Is China Ready for a Budget Air Travel Boom? AirAsia Is Betting on It

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

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

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

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

But the Malaysia-based 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 the opportunities of low-cost competitors.

The incumbents command all the best landing slots and lobby against the awarding of operating licenses and slots to low-cost rivals, said Will Horton, a senior analyst at CAPA.

The government also tightly regulates aircraft purchases, limiting the expansion of potential rivals, he said, and airlines are 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.

China's aviation authority didn't respond to questions.

Elsewhere in Asia, budget airlines are thriving. 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.

Low-cost carriers typically 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 $186 round-trip fare from Shanghai to Hong Kong in July, whereas full-service rival China Eastern Airlines charges $258 for the same route on the same dates.

But while Spring Airlines and several other Chinese low-cost 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 already 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 capitalize on surging Chinese demand. It didn't respond to requests for comment.

Demand for air travel in China is growing strongly: Chinese people will take 1.3 billion flights in 2035, up from 483 million in 2015, the International Air Transport Association predicts, and China will eclipse the U.S. as the world's biggest aviation market by around 2024.

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

Those reforms removed minimum-pricing rules, enabling low-cost carriers to undercut full-service competitors, Mr. Cowan said. The new rules also cut airport fees in provincial cities like Zhengzhou where budget airlines typically operate, and raised fleet-size caps.

Even so, AirAsia's strategy of establishing a local unit is 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.

Although the budget carriers could dent the business of the state-owned airlines, Mr. Cowan says Beijing has at least one good reason to support budget airlines' expansion. The government is investing heavily in dozens of new regional airports across China, he says; unless it wants them to sit empty, it will need low-cost airlines to move in and start using them.

--Yantoultra Ngui in Kuala Lumpur,

Junya Qian

in Shanghai and Gaurav Raghuvanshi in Singapore contributed to this article.

Write to Trefor Moss at Trefor.Moss@wsj.com

(END) Dow Jones Newswires

June 05, 2017 18:03 ET (22:03 GMT)