Growth of the Chinese private jet market slows as the rich avoid attention after frugality campaign

By Liang Chen Source:Global Times Published: 2015-1-11 19:13:01

China's private jet market might have its wings clipped due to the tightening anti-graft campaign led by the central government. China's private aircraft market saw significant growth from 2008 to 2012, as a result of the growing numbers of highly wealthy people. However, the market experienced its lowest growth last year since 2011. Insiders have speculated that one-third of the new orders made for jets by customers from the Chinese mainland might be cancelled this year. As the anti-graft campaign deepens, super-rich Chinese people's enthusiasm about the prospect of owning their own airplanes has dampened.

A Bombardier business jet is displayed during an aviation exhibition in Zhengzhou, Henan Province, on September 13, 2014. Photo: CFP

China's leading airplane salesman doesn't have his head in the clouds; he can see what's in front of him and it's making him worried.

Liao Xuefeng is CEO of the China Business Aviation Group, a pioneer of the private jet business in China, and has sold airplanes to the country's rich and famous. He has sold over 100 private jets over the past decade, nearly half of the total number of private jets sold on the Chinese mainland.

When he started selling private jets in 1995, he predicted the huge potential for growth in China's private jet market and estimated that China would become the world's second largest market for private jets.

But now, he is doubtful about the future of the market. "China's private aircraft market saw significant growth from 2008 to 2012, but in the past two years, the sales of private jets in China has dropped," Liao told the Global Times while sitting in his office in Beijing's Central Business District, with floor-to-ceiling windows and bookshelves stacked with model airplanes  covering one wall.

Liao said that some private Chinese buyers have been cancelling their orders for airplanes. For instance, a Beijing customer who had planned to purchase a jet from Liao's company last December changed his mind and decided to postpone his purchase, saying "he didn't want to attract attention," Liao said.

Observers have said the decline of the private jet market is directly connected to the central government's ongoing anti-graft and thrift campaigns.

A clear example of this trend in action is the fact that several business aviation companies that used to rely heavily on offering charter flights to government agencies have received zero orders from government organs since 2012.

"The development of the Chinese business aviation industry will slow down after explosive growth in the past three years," Wang Zhiqing, deputy director of the Civil Aviation Administration of China (CAAC), said at the 2014 Asian Business Aviation Exhibition held in Shanghai.

As of March 2014, the number of private jets owned by individuals in China reached 300, a 40 percent increase compared with March 2013, but the market's growth was the slowest since 2011, statistics from CAAC showed.

The Zhao Benshan butterfly effect

This market cool-down, Liao said, might have something to do with the problems faced by Chinese comic star Zhao Benshan.

Zhao, who has performed in the CCTV Spring Festival Evening Gala many times, has been plagued by rumors - including that he and his family were planning to emigrate and that his works have been banned - that he has strenuously denied, since he ordered a Challenger series airplane from Canada's Bombardier Aerospace for 200 million yuan ($32 million) in 2009.

It seemed that Zhao's fortunes began to fade after he purchased the private jet. Zhao insisted that he bought the private jet, which is named after him, to help take care of his business. However much of the public regarded it as a way to show off his wealth.

In September 2009, he reportedly asked his friends whether he would be able to return the jet after being hospitalized with a heart problem. He later gave up on the idea after learning that returning the plane would lead to a huge financial loss.

The topic resurfaced again late last year after Zhao did not attend a literary work meeting held in Beijing that was hosted by President Xi Jinping, according to the Chongqing Youth News. Zhao said to his friends he would to donate his jet to the government if possible, according to the paper.

Zhao's absence from the top-level symposium, a gathering of leading literary and art workers, was a demonstration of his fall from official favor, critics speculated.

"The rumors surrounding Zhao have influenced the private jet market. When the central government stressed frugality in every aspect, people have to be really cautious. They would rather postpone their purchase of private jets at such a critical time," Liao said.

At the Asian Business Aviation Exhibition in April last year, customers from the Chinese mainland ordered 88 airplanes and helicopters. An anonymous insider told the Chongqing Youth News that he estimates that one-third of buyers might withdraw their orders.

Before 2013, no business airplanes were resold in China, but last year the Sichuan BRC Group resold its $55 million corporate aircraft at a loss of $7 million, while a Guangxi firm resold its $30 million plane, taking a loss of $10 million.

"To withdraw a business aircraft order, buyers need to pay a maximum fine of 15 percent of the contract price as compensation," said Liao Xuefeng.

In the meantime, the demand for private jets has shrunk. According to a survey carried out by Honeywell, a multinational conglomerate, in 2013, 42 percent of the highly affluent Chinese respondents said that they intended to buy a private aircraft at some point in the future. The figure dropped to 29 percent this year.

"Wealthy people cancel orders temporarily to keep a low-profile, afraid of attracting attention. Secondly, due to the economic slowdown in recent years, some wealthy people have withdrawn orders because of bad business performance," Liao said.

The anti-graft campaign has also affected business aviation companies that relied on providing charter flights to government agencies.

Deer Jet, a leading Chinese business aviation company launched in 1995, has stated that the number of orders for charter flights from government agencies has declined sharply over the last two years.

"Orders for charter flights from government agencies used to make up 30 percent of our total revenue before the 18th National Congress of the Communist Party of China [was held in 2012], but we have had no government clients in the last two years," a Deer Jet employee who asked not to be named told the Global Times.

In response to this decline, Deer Jet is shifting its focus to the private aviation market in the Middle East and Russia.

Cockpit corruption

Private jets are relatively new to China. The industry boomed before private airplanes became politically sensitive, in 2009 to 2012, due to China's economic growth and the increasing numbers of people taking advantage of that growth to amass huge personal fortunes. Realizing the high potential of the Chinese market, many foreign aviation companies began to develop their operations in China and many of the country's wealthiest people and celebrities, such as Jackie Chan, pop star Jay Chou, and actress Zhang Ziyi, as well as businesspeople began to purchase private jets, gradually bringing the market into the spotlight.

Despite the fact that business aviation companies market private jets as "an efficiency tool," the public has long regarded private jets as a tool that helps government officials and businesspeople collude and seek illegitimate benefits.

Many use private jets to court government officials by offering free rides. Liao admitted that some of his customers seek benefits through their private jets as they "open a door for businesspeople to connect with government officials."

"Considering the complicated relationship between government officials and businesspeople, it is not uncommon for businesspeople to offer a free ride for officials as a convenience," Liao told the Global Times.

"If any government official enjoyed the privilege of having a free ride in a private jet, they would definitely help the businessperson by abusing his executive power, which is against the law," Gao Yuanyang, director of the general aviation industry development and policy research center under the School of Economics and Management at Beihang University, told the Global Times.

In some other cases, owning a private jet can help develop one's business and can help establish mutual trust among businesspeople. "It is easy to do business if you own a private jet. After all, it demonstrates your strong economic power. Your business partners will trust you if you own one," an anonymous private jet owner, whose family runs a mining business, told the Economic Information Daily.

Normally it costs at least 100 million yuan to purchase a private jet and nearly 20 million yuan per year for the maintenance of a jet. "One who owns a private jet should possess at least 1 billion yuan," Liao said.

People are highly concerned about whether the money used to buy private jets is acquired legitimately or not.

"We don't envy them. But [the public] is concerned about whether the money used to buy the private jets is clean. If the origin of money was dubious, we should have second thoughts on the legitimacy of the private jets they bought," Fang, a staff member of a business aviation company in Beijing, told the Global Times.

Back in 2012, Li Jiaxiang, director of the CAAC, announced a plan to build airports exclusively for the use of private jets in Beijing and Shanghai, which led to critics claiming that this would squeeze limited aviation resources and intensify flight delays. More importantly, critics said that the construction of business airplane-only airports would be a waste of public resources that would solely benefit the rich and government officials.

In Liao's view, such prejudices against China's business aviation industry have constrained the development of the industry in China.

"Most of the buyers are private company owners who want to improve efficiency by owning jets. Most of them have overseas businesses and they cannot match their schedule with the regular air services, or they have to deal emergencies while the regular air services are not available. To take care of their business, they have to use private jets," Liao said.

In the long run, he predicts that the business aviation industry would pick up considering the small market base and the rising demand.

Newspaper headline: Grounded flights

Posted in: In-Depth

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