The intricate details of corruption have all the ingredients of a best-selling airport, pulp-fiction thriller. The rent-seeking ecology of the aviation industry was exposed by a recent audit of China Southern Airlines (CSA). An abnormally large amount of ‘air route coordination fees’ were uncovered on CSA’s books. According to the Caixin reporters, these fees amounted to a staggering 200 million yuan. Further forensic investigation uncovered a money trail that led all the way up to two kingpins in the industry, who had the power to allocate air-routes to carriers, namely the head of the East China Bureau of the CAAC, Huang Dengke, and the CEO of the Beijing Capital Airport, Zhang Zhizhong.
Under China’s rules governing the establishment of new air routes, administrative approvals must be obtained from the regional offices of the CAAC and the air traffic control authority, which is effectively the PLA Air Force, then the final nod from the CAAC head office. The administrative approval process concentrates enormous power in the hands of key aviation officials as they have control over the most lucrative air routes between major metropolis and best time slots.
In addition to the administrative approval process, development of the aviation industry has also been hamstrung by Beijing’s discriminatory industrial policy favouring three major state-owned carriers. It is the so-called ‘tri-base strategy’, which basically allowed three state giants to divvy up three of China’s most lucrative regional markets, namely Beijing, Shanghai and Guangzhou and their surrounding areas.
So powerful is the entrenched power patronage network within the industry that even privileged state carriers found it hard to obtain permission to establish new air routes originating from their rivals’ base areas. On many occasions, they had to turn to shadowy middlemen intimately connected with the powerful air mandarins to get their blessing to establish new air routes, in return for a hefty public relations fee of course.
One can only begin to imagine the difficulty for private and foreign carriers to gain a foothold in such a competitive landscape. Many private carriers have to wait for years to get permission to launch new routes and breaking into the golden markets of Beijing, Shanghai or Guangzhou is almost mission impossible.
It is a special concern that corruption is endemic in one of China’s most liberal and dynamic industries. Unlike other monopoly industries in China, Beijing liberalised the aviation industry as early as 2005 and a host of new players have entered the aviation market since.
The abolition of entry barriers was also apparently accompanied by far-ranging reforms in the administrative approval system governing the industry. CAAC gradually relinquished and decentralised its power to approve new routes between China’s 133 airports. By 2008, the CAAC only retained approval powers over the ten busiest airports in China.
As part of the reform package, the official Flight Time Slot Coordination Committees (FTSCC), composed of both industry representatives and officials, have also been set up by the regional and head offices of the CAAC to allocate flight time slots. Though the rules governing FTSCC follow international conventions on issues such as giving preference to new players in the allocation of new routes in order to encourage competition, in practice vested interests and government industrial policy often trumps market-oriented international conventions.
The supposedly representative membership of the FTSCC in practice became nothing more than an ‘Old Boys’ club for officials and former officials from the CAAC and state carriers to divvy up the spoils. According to industry insiders, a lucrative new route could cost RMB 40 to 50 million in ‘public relations’ fees. Private industry representatives are often excluded from this decision-making process altogether.
Despite being impressive on paper, the implementation of aviation reforms on the runway is still proving to be taxing for the authorities. The endemic corruption within the aviation industry exposes the Achilles’ heel of China’s economic reform and development.
Significant market reform and liberalisation have yielded three decades of unprecedented economic growth in China and the aviation industry has been one of its pioneers. Yet, one of the most significant challenges to encourage further economic reform is dismantling China’s cumbersome administrative and regulatory systems both in name and in practice. This would greatly reduce the room for rent seeking and improve efficiency.
As argued earlier in this forum, Beijing must undertake to establish a level playing field for private industry players in China based on the principle of equal treatment. It is glaringly obvious that one of the chief victims of the rent-seeking ecology of the industry has been private carriers who have been shut out of most lucrative air routes as a result of implicit state discrimination and corruption.
Reform in the aviation sector is especially pressing and imperative, as this capital-intensive industry naturally favours large carriers with access to funding. China’s civil aviation has long been dominated by large state carriers supported by industry policy and subsidised finance. In order for private carriers to gain footholds, they must be not be discriminated against in route and flight time slot allocation. In fact, they should be given preferential treatment during their infancy so as to nurture competition.
The influence of officialdom and state carriers in the FTSCC must be curbed in order to turn it into a respectable, impartial and representative body capable of delivering fair and equitable results to all players in the industry and not just the selected few. Independent experts and the contributions of private and foreign carriers representatives must be included and reflected in any future allocation.
China has entered a critical phase of development: sustainable economic development hinges on deeper market-based reforms.
Rule-based market reforms would also have the great additional benefit of reining in endemic rent-seeking and corruption. The market mechanism and open competition should gradually replace the murky discretionary power of China’s mandarins.
Justin Li is principal of the Institute of Chinese Economics and will be associated with EAF as a regular contributor.