ANYONE who doubts the ambitions of China’s airlines need only look over the plans for Daxing International Airport, which will serve Beijing after it opens in late 2019. It will be the world’s biggest airport by far, with eight runways and room for 100m passengers a year. The new facilities are needed to serve a fast-growing appetite for air travel. The three Chinese carriers that will dominate the passenger traffic passing through Daxing’s cavernous halls are all in rapid ascent. And that has rivals everywhere complaining about the sorts of subsidies that have fuelled airlines since the dawn of commercial aviation.
China’s airlines are adding passengers at a rate not seen since Emirates, Etihad and Qatar Airways started to attract customers to their Gulf hubs, handily placed between Europe and Asia, with a winning combination of cheap fares and superior service. Between 2010 and 2017 passenger numbers on China’s three biggest carriers grew by 70%, to 339m (see chart). That growth has translated into some financial high-flying. At the end of March China Southern, Asia’s biggest airline, and China Eastern both reported record annual profits. Air China’s share price fell after it announced that it had only made its best profits since 2011.
As China’s carriers expand, their Gulf rivals, which for a decade have seen passenger growth of over 10% a year, are languishing. Slower expansion—or in Qatar’s case, shrinkage—has hit profits hard. It is natural to expect China’s carriers to eclipse those from the Gulf, says Will Horton of CAPA, a consultancy. Those Gulf airlines rely on long-haul passengers connecting in their hubs. China’s carriers are built on more solid foundations of fast-growing local demand. A total of 549m passengers took to the air last year, compared with 184m in 2007. The International Air Transport Association (IATA), a trade group, predicts that China will overtake America as the world’s biggest aviation market by 2022, and will go on to hit a total of 1.5bn passengers by 2036.
Much of that growth is on international routes. Over the past decade airlines in mainland China have opened over 100 new long-haul routes. These flights mainly serve an increasing urge among Chinese for foreign travel. The number of tourists going abroad, mostly by plane, has rocketed in the past decade, from 41m a year to over 130m. As a result, Chinese airlines are gobbling market share, says Dave Emerson of Bain & Company, a consultancy. Between 2011 and 2017 the capacity on Chinese planes flying between China and America rose from 37% to 61%, reckons OAG, a flight-data firm.
The battle to fly the Chinese around the globe is not the front that most concerns the world’s other big international airlines, however. The Gulf carriers took business from American and European airlines by getting the world to fly through their hubs. Chinese airlines are also now making the most of their location, and the largesse of the state, to offer connections to destinations beyond their home market.
Chinese regulators limit competition on domestic routes, allowing airlines to make healthy profits to cross-subsidise loss-making international routes chosen to reward allies such as Cuba. China’s smaller cities also give handouts to airlines (around $1.3bn in 2016) to launch new long-haul routes from their airports. All this has created more seats than locals can fill. So the carriers are selling them cheap to foreign travellers looking for a long-haul bargain, explains Mr Horton. The Chinese authorities encourage the practice. They are, for example, loosening immigration checks on connecting travellers and giving some visa-free access to China for six days.
This is hitting regional rivals hardest. Many Asian carriers were struggling long before the threat from Chinese airlines arose. Carriers such as Malaysia Airlines had allowed costs to run out of control, thanks to poor management and political meddling. But since the visa rules changed, even comparatively well-run airlines, such as Cathay Pacific, have had to contend with a sea of red ink. Airlines globally may be enjoying an era of record profitability but earnings per passenger for those in Asia have slumped by a sixth since 2015, according to IATA.
Airlines in America and Europe have less at stake, even if many are already nursing losses on their Chinese operations. But coming on top of competition from low-cost rivals and the Gulf carriers, the arrival of the Chinese acts as another spur to calls for protectionism. America’s three biggest carriers want the “open-skies” agreements that enable the Gulf carriers to fly to America revoked. In Europe, Air France-KLM and Lufthansa have been lobbying for a proposed reform of Regulation 868, which would allow the EU to impose sanctions on foreign airlines that get state subsidies.
These tactics will not work on China, warns Andrew Charlton of Aviation Advocacy, a consultancy. Unlike the Gulf states, China is an emerging superpower. It has the power to hit competitors where it hurts. Last June it fined Emirates 29,000 yuan ($4,270) and banned it from expanding in China for six months on trumped-up charges over safety lapses. A trade war over flying rights will hit the West harder than China, which is fast becoming a sizeable exporter of tourists.
Foreign airlines may yet get some respite. The growth in international passengers on Chinese carriers is already slowing, from a breakneck pace of 33% in 2015 to a merely rapid 12% forecast for this year. Many politicians are starting to ask whether some of the subsidies are value for money. And Chinese regulators are belatedly liberalising the domestic market by giving up their control of fares, potentially leaving carriers with less spare cash to subsidise foreign operations. Some smaller airlines are already hitting financial trouble. Hainan Airlines, the country’s fourth-largest carrier, looks wobbly and its owner, HNA Group, is struggling to pay creditors.
And foreigners have ways to fight back. Qantas and Singapore Airlines, for example, are keen to use ultra-haul-long direct flights to attract business travellers keen not to have a layover. The take-off of Chinese airlines looks unstoppable. That does not make them invincible.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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