There is great demand in China for flights connecting provincial cities, and, with the involvement of more private investors, Huaxia Airlines is striving to meet that demand by finding a balance between cultivating more regional routs and expanding fleet size and profitability.

According to Huaxia Airlines chairman Hu Xiaojun, China's aviation network has managed to form a basic web, but the number of essential vessels needed for regional flights is still thin.

Presently, Huaxia Airlines owns two 50-seat CRH200 passenger planes, and the number is expected to grow to 20 in two years' time.  The airline considers cultivating regional aviation as an important corporate strategy.  Huaxia Airlines recently entered into a partnership with Air China to develop flights connecting Guiyang, Beijing and Tongren.  This marks the first cooperation between a private airline and a large, state-owned one.

Regional aviation is characterized by flights with low passenger volume and short distance, connecting smaller cities.  Flights usually seat between 50 and 110 passengers, and travel a distance of between 600 and 1200km.  Wu commented that China's demand for regional aviation is high, but the industry suffers from an extreme imbalance between supply and demand. Regional aircraft account for less than 10% of the total fleet size; regional aircraft account for 37% of the total fleet in the US, and 34% in Europe.  While the transport capacity of China's regional aircraft accounts for 3% of the country's total, this number is 20% in the US and Europe.

Beginning in 2003, Hu led the market research on  regional aviation markets.  Since this is a relatively new concept in China, Hu conducted his research in the US, which has a mature regional aviation market.

"America's regional aviation market offers an interesting perspective.  It generally enjoys a higher price-earnings ratio and double the profitability of the major aviation market," Hu says.  "In contrast to the US market, China's aviation destinations can be categorized in a pyramid shape, with Beijing, Shanghai, Guangzhou and Shenzhen on the top and all other smaller, connecting airports on the bottom.  The second layer consists of regional centers including Chengdu, Kunming, Wuhan and Xian, with provincial capitals below.  With economic development accelerated in these regions and cities, the number of airports and connecting flights would increase accordingly, and demands would rise.  It is expected that 70 small airports for regional flights will be completed in the near future."

Without a doubt, Huaxia Airlines faces strong competition in the market.  Hainan Airlines inked a US$2.7-billion contract last year with Brazil's Embraer to purchase 100 regional aircraft to form China's largest regional fleet.  Meanwhile, it also acquired Changan Air, Shanxi Air, and Xinhua Air.  Shenzhen Airlines also signed on to a joint venture with Mesa Air Group Inc to form a regional airline in China.  The new airline is expected to commence scheduled services within 12 months, initially operating 50-seat regional jets on domestic routes within China.

Hu said that Shenzhen Airlines and Hainan Airlines focus on 100-seat aircraft suitable for both domestic and international flights.  The regional aviation markets offers other segments for Huaxia's focus.  The industry is, as a matter of fact, strongly supported by local governments.

Hu added, while an aviation network benefits corporate profitability,  the initial cultivation stage would inevitably entail early financial losses.  Therefore, companies need to find a careful balance between retaining profitability and developing a network.  "At the beginning, we did not analyze economic relations and changes between cities in detail.  This mistake led to greater difficulties in operations.  Henceforth we need to focus on capturing market changes and reacting swiftly.  At the same time, we should have firm control over the market instead of merely expanding the size of our operation.  We need more time to consolidate the market and get a better grasp on market demands," Hu said.