CAAC’ s policy reforms and its influence to the Aviation industry

CAAC’ s policy reforms and its influence to the Aviation industry


The Chinese economic miracle has been fuelled in large part by a flood of foreign investment. For a variety of reasons, airport infrastructure construction has yet to experience the kinds of foreign investment supplied to China's manufacturing sectors. In the December 2001, since china join the WTO accession, China’s reform and opening of the market has been initiated a new era. It push the regional opening up to the markets and investment to expand to broader levels. China’s opening up to the world and its commitment to its WTO obligations is catching investors’ interest. As a consequence, the global trade tended to increase continuously.

As a result, on August 1, 2002, since the revised policy on foreign investment in aviation industry has been effective, China has opened the door to the foreign investors to enter into the air transport market. It unrestricted the shareholding in the local airlines and airports from 35% to 49%. Since then, there are no restrictions which limited air cargo service and related warehousing. The operation efficiency and the national airline industry will be inspired by the foreign investments, advanced operation method and management .

Since the aviation reform expanded around the country, the local private investment on airlines has been encouraged by CAAC by steadily moving up its constraint on local investment. In June 2005, in order to push the local aviation industry to be more competitive, CAAC announced its policy of “Provisional regulation on domestic investment on Civil Aviation” officially. In 2005, CAAC announced 10 licenses for private airlines(National Bureau of Statistics of China,2002)1


The article will describe the CAAC’s structure, operating units, and services at current stage; the CAAC’s current existing relationships with other institutions; besides, the author will assess the CAAC’s various operational activities in terms of their efficiency and effectiveness; and also, the paper will identify organizational changes in terms of the policy reforms being undertaken by the entity and how well the CAAC implements the policies and the consequences and influences of the policy reforms; and then, the article will suggest operational changes, cultural changes or changes in strategy that might require to consider in order to improve the performance of the entity.

3.Airport policy reform -Restructuring of the aviation industry

3.1Continuing process of Consolidation

According to Anne, et al.(2008),2, though aviation reforms in the 1980s separated the role of CAAC as regulator and operator, CAAC still stands for the government as the owner for certain carriers and the majority of airports. In 2002, the Government Council formed three mega carriers to gather fourteen minor carriers, in this sense, the CAAC ‘s function of operating and control of the airlines was completely broken.

3.2Reforms and deregulation are still progressing

According to Postorino(2010)3, the State council stated three main policies of ‘Reform Programme’ to separate CAAC as the regulator from being the owner:

  • Consolidation of carriers: First, nine CAAC –controlled airlines were ordered to consolidate into three airline groups around Air China , China Southern and China Eastern. In 2005, the consolidation process was formally completed. Upon the completion of the consolidation, the CAAC no longer represented the state to own the airlines. The three airlines were listed with the main shares being controlled by the state. In 2006, Air China, China Southern and China Eastern were all in the process of joining a major airline alliance.
  • Restructure of airlines and aviation services: The third main policy was to restructure those companies responsible for aviation oil supply, ticketing distribution and aircrafts purchasing into three groups. Restructure of the airlines and aviation services. Nine airlines were to be regrouped under the big three: Air China Group, China Eastern Group and China Southern Group. These groups were established in October 2002 through this reform programme.
  • Privatization of airports: The second main policy announced by the State Council was to transfer all civil airports, except for those in Beijing and Tibet, to local governments, giving them incentives to invest. Transfer of the management rights of 93 airports to provincial governments, except for the Beijing Capital and Tibetan airports. After the completion of the transfer, the financial and operational burden passed to the provincial governments. This is one of the main reasons why the new aviation investment regulation encourages more private investment in airports. The process was completed on July 2004. Most local governments have created new airport corporations to manage and operate their airports and this represents an important step in the evolution of airport management in China. Since all airports were transferred from the general Administration of Civil Aviation of China( CAAC) to local governments in the mid2004, with the exception of Bei Jing Capital international Airport and Lhasa Airport, China’s civil airports have entered a new era.

According to Yahua & David (2008), On 3 March 2002, ‘‘Civil Aviation System Reform Programme’’ was approved by the State Council with the purpose of:

  • Restructure of the civil aviation administration system from four to two tiers, The role of the CAAC and the regional bureaus was clearly defined with a focus on safety management, aviation market management, macro-control, air traffic control management, and foreign relationships, with no interference in transport enterprises’ internal affairs.
  • The core of this reform is to remove the hand of the CAAC from the commercial operation of air transport enterprises and aviation-related companies. The major task is airline consolidations. All of these reforms can be regarded as a further move to deregulate the aviation industry.

At the end of 2004, all the tasks involved in the 2002 policy of Reformrogrammer had fully completed, confirmed by the CAAC. The CAAC’s function as an owner was effectively separated from its regulatory role through implementing the three major aviation reforms, it represents a main step forward.

3.3 Consequence of the Reform Programme

-Restructuring of the aviation industry-liberalization process

3.3.1The encouragement of Foreign investment

In 2002, “the rules on Foreign investment in Civil Aviation Industry” was announced by both the former Ministry of Foreign Trade and Economic Cooperation and the State Development Planning Commission, which attract the foreign investors and airport operators interest( Postorino, 2010). Since major airports had been transferred to the provincial state, it increase the opportunities of airport financing, like

“commenercial loans, domestic bonds, private sector investment, domestic cross- industry investments by airport corporatization and foreign loans, international bonds and investment or lease by foreign operators”

(Orient Aviation, p.17, cited in Postorino, 2010)4.

As an effect, since 2002, the policy had given the foreign investors chances to invest in the construction and operation of airport terminals and runways, offering the maximum equity interest of 49 percent(Anming, et al.,2004)5.

3.3.2 Consolidation

In July 2000, the CAAC announced the Consolidation policy, declared the major 10 government –owned airlines merger into three groups for the purpose of coping with the access into the WTO and improve the competiveness of Chinese airline industry, since then, the CAAC actively encouraged and involved in the coordination and restructuration of the merger of the ten carriers into three main mega groups, (including Air China, China Southwest, and Zhejiang, with 105 passenger planes), China Eastern( including China Eastern, China Northwest, and Great Wall Air, with 93 passenger planes), and China Northwest and Great Wall Air, with 93 passenger planes), and China Southern( China Southern, China Northerrn, China Xinjiang, and China Yunnan, with 158 passenger planes). The first stage of the consolidation process was completed by June 2001(Business Week, 2001; China Civil Aviation Report, 2001c).6

Currently, the CAAC fulfil the function as an industry regulator, but still owns 85% of its airlines. The CAAC restructure the airline industry into three mega carriers, including Air China, China Southern, and China Eastern, each of those mega carriers has around US$6 billion asset. The process of the industry consolidation aims to improve global competitiveness of the mega airlines. In addition, it serves the purpose of enhancing regulatory efficiency.

Since April 2001, the CAAC issued the consolidation policy-mega plan , six local airlines declared that they would set up an alliance in order to compete with the three mega groups, these are airlines, including Shanghai , Shang dong, Sichuan, Wuhan, Shenzhen and China Postal(Anming, et al.,2004).7

3.3.3 Price deregulation -Fare competition

The emergence of the low cost carriers has happened since the domestic aviation market has been opened up to the world. To cope with the access of the low –cost carriers, the CAAC declared that it intended to adopt the “minimum fare restriction” in the future. As a tendency, low cost have become well-known in China, since the end of 2006. Currently, CAAC announced its intention to offer a certain standard for the low fare carriers and dedicate to keep equality market competition ( lonides , 2007, as cited in Anne, et al. 2008).8

In November 2002, CAAC gave up its revenue- pooling policy completely. Since then, the carriers have the right to make a decision whether they would pool revenue on any given route bilaterally or multilaterally, or not to pool. However, the CAAC, as a regulatory agency, was still in charge with regulating air prices. ‘‘The Scheme of Domestic Airfare Reform’’(2004 Airfare Reform Scheme hereafter) was issued by the CAAC and the National Development and Reform Commission, which built a standard prices and create a pricing method. The policy was then publicized in April 2004, after a hearing involving carriers, passengers and other related parties, on 15 July 2003. The standard price was 0.75 Chinese yuan ($0.094) per kilometer in the local market. It is the first time that carriers have the right to make a decision of the price in a range 25% higher (price ceiling) and 45% lower than the standard price (Anne, et al. 2008).9

At present, CAAC declared that it would not look after its airlines any more, in a competitive aviation industry. Mr Yang Yuan yuan, CAAC Minister claimed in a recent interview:

“ We believe that pure protection is not enough for the healthy growth and development of Chinese airlines… Chinese airline can accumulate certain experience and learn lessons from their counterparts, and they will grow in the process of liberalization”

( Londies, 2007, as cited in Anne, et al. 2008).10

In 2005, additionally, CAAC eliminate its policy which forbids Local passengers taking on oversea carriers for official travelling, for the purpose to encourage domestic carriers to improving their services (Thomas,2001,as cited in Anne, et al. 2008).11

3.3.4 Relationship with Local tourism

-Contributing to local tourism facilitates CAAC’s liberalization
A deepen liberalization of CAAC can also been pushed by the contribution to the regional tourism developments. CAAC stated that it set Hainan as an “ open skies” zone, which offers more opportunities for overseas and local airline rights to run cargo or services flights by the Haikou and Sanya airports independently. As A result, many local and overseas airlines have show interest and lots of overseas air links have been built up. CAAC pointed out that it would reach advantageous results as the practice would be implemented in other province of China( Anne, et al. 2008).12

3.3.5 Privatization of local airports

-Revised regulations of Foreign investment in Aviation Industry

To cope with the localization program, at present, the CAAC is creating policies for the purpose of encouraging overseas investment in airport management and authorize overseas ownership for some airports, particularly, the airports which is recently build up (Anming& Andrew, 2008)13. According to Efendioglu(2003), CAAC has approved 25 aviation joint ventures in the area of catering and aircraft maintenance.

In December 2001, since China entry into the WTO, it created a new area in the records of the airline industry’s reform and deregulation. On 1 August 2002, “New Regulations for Foreign Investment in the Civil Aviation Industry’’ was announced, replacing the ‘‘Notice on Policies Concerning Foreign Investment in Civil Aviation’’ (1994), to step up and enhance development of the airline industry by pushing the process of mega airlines and airports coordination. Since then, the promotion of foreign investment has been boosted in every local airlines, broad aviation company, and in projects related to the air transport in air traffic control system, or national security- related projects (Anming& Andrew, 2008)14.

In the new regulation, the limitation of registered capital investment from overseas airlines in airlines has been increased from 35% to 49%. In this sense, comparing with lots of countries, the new relations of ownership is much more opening up.

In addition, the ‘‘Regulation on Domestic Investment on Civil Aviation’’ was finally taken into affect on 15 August 2005 ( CCAR-209), CAAC announced a policy which lets local individual investors enter the civil aviation industry, it opened up to the domestic private investors as well, aiming to reach a “ trade-off” between the operation of foreign capital and local capital (Securities Times, 02.08.2005). It shows the state has decided to break the monopoly of the CAAC in the airline industry and to promote a fair competition of the airline market. The policy has relaxed the investment in civil aviation , which has promoted the emergency of the private airlines. Since 2005, more than 10 private airlines have been licensed, most of which are belong to the low cost airlines(Anming& Andrew, 2008)15.

3.3.6 Additional Investment on airlines and airports

According to Efendioglu(2003), at present, to solve the operation problem, the CAAC intended to invest more to boost the ability and to consolidate the recent operations of the four aircraft maintenance, including Beijing , Shanghai, Guangzhou, and Chengdu and the three engine maintenance bases in Beijing, Guangzhou, and Chengdu. Furthermore, six airports will be extended into medium sized passenger and cargo terminals, involving, Shenyang, Wuhan, Chengdu, Kunming, Xi’an and Urumqi. In addition, the CAAC will make extra investment to expand and conduct the “trunk airport system”, in order to boost construction of local airports. By 2005, 170 domestic civil transport airports will be set, three of them will be “large-scale hub airports”, six of them will be medium-sized hub airports, and the others will be trunk and local airports.

4.Reforms and deregulation deepens

As the reforms and deregulation deepens, in early 2006, the CAAC announced “CAAC Guidelines on Deepening the Civil Aviation Reform’’, it intended to conduct some objectives and tasks in the coming five years. Significantly, one of the objective is “the removal of the control over operation rights on all domestic routes,” It means by 2010, the “ registry –for-record” system for access and exit will be implemented. National airlines will have the right to make a decision to fly on some route and will no longer need to be approved by the CAAC, expect certain routes, which need to be reported to the CAAC. Another obvious objective is to abolish the price standard which was created in the “2004 Airfare Reform Scheme (CAAC,2004;CAAC2006;CAAC2010).

In addition, the policy declared that the state promote the national airlines to cooperate with foreign airlines involving joining global airline alliances.
At the end of 2007. China Southern joined Skyteam, and Air China and Shanghai Airlines became member of Star Alliance. In this sense, it means national airlines have built up an broader network and code sharing has linked the national points with the other alliance members.

4.1 Reform in air traffic management and control system to optimize utilization of airspace

In November 2007, in order to reduce the operation of the three dimensional airspace between military and civil aviation, the CAAC has put the reduced vertical separation minimum (RVSM) into action. In April 2008, the CAAC has revised and summarized that the improvement of the ability of airspace and the efficiency of flight operation and air traffic control is because of the booming achievement of RVSM. It would continuously conducting research and implement modern technology to optimize the resource allocation airspace, assumed by the CAAC, and it would spread the innovation in the air transportation system in the future(CAAC, 2007c; CAAC, 2008a; ICAO, 2008).


As a conclude, Since the 2002 Civil Aviation System Reform Programme has taken into effect, the tendency of deregulation has be obvious, the formulation of the 2006 ‘‘CAAC Guidelines on Deepening the Civil Aviation Reform’’. The national air line industry tends to be more privatized and more deregulated and airlines have more rights due to the continuing reforms in the third state.

By a continuing reforms of policy, the CAAC has shifted its function as an operator and owner of airlines and airports to regulatory issues completely. At present the CAAC fulfills the function mainly as the regulator of the airline industry which serve the purpose of keeping a equal completion market and pursuing passengers rights. Therefore, the aviation reform opened the door to market–oriented airline and airport management. As a result of the CAAC, the strategic implementation of aviation policy has boost the tourism and economic development. The current decentralization of the airport ownership to local state has pushes the process to be deepen, and it has expended more links at their airports to facilitate developing and improve the values of local airports(Anne,et al 2008).16 With the foreseeing the economic development in the future, it can be assumed that China will actively carry on the policy reform and further opening up to the world.


1. Anne G., Peter F.,& Andreas (2008) Aviation and Tourism, Implications for Leisure Travel, ASHGATE, England.
2. Anming Z. & Andrew, Y.( 2008) Airport Policy and Performance in Mainland China and Hong Kong. Aviation Infrastructure Performance , A study in Comparative political Economy. Clifford ,W.& Gines,D.R.( editors), BEOOKINGS INSTITUTION PRESS, Washington D.C.
3. Anming,Z. Geogre, W.L., Lawrence,C.L., Waiman, C.& Yer,V.H.( 2004). Air Cargo in Mainland China and Hongkong. ASHGATE, England.
4. Anming Z., (1998). Industry reform and air transport development in China, Journal of Air Transport Management 4,155-164.
5. Paul h.,(2002). Privatization of airports in Asia. Journal of Air Transport Management 8 , 289–300
6. Shih-L. S.,Feng, L. B., Jie, C. B., & Chenghu Z., B.,(2009) China’s airline consolidation and its effects on domestic airline networks and competition. Journal of Transport Geography 17 ,293–305.
7. Yu,C.C(2010). The development of regional airports in Asia . Development of Regional Airports, Theoretical Analysis and Case Studies. Postorino, M.N., Southampton, Boston
8. Yahua Z.& David,K.R., (2008) China’s airline deregulation since 1997 and the driving forces behind the 2002 airline consolidations. Journal of Air Transport Management 14, 130– 142

Want to know more?

  1. CAAC, Civil Airport Traffic Statistics: 1996 ~2002
  2. National Bureau of Statistics of China: National Economic and Social Development Statistics 2002, February 2003

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Authors / Editors

Alice LiuAlice Liu

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