VZCZCXRO6575
PP RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0109/01 0240903
ZNR UUUUU ZZH
P 240903Z JAN 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC PRIORITY 5716
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 0932
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 000109 
 
SIPDIS 
 
STATE FOR EAP/CM AND EB 
USDOC FOR 4420/ITA/MAC/MCQUEEN 
USPACOM FOR FPA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR ECON CH
SUBJECT: South China Civil Aviation: Views on Subsidies, 
Expansion, and Market Liberalization 
 
REF: 06 Guangzhou 32347 
     06 Guangzhou 32163 
 
(U) This document is sensitive but unclassified.  Please 
protect accordingly. 
 
¶1. (SBU) SUMMARY: Major airlines in South China admit 
subsidies are available from local governments to offset 
losses from flying less traveled domestic routes.  One 
airline mentioned they received subsidies for international 
flights.  The airlines have limited expansion plans for the 
overseas market.  Local private airlines will continue to 
increase their aircraft fleet size and expand operations in 
the short-distance domestic market sector.  All airline 
companies expressed concern over the increased competition 
from market liberalization.  END SUMMARY. 
 
¶2. (U) Post contacted three major airline companies in the 
Consular district - China Southern Airlines, Hainan 
Airlines and Shenzhen Airlines - to garner their views on 
media reports of government subsidies, airline expansion 
plans, and market liberalization. 
 
Subsidizing Less Traveled Routes 
-------------------------------- 
 
¶3. (SBU) China Southern Airlines officials said they used 
to receive cash subsidies from some local governments for 
operating routes to less traveled areas.  Given the high 
costs and low demand, China Southern began to eliminate 
some less traveled routes several years ago despite the 
subsidies.  The China Southern official noted that the 
airline does not currently receive any government subsidy 
for operating domestic routes. 
 
¶4. (SBU) According to Hainan Airlines representatives, 
individual airline companies can get some form of subsidy 
for less traveled domestic routes from local governments 
instead of the Central Government.  Local governments 
usually provide incentives, such as low airport costs or 
cash subsidies, to attract airlines to open routes to those 
areas.  Subsidy levels are determined on a case-by-case 
basis.  According to Shenzhen Airlines officials, the 
Central Government does provide subsidies for international 
routes, noting that no airline company is making a profit 
on international flights. 
 
¶5. (SBU) An official from China Southern Airlines denied 
the news that RMB 10-20 billion (USD 1.3-2.6 billion) worth 
of subsidies would be given to the three major airlines by 
the Central Government.  The official complained that the 
Central Government requires the airline to procure a large 
number of aircraft that subsequently become a heavy 
financial burden to maintain and operate, especially with 
rising fuel prices.  A Hainan Airlines official said that 
such subsidies (if the story is true, he noted) would be 
reserved for the state-owned giants, not for a private 
company like Hainan Airlines.  A Shenzhen Airlines 
representative also believed it unlikely Shenzhen Airlines 
would receive such subsidies from the government. 
 
Expansion Plans 
--------------- 
 
¶6. (SBU) In 2007, China Southern Airlines plans to focus on 
the domestic market and further develop its transportation 
hubs in Guangzhou and Beijing.  It plans to increase 
domestic passenger capacity by 15% by adding 30 additional 
aircraft to its domestic routes.  Two new international 
routes, Guangzhou to Lagos and Guangzhou to Kathmandu, were 
opened in January 2007.  China Southern does not have any 
plans to open more international routes, as they are not 
profitable, nor does it plan to purchase more aircraft this 
year.  A China Southern official does not expect the 
airline to merge with other domestic airlines in 2007; the 
priority is to incorporate and streamline recently acquired 
businesses into their operations. 
 
¶7. (SBU) Hainan Airlines will expand their aircraft fleet 
size bQbuying 10-20 planes each year until the total 
number reaches 400 or 500.  Hainan Airlines recently signed 
 
GUANGZHOU 00000109  002 OF 002 
 
 
a contract with Brazil to buy 100 ERJ planes; delivery is 
expected to begin this year.  Shenzhen Airlines also plans 
to expand the number of its planes to 80 by 2008, and to 
160 by 2015. 
 
¶8. (SBU) Hainan Airlines hopes to expand its international 
presence in 2007.  It will open a route to Siberia in 
February and hopes to conclude negotiations establishing a 
flight to Boston.  Domestically, Hainan Airlines will 
continue to expand by merging with small province-based 
airlines, such as Xiangpeng Airlines in Yunnan Province. 
 
¶9. (SBU) Shenzhen Airlines will continue to focus on the 
domestic market, especially cargo flights.  Shenzhen 
Airlines plans to expand operations in the short-distance, 
or "branch route," market. 
 
Market Liberalization 
--------------------- 
 
¶10. (SBU) China Southern Airlines representatives expressed 
concern over market liberalization.  They believe market 
liberalization will bring in more competition that will 
impact China Southern Airlines' bottom line.  China 
Southern hopes that the Central Government will give them 
more support as it faces challenges from private domestic 
airline companies. 
 
¶11. (SBU) Hainan Airlines officials confessed that market 
liberalization will also hurt the Airlines' business.  The 
airline hopes to meet the challenge through continued 
expansion.  Shenzhen Airlines plans to deal with 
liberalization by increasing cooperation with foreign 
partners.  In December 2006, Shenzhen Airlines signed an 
agreement with Mesa Air Group Inc. to set up a joint 
venture using 50-seat planes for domestic short-distance 
flights.  The joint venture would likely begin operations 
within the first year. 
 
GOLDBERG