The regional aircraft that Tang Xiaoping, general manager of AVIC Commercial Aircraft Co. Ltd. (ACAC) -- a subsidiary to China Aviation Industry Corp. I (AVIC-1), and his colleagues have been working on is fit for either medium or short trips.

There are two aircraft sizes-the 72- or 79-seat standard version and the 92- or 99-seat extended version. With an average speed of 833 km per hour (km/h) and a high speed of 854 km/h, the ARJ21 regional aircraft is designed to meet diverse environmental conditions in China. The production of the aircraft started at the end of last year in Shanghai, Xi'an, Chengdu and Shenyang simultaneously, an indication of a substantial progress in the goal of "making China's own aircraft."

"We have just got the first order of 35 units of ARJ21 turbofan regional aircraft. We have secured the intellectual property right of the newly designed planes, which are scheduled to hit runways by the end of 2005," revealed Tang.

Regional aircraft refer to small planes (having less than 100 seats) that cover short distances (less than 800-km a trip). Not only will regional airlines complement major airlines, but they will also compete with long distance buses, trains and ships. Regional aircraft are more versatile than trains and cheaper than large planes.

While companies like Boeing are dedicated to large investment in large aircraft, small regional aircraft are popping up in China. At the end of last October, Canada-based Bombardier Inc. sold two CRJ700 regional aircraft to Shandong Airlines Co. Ltd., bringing the number of Bombardier planes in China up to 35.

On December 16, 2003, an ERJ145 jet commercial plane, a product jointly made by China Aviation Industry Corp. II (AVIC-2) and Embraer, a Brazilian plane manufacturer, successfully conducted its first flight in Harbin, Heilongjiang Province.

ARJ21 and ERJ145, introduced by Wang Yongsheng, deputy director of Aircraft Research and Production Department of AVIC-2, are world-class aircraft in terms of technology. Because of low labor costs in China, their prices are quite competitive compared to similar products abroad, Wang said.

It is also reported that in the next five years, China is going to build another 50 or so new airports to handle much more transport volume. Regional aircraft, whose transport volume is expected to increase at an annual rate of 12 percent in the coming two decades, will play an important role in the development. Regional aircraft, now in operation in China, are all foreign made and China has listed domestic production of turbofan regional aircraft in its 10th Five-Year Plan (2001-05) for National Economic and Social Development.

China is vast but has an imbalanced economy. Regional airlines could be critical in domestic transportation that may not be reflected in numbers yet: Less than 200 passengers are received daily at each of over 70 of China's airports and, in 60 percent of all airliners, there are less than 120 passengers on board everyday. However, as west China's economy improves, the demand for regional airliners will continue to expand. For some reasons, domestic airlines have been using Boeing 737, Boeing 757 and Airbus 320 planes-all with over 140 seats. Airlines pay a lot for these planes that don't actually fill up. Currently, regional aircraft make up only 12 percent of all civil aviation planes. This is much lower than the international average of 30 percent.

Statistics show that the average passenger occupancy rate in the past two years is as low as 58 percent. China's 40 major cities own two-thirds of the country's airlines, 81 percent of all flights and 85 percent of the transport volume. As major lines approach maximum transport volumes, regional airlines still have much room for development.

It is estimated by the Development Research Center of the State Council that the next few years will see purchases in regional aircraft peak. By 2030, the passenger volume and turnover of regional airlines will take up 19.3 and 6.4 percent of their respective total.

Experts point out that China is in urgent need of an airline network through which regional airliners are able to supplement major ones by flying passengers from all corners of China at a relatively low cost. According to Embraer's estimation, in the next 20 years China will need 600 regional aircraft that will total US$15 billion in market value. Echoing these estimations, the three large airline corporations in Beijing, Shanghai and Guangdong are busy purchasing regional aircraft to improve their competitiveness.

At present, most regional aircraft are imported from aboard. Canada-based Bombardier, the third largest aircraft manufacturer in the world, is the only company that is able to offer 40- to 90-seat regional jet aircraft. It has been the main supplier to China. The largest problem the company is facing in China, however, is the tax barrier. Since 2001, a 17 percent value-added tax (VAT), in addition to the 6 percent import tariff, has been imposed on regional civil aircraft from abroad. For the near future, Bombardier will continue to have to put up with the taxation barrier.

By contrast, another main regional aircraft producer-Brazil-based Embraer-is taking a more active strategy in the market. As early as in December 2002, Embraer and AVIC-2 formed a joint venture to produce regional planes. Last March, the Civil Aviation Administration of China and Aerospace Technical Center of Brazil reached an agreement that it is necessary for the two countries to further improve cooperation. Although ERJ145 regional aircraft, a product of the joint venture, have yet to confirm orders, they gain a competitive edge over Bombardier since they can be sold at a much lower price after being exempted from VAT and import duties.

Although China's aircraft industry lags behind, it has still been able to find a suitable place in the international market. AVIC-1 and AVIC-2, the two main plane manufacturers in China, have issued a 20-year development plan for regional aircraft production. Their goal is to take half the market share.

Tang has pointed out that his company's ARJ21 regional aircraft project is the outcome of international cooperation. The engine and other major parts are supplied by international partners who have "borne much of the cost and risk of product research and development."

With developed core technology, international regional aircraft makers have left enough room for ACAC to choose its suppliers and avoid high costs of initial product development. Tang confirms, "Now we have got an order for 35 aircraft and are able to move on to financing and production."

It will cost at least US$650 to 700 million to get an ARJ21 sample plane into the sky. Besides a 2.5 billion yuan (US$301.9 million) government discount loan, 15 investors paid for most of the rest. ACCA is actively seeking other investment to make the project financially sound. "We will set up a special department to attract investment including listing and accepting private capital," said Yang Yuzhong, Chairman of ACAC.
The company has made a detailed plan to promote the project to investors, governments, financial institutions and businesses both at home and abroad. "We welcome investors in every sector whether domestic or foreign, state-owned or private enterprises, as long as we reach an agreement in negotiation," said Yang Yuzhong. There is no limitation to investment amount.

Domestic companies like Haier Group, Chunlan Corp. and Qingqi Group have shown intense interest in the project.

"We have thought much about cooperating with foreign investors under the condition that foreign shareholders hold less than 49 percent of the stake," said Yang frankly.

Boeing and GE Aircraft Engines have responded, "We will keep in touch with ACAC in almost every field. Cooperation is possible."

It has already been confirmed that GE Aircraft Engines' CF34-10 engine has been chosen for ARJ21. GE has been developing its business in China for nearly a century but it has never made such a strong commitment: Both parties will join hands to develop world-class products while making China a competitive supply center, said David Joyce, General Manager of Small Commercial Engine Programs for GE Aircraft Engines. Making Chinese companies GE's most valuable clients, the project, as well as China's aviation industry, will continue long-term development, David Joyce added.

(Beijing Review February 17, 2004)