Anti-graft drive grounds China private jet sales

China's campaign against corruption launched by Chinese President Xi Jinping, which has dented sales of luxury goods, has now grounded the private jet sector.

According to Jetnet, an aviation data provider, purchases of business jets by Chinese companies peaked at 55 in 2011, the year before Mr Xi assumed power at the Chinese Communist party's 18th congress. They have declined steadily ever since, to just 35 last year.

The fall-off has been exacerbated by severe capacity constraints and a yawning infrastructure gap, shattering expectations that China's private jet fleet - 350 aircraft - would triple over the next five years. By contrast, more than 12,000 private jets operate in the US.

"The drop in the market last year was not in line with our expectations," Eric Wong, vice chairman of NetJets China Business Aviation, said as he boarded one of his company's two China-based jets for a flight from Shanghai Hongqiao International Airport to Hangzhou. The aircraft was then scheduled to continue on to Chengdu, capital of southwestern Sichuan province, to pick up a charter party.

"Demand for charters dropped by half after the 18th party congress," added Mr Wong. "The industry has lost all business from government officials as well as state-owned enterprise executives. But the most critical factor is the lack of infrastructure."

Mr Wong's flight was one of just two scheduled that morning at the Shanghai Hawker Pacific Business Aviation Services Centre, which handles private jet traffic at Hongqiao. The city's main domestic airport otherwise serves about 40m passengers a year, making it China's fourth busiest aviation hub.

NetJets China Business Aviation is a joint venture involving Warren Buffett's NetJets Inc, Fung Investments of Hong Kong and Hony Capital, a Chinese private equity group.

In accordance with Chinese government rules restricting overseas investment in the aviation sector, Hony has a controlling 51 per cent stake in the joint venture, which obtained its operating licence in September and has registered capital of Rmb200m ($32m).

Because of strong demand for take-off and landing slots in China, between 8am and 10pm private jets are restricted to one movement in or out of busy airports such as Hongqiao, Shanghai Pudong International, Beijing Capital International and Shenzhen Bao'an International.

Hong Kong-based business executives, for example, would not be able to fly to and from Beijing on the same day unless they left the Chinese capital late at night. Commercial flights, by contrast, offer more flexibility. As a result, one of the greatest selling points of private jets - their convenience - is largely negated in China, reducing demand for charters let alone purchases.<

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The same capacity problem exists at busy US airports but private jet owners and operators can usually turn to smaller airfields nearby, such as Hanscom Field near Boston's Logan International. The closest alternative to Beijing Capital International is Tianjin Binhai International, an almost two-hour drive from the Chinese capital's business district.

Industry executives, however, believe that China's private jet sector will expand rapidly as infrastructure issues are addressed.

"Demand for business jets should increase considerably in China as barriers to business jet ownership and operation are gradually removed," says Fabrizio Poli at Tyrus Wings, an aviation consultancy. Tyrus Wings predicts that China's private jet fleet will exceed 2,600 aircraft by 2032.

Another benefit of the slowdown is a cooling-off of the pilot poaching wars of 2011-12, just before Mr Xi assumed power. With a limited talent pool working principally for China's commercial airlines, signing bonuses of up to Rmb5m were common. Chinese pilots typically have to pay their commercial airline employers a "bond" of up to Rmb3m if they break their contracts.

NetJets China Business Aviation has, meanwhile, been adjusting its China strategy. It is working with events organisers to cater special occasions, such as flights to exotic regional destinations for rich honeymooners.

It has also begun marketing aircraft management services to existing private jet owners in China. The latter clients, however, can be hard bargainers.

"You might think rich people are easy with their money," said Mr Wong. "It's not true."

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