South China Airports: Capacity Shortage,

UNCLAS SECTION 01 OF 04 GUANGZHOU 000670 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM AND EB/TRA USDOC FOR 4420/ITA/MAC/MCQUEEN TRANSPORTATION FOR A/S STEINBERG/GLATZ/RAO USPACOM FOR FPA E.O. 12958: N/A TAGS: EAIR ECON CH HK SUBJECT: South China Airports: Capacity Shortage, Expansion, and Competition REF: A) 07 Guangzhou 206 B) 07 Guangzhou 109 C) 06 Guangzhou 32347 D) 06 Guangzhou 32163 E) 06 Guangzhou 18105 F) 06 Guangzhou 16330 G) 06 Guangzhou 13550 H) 06 Guangzhou 11471 I) 06 Guangzhou 8841 (U) This document is sensitive but unclassified. Please protect accordingly. ¶1. (SBU) SUMMARY: To meet the rapidly mounting demands of passengers and cargo transportation, major civil airports in the Pearl River Delta (PRD) region are gearing up to upgrade their infrastructure and service. Fierce competition is expected as both airports and airlines compete for a bigger slice of an ever-growing pie. The General Administration of Civil Aviation of China (CAAC) is working to optimize air space utilization and is calling for cooperation among the airports. END SUMMARY. Mounting Demand and Conflicts in the PRD -------------- ¶2. (U) On March 18, 2007, an industry consultant told AFP in Singapore that Asia will overtake North America as the world's biggest aviation market by 2025. Airports in Asia are operating at close to full capacity and investment is urgently needed to upgrade infrastructure. The consultant predicted that traffic growth will exacerbate capacity shortages at many Asia-Pacific airports and it is vital that new infrastructure be developed. On March 27, 2007, Chen Wenyi, a senior official from CAAC Central and Southern Regions also pointed to the growth in air traffic in the PRD region (15-20 percent per year year from 2005 to 2010) and said that the five major civilian airports in the region - Hong Kong International Airport (HKIA),Guangzhou Baiyun International Airport, Shenzhen International Airport, Macau Airport, and Zhuhai Airport - are working to upgrade their operations. The five airports currently have seven runways and could add four or five more. ¶3. (SBU) Currently, there are three separate air traffic control centers in South China: Guangzhou, Hong Kong, and Zhuhai. Four of the five airports - Hong Kong, Shenzhen, Zhuhai, and Macau - are within a 65km radius; Guangzhou is within 140km of the other four airports. Proximity of the five airports creates operational challenges as aircraft fly near or across sector boundaries and have to be rapidly transferred from one air traffic control facility to another. Most airspace within the PRD (and throughout all of mainland China) is reserved for military use, thus airspace available for civil aviation is insufficient to accommodate expected air traffic growth in the coming years. In order to avoid conflicts between flights that arrive in Hong Kong and those departing from Macau and Zhuhai, Hong Kong International Airport (HKIA) arrivals are required to stay above 5,000 meters once entering Zhuhai's control area. This creates problems for those planes flying into HKIA from the north (over the mainland),as they are too high to drop down and land at HKIA; as a result, they fly extra miles to the south to descend safely to the HKIA runway. The uncoordinated runway directions of the five airports create overlapping and crossing arrival and departure paths that further increase, perhaps dangerously so, air traffic congestion in the region. CAAC Calls for Cooperation Among Airports -------------- ¶4. (SBU) To reduce air traffic congestion in the PRD region, CAAC Vice Minister Yang Guoqing said that the mainland will increase cooperation with the airport authorities in Hong Kong and Macao. On March 15, another senior CAAC official disclosed that a procedure, known to the global aviation community as Reduced Vertical Separation Minimum or RVSM, will be implemented by November ¶2007. This procedure reduces vertical separation standards GUANGZHOU 00000670 002 OF 004 from 2000 feet to 1000 feet, increasing en route capacity. Hong Kong is also studying how to optimize air space utilization and reform air space management. Proposals, including removing the 5,000 meter "air wall" between Hong Kong and mainland China, are being studied. ¶5. (SBU) CAAC officials commented that HKIA tops the market with an excellent overseas airline network and outstanding service, while Guangzhou Airport has the best infrastructure and lowest operating costs. Shenzhen Airport will focus on the cargo sector. Zhuhai can take advantage of its cooperation with Hong Kong and serve as a bridge between Hong Kong and the mainland. Located in a popular tourist spot with many budget airlines, Macao Airport can develop its international passenger sector. Still, it is clear that there is one, possible two, airport(s) too many for the area covered. ¶6. (U) Guangzhou's Nanfang Daily reported that on June 2, representatives from five major airports in the PRD signed an agreement in Hong Kong. They agreed to stand up a coordination team and to restart the PRD A5 Forum after a 4-year suspension. Airports Scale Up: HKIA Integrating with PRD Aviation Sector -------------- ¶7. (SBU) HKIA is the world's fifth busiest international passenger airport and has the most active worldwide air cargo operation. In light of Hong Kong's continued economic integration with mainland China, HKIA is expanding into the PRD region and serves as a gateway hub airport to China. In October 2006, the Airport Authority of Hong Kong (AAHK) moved more directly into the mainland aviation sector by taking over the management of Zhuhai Airport. AAHK is expected to ramp up its investment in the fast- growing mainland aviation sector with a joint venture at Hangzhou Xiaoshan International Airport. ¶8. (SBU) HKIA has invested HKD 4.5 billion (USD 577 million) in construction projects at the central arrival concourse at Terminal 1, in passenger capacity enhancements, and in airfield improvements. The permanent SkyPier is under construction and scheduled to open in 2008 to provide cross-border ferry service to passengers. Passengers in both directions can bypass customs and immigration formalities, nearly cutting in half the current four-hour transit time. To further streamline the transit process at the border, AAHK joined with Cathay Pacific Airways and Hong Kong Dragon Airlines to launch up-stream check-in services at the Shekou ferry terminal for sea-air passengers; passengers can obtain their boarding pass and receive a guaranteed acceptance of carriage before arriving at HKIA. ¶9. (SBU) HKIA is constructing ten additional cargo stands and related taxiways to facilitate air freight movement; the total number of cargo stands will reach 35 by the end of this year. AAHK is also working with the Civil Aviation Department to maximize runway capacity and conduct a feasibility study on the construction of a third runway. ¶10. (SBU) Even with this development and expansion, Hong Kong authorities have not agreed to further liberalization of the U.S.-Hong Kong Air Services Agreement since 2002. Guangzhou Creating World-Class Aviation Hub -------------- ¶11. (SBU) Guangzhou plans to develop Baiyun Airport - headquarters of China Southern Airlines - into one of the key hubs in the Asia-Pacific region. Business expansion has exceeded the design capacity of the airport's Phase I operating plan. In 2006, passenger throughput was 26.2 million, and cargo throughput was 653,100 tons, ranking third nationwide after Beijing and Shanghai. The airport's Phase II operating plan, expected to be completed in 2010, entails an investment of RMB 17.5 billion (USD 2.16 billion) GUANGZHOU 00000670 003 OF 004 and includes the construction of a third runway, aprons, two international cargo terminals, a freight transportation hub for FedEx (ref A),and a tax-free zone for processing and logistics. ¶12. (SBU) Baiyun Airport is looking to foreign investors for capital input and advanced management ideas. Several overseas airport operators - including companies based in France, Singapore, Hong Kong, and Germany - have reportedly approached Baiyun to discuss possible partnerships. On March 23, Baiyun Airport confirmed that it was in partnership talks with the Frankfurt-based Fraport AG, and both sides had agreed to cooperate. ¶13. (U) On March 22, Guangdong Airport Group, Guangzhou Airport Customs, Guangzhou Baiyun Entry-Exit Frontier Inspection Office, and the Guangzhou Entry-Exit Inspection and Quarantine Bureau signed a strategic cooperation agreement to initiate more than 30 "innovative" services, such as 24-hour passenger clearance service, a Credible Enterprises System, simplified customs procedures, a multi- point declaration policy, and a visa-free transit policy. ¶14. (SBU) Guangzhou city is making Baiyun Airport the commuter transportation hub for highway, railway, metro, light rail transit (LRT),and China Railways Highspeed (CRH) train. Guangzhou's Metro Line 3 will be connected to the airport by 2009; 12 regional highways linked to the airport by 2010 will put any PRD city within a two-hour drive; and a new railway station at the airport will be linked to passenger transport and freight services by 2020. Shenzhen International Airport Focusing on Cargo -------------- --- ¶15. (SBU) International cargo traffic at Shenzhen Airport rose by 83 percent in January 2007. Cargo throughput will likely grow an additional 25 percent in 2007, potentially surpassing Baiyun Airport in cargo handling volume. The Shenzhen municipal government has promised to support the logistics industry by providing a RMB 10 million (USD 1.3 million) subsidy per year for new international cargo routes. ¶16. (SBU) FedEx and Asiana Airlines will open new routes from Shenzhen this year, and two Chinese private cargo airlines will set up bases at Shenzhen Airport. To cope with increasing demand, the airport is accelerating its expansion, including a sea fill project, the construction of a 3,600m long runway, and a new terminal. Airport management expects the expansion to be completed in 2008 and should satisfy anticipated transportation needs through ¶2020. Zhuhai to Develop with Hong Kong's Help -------------- ¶17. (SBU) AAHK took over the management of debt-ridden Zhuhai Airport last year, completing a series of renovations of airport facilities, and beginning work on Hai Tian Pier, scheduled to open by 2008; ferry service will be provided to airports in Hong Kong, Macao, and Zhuhai. Airport management announced that the first international cargo route from Zhuhai to Manila will open this year. Two new airlines have also been invited to operate domestic routes from Zhuhai. For now, Zhuhai Airport will be used mainly for cargo business. However, the Zhuhai municipal government recently announced its intention to build a strong aviation industry, integrating flight training, aviation conferences and exhibitions, and aircraft maintenance facilities. Macau International Airport -------------- ¶18. (SBU) Macau International Airport Company (CAM) announced March 29 that passenger volume in 2006 was 4,976,093, cargo throughput was 220,572 tons, and 51,409 aircraft movements were recorded. Total operational revenue for 2006 reached MOP 573 million (USD 71.6 million), GUANGZHOU 00000670 004 OF 004 a growth of 21.1 percent compared to 2005. Gross profits amounted to MOP 223 million (USD 27.9 million),a 72.3 percent growth over the past year. CAM has invited Netherlands Airport Consultants to create a five-year expansion plan for Macau International Airport (MIA). The plan will focus on infrastructure expansion, including a new apron, new hanger, and increasing the length of the runway from 3,360m to 3,860m. MOP 4 billion (USD 500 million) will be invested to complete the expansion by 2011. COMMENT: Tremendous Growth and Competition -------------- ¶19. (SBU) Enormous growth opportunities and increasing competition in civil aviation exist in the PRD region. Airports' capacity shortage and air traffic congestion will continue to hinder the development of regional civil aviation in the near term, while expansion plans will attract major investment in the sector. Demand will expand as the economy continues to grow at more than 12 percent per year in the PRD region. ¶20. (U) This cable was coordinated and cleared with Consulate General Hong Kong, Embassy Beijing, and the Federal Aviation Administration. GOLDBERG