even the most basic business decisions, such as selecting landing airports, flight routes or when to purchase a plane. Some small airways even can not find a way out, Zhou said.
"After Okay was established, 40 to 50 airports have called us to open flights up, but we could not fly to these places because airline companies can not decide on the flight routes," said Liu.
Generally speaking, Chinese carriers have tariffs on aircraft imports, charges on taking-off and landing at airports, and costs for market access. Fuel alone makes up 30 percent or so of a carrier's cost, which is 10 percentage points higher than the proportion for airlines abroad. This is due largely to high fuel prices in China, which are 15 percent to 30 percent higher than oil prices in international oil markets. The higher prices were shored up by the monopoly of a state aviation fuel corporation.
"We need a more loose policy and market environment," said Liu, predicting that "It will take at least three to five years for the low-budget aviation market to mature in China."
Liu disclosed that Okay would conduct mainly cargo transportation in the future to avoid fierce competition of passenger transportation. He said Okay is in contact with the Korean Air Lines Co., Ltd. for cooperation. The latter is willing to take over 49 percent of Okay's shares.
Besides Okay, a number of private airlines have already taken to the skies, such as United Eagle Airlines and Spring Airlines, while quite a number of others are waiting for approval by the General Administration of Civil Aviation of China (CAAC).
But insiders say that despite the potential of the civil aviation market, the current regulations have to be changed if any of these carriers are to succeed.
Loosening control on the market, flexible ticket pricing, cutting tariffs on aircraft and fuel imports are the keys factors that can guarantee low-cost aviation success, said Zhou, with the School of Economics at Nankai University.
CAAC is considering revising regulations and simplify the flow path and services at the airport, for the purpose of providing a suitable environment for the low-cost aviation business, a source close to the CAAC said.
(Xinhua News Agency October 25, 2005)
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