Private jet market flying high in China

September 5, 2014 by Cameron Frecklington

With the massive increase in wealth in China in recent years has come an increasing taste for that most luxurious of private possessions – an executive jet. But how will the Chinese leadership respond to wealthy business magnates flashing their cash in such an obvious way? Tax penalties, and anti-corruption inquiries, probably.

According to the Hurun Global Rich List 2014, China is now home to 358 US dollar billionaires (behind the US at 481) – up almost 13% year-on-year. In addition, China further boasted 2.4m millionaire (in USD terms) households in 2013, according to the Boston Consulting Group’s 2014 Global Wealth Report, up 60% year-on-year (compared with only 19% growth in millionaires in the US).

Now, what does a Chinese titan of commerce or industry need if there is already a Ferrari (or two) in the garage? One investment that is growing in popularity is the purchase of private jets. As a 2014 Airbus report simply titled Billionaires Study puts it: “As Chinese travel regulations are eased, and as 2nd generation internationally-educated billionaires come to the fore, the role and importance of the Chinese private jet market is likely to rise.”

This projected rise can be seen from sales to the Greater China region (mainland China, Taiwan, Hong Kong, and Macao) in recent years, with Hong Kong-based aviation consultancy firm Asian Sky Group stating in its year-end report for 2013 that the region’s business jet fleet has risen from 203 jets in 2011 to 371 in 2013 – a growth of 82%. This stands as a stark comparison to the US – home to more than 15,000 business jets.

From Gulfstream (US) to Bombardier (Canadian), Embraer (Brazil) to Dassault Falcon (French), the world’s premier business jet manufacturers are increasingly looking to China – along with India – to bolster an otherwise flagging global market.

“China is a very important market for Gulfstream, and we have seen significant growth over the years. In 2008, there were 30 Gulfstream aircraft in the greater China region. Today, there are more than 130,” says Roger Sperry, the company’s regional senior vice president for international sales, Asia Pacific region.

In order to inject itself in the market and maintain a presence until the real golden days arrive, Sperry says that Gulfstream’s emphasis on aircraft maintenance and servicing has been critical. “Our Gulfstream Beijing service center, a joint venture with the Hainan Group, has been a key element to our success in China…This facility has been very successful and has handled more than 200 aircraft visits since it opened in November 2012. This strategy has been very successful for Gulfstream resulting in a 65% market share in the Greater China region for the large cabin segment (G450, G550 and G650),” Sperry says.

However, China is far from a business jet goldmine at present. The sector faces a number of obstacles before its potential can be fully realized.

Airspace regulations, weak aviation support infrastructure, a dearth of locally licensed pilots, taxation, and “the expenditure sentiment currently emanating from Beijing as dictated by the Chinese Central Government” (read: President Xi Jinping’s anti-corruption and austerity campaign) are all hindrances listed by the Asian Sky Group report.

And yet the current Chinese leadership well knows just how beneficial improved aviation infrastructure will prove. Not only would additional airports and aviation services help ease the burden of having some of the worst flight delays in the world – not helped this year by the PLA’s monopolization of airspace for training exercises – making tourism more accessible and efficient, but it would help develop a general aviation industry (which excludes military planes and commercial airliners) in its absolute infancy.

According to January 2014 data from the Center for Asia Pacific Aviation (CAPA), China will add another 69 regional airports to its existing 193 by 2015, at an estimated cost of $100m. Putting a dampener on this airport expansion is the fact that 90% of China’s air hubs are operating at a loss, compared to 50% in Europe.

“This is welcome news to Gulfstream and to other private jet companies around the world,” says Gulfstream’s Sperry. “Creating dedicated general aviation airports with FBOs [fixed base operations] would allow business jet customers to take full advantage of one of business aviation’s greatest features: flexibility, going where they want when they want. Right now, it’s challenging to secure flight-slot approvals when sharing commercial airports with airlines.”

Björn Näf, CEO of Hong Kong-based business-aviation company Metrojet, agrees. “The Chinese government is making progress to relax the rules and regulations, so it’s a matter of time when the rules become slightly more flexible. In terms of shortage of talents, the business aviation industry is competing with commercial aviation, hence intensive training and development is required to equip the amount of type rated pilots, engineers and aviation professionals to serve the future demands in business aviation,” Näf says.

But how many of these jets are necessary in today’s China? Some might say that China’s culture of mianzi, or face, mean that such business jets are too often seen as the new talisman of wealth. Jack Ma, executive chairman of the Alibaba Group, has one, as do Wang Jianlin, chairman of the property development company Dalian Wanda Group, and Robin Li, chairman and CEO of Baidu, Inc. To compare oneself to the richest men in China is undoubtedly an immense source of pride for those who can afford their flying palaces.

But is the ownership of business jets in China any different than in the West? Karen Lo, marketing director of Private Jet Journeys, thinks so, telling Shanghai Daily in 2013 that “many Chinese people who buy or charter private jets are just trying to show off” while Western business jet users are motivated by convenience.

That may have been true initially, but with China’s economic progress – not to mention the personal wealth of some of the country’s more successful citizens – outpacing infrastructure development, the need for business jets among those same successful citizens is obvious.

“Business jets in China are playing an important role as an efficient business tool. There are remote locations within China that are difficult to get to; hence business jets enable the aircraft owners to access these remote locations to conduct business,” Näf says.

China has long focused on developing its western regions as the country looks to even up access to the country’s economic bounties. And yet, for all of the supposed emphasis and development, provinces and regions such as Sichuan, Gansu, Qinghai, Tibet and Xinjiang are woefully under-serviced in many ways, with transportation infrastructure and available flights one such glaring weakness.

How is China supposed to develop such regions if investors with money are unable to get there? And what do Chinese business jet buyers want from their jets? It used to be that Chinese buyers wanted the biggest and newest jets around, but that appears to be changing as private companies get in on the act and purchase jets for corporate use.

However, that does not mean that jets sold to Chinese buyers are not designed with market specifics in mind. Contrary to previous reports, Gulfstream does not have rice cookers on board its planes, according to Roger Sperry. Nevertheless, such moves may not be far in the future.

“We are exploring a design that would allow for rice-cookers to be installed on the aircraft. Additionally, there are modification options, such as storage for chopsticks (vs. flatware), that customers can select to tailor their aircraft to their particular needs. We also offer a great deal of interior design customization to give operators around the world the ability to design an interior that reflects their personal/cultural tastes,” Sperry says.

Another common trend among Chinese business jet buyers is a preference for large-cabin aircraft despite the most-travelled destinations being short-distance hops to or from Hong Kong, Macao, and Taiwan.

“In general, Chinese customers demand large cabin/long-range aircraft because of their family-oriented nature and enjoyment of large group gatherings. They also prefer new aircraft as opposed to pre-owned aircraft, though the pre-owned market is gradually gaining popularity”, says Sperry.

Yet China’s fledgling business jet industry may be grounded before it reaches the end of the runway. And it all comes down to whether or not business jets are deemed a “luxury item” or not, as being defined as luxury would bring about a whole host of tax penalties, ranging from import tariffs to consumption taxes.

For the regular layperson, the idea of a private jet is the very definition of luxury. But is it any different than owning a nice car? Some would argue that it is more pragmatic than a car, allowing the owner to conduct important business on his or her terms.

For now, it looks as though the business jet industry in China is set to soar. But Beijing’s anti-corruption campaign, potential tax penalties, and the possibility of economic slowdown all loom, meaning it is far from clear skies ahead.

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