The Chinese government has acknowledged that although China’s airlines have improved in airline management and operations, they still lag their major Asian competitors. China’s entry into the World Trade Organization and its continuing march toward a market economy present significant challenges to its airline industry.

New private airlines are adding to the fierce competition on domestic routes. The country’s three main airline groups–Air China, China Southern and China Eastern–now worry not only about their declining market share but also a potential price war.

Last year, the General Administration Civil Aviation of China (CAAC) issued air operating certificates (AOCs) to 14 private domestic airlines. Two more airlines–Datang Qili Airlines and Northeast Airlines–are to receive their AOCs by the end of April. Three new airlines–Okay Airways, Autumn Airlines and Spring Airlines–have started operations, while four more–East Star Airlines, China United Airlines, Huaxia Airlines and Dongxing Airlines–are expected to do so this year.

Civil aviation minister Yang Yangyuan has justified issuing new AOCs by saying the Chinese government will continue to pursue a liberal policy of opening the aviation market. “We will continue to look at ways to reform and improve the local airline industry to make air travel available to more Chinese. The pressure is on state-owned airlines to improve in their marketing, management and service to compete in the market,” he said.

To fill their seats, the airlines offer competitive fares on international routes, and the big three are also looking at offering more direct flights from cities in China other than Beijing, Shanghai and Guangzhou. Air China recently started flights from Xi’an in the Shaanxi province via Beijing to Vancouver, Los Angeles, New York, London, Paris, Kuala Lumpur, Singapore, Bangkok and Hong Kong.

Chinese airlines currently operate 770 aircraft and expect to add another 142 to the fleet this year. Orders they recently placed include 150 Airbus A320s and 80 Boeing 737-700/800s.

The bulk of the A320s are to be delivered to China Eastern and China Southern to replace aging aircraft and to meet expansion requirements. Delivery is to start next month and continue through to 2013. The 737s will be for Air China, China Southern, Hainan Airlines, Shanghai Airlines, Shenzhen Airlines, Shandong Airlines, China Eastern and Xiamen Airlines. Deliveries also are to commence next month and run through to the third quarter of 2008.

Meanwhile, CAAC has firmed up plans to give the nod to Chinese carriers to order another 80 B737s next year with delivery planned to start in late 2008. The aircraft will replace older generation 737-300/400/500s currently in operation or be used for expansion on domestic, Southeast Asian and Korean routes.

China Southern is the only Chinese airline to have ordered the Airbus A380, thus far, with five to be delivered on a staggered basis from 2008 through to 2010.

China is projected to become the world’s second largest aviation market by 2020 after the U.S. in terms of number of passengers and volume of cargo carried.

Yang predicted that by 2010 China will have 145 airports handling an estimated 500 million people and 10 million tons of cargo. Currently nine new airports are being constructed across the country.

With their rapid growth, Chinese airlines have started hiring foreign pilots to cope with the shortage. Until last year, the hiring of non-Chinese pilots was frowned upon by the government. Currently about 11,000 pilots are employed by the airlines, including 100 foreigners who work for Shenzhen Airlines, Okay Airways, Hainan Airlines and Sichuan Airlines. Attractive compensation packages offered by provincial airlines are seeing pilots from state-owned carriers jumping ship.