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Growing Chinese wealthy bodes well for aircraft and yacht markets

Growing Chinese wealthy bodes well for aircraft and yacht markets

By Leo Zhang.

Richard Hu, who last year spent several millions to buy a fancy yacht, is considering a new purchase. This time, the 29-year-old entrepreneur hopes he can have a jet for short-term flight with his friends.

Hu just took over his family business, which mainly deals with printing and packaging in Zhejiang Province, from his father. The family currently owns two yachts, three supercars and a raft of luxury sedans for leisure and fun.

"When I was a boy, my dream was to fly in my own plane," said Hu, who has dozens of aircraft models sitting in the closet of his office in Shanghai. "I knew it was hard to do this even if you could affordable buying one. Registration and applying to fly can be a complicated process. But for me, owning a jet still has an irresistible appeal."

As for the growing wealthy class in China, owning a private jet is no longer a pipe dream. Chinese aviation authorities have pledged to open up the country's low altitude airspace in the coming years, an initiative that could spur jet sales among the super rich on the mainland.

China's richest individuals forked out 7.7 percent more for luxury consumer products last year due to growing demand and lowered import duties, according to Hurun Report. The expenses for private aircraft and yachts soared the most by 20 percent, followed by prices of accessories and cosmetics, which jumped more than 16 percent, according to the report.

China is becoming one of the fastest growing markets for business aviation with high net worth individuals keen to own their private aircraft. According to the 2010 Hurun Rich List, one-sixth of the 2,000 Chinese yuan billionaires have plans to buy private aircraft - jets or helicopters - for business as well as personal use. Nearly half of them have plans to buy yachts, it said.

In US or Europe, which have a long tradition of private ownership of jets, people prefer second-hand aircraft for their first purchases, upgrading to larger ones later. But in China, where the aviation market is still immature, only the richest individuals buy jets and they mostly want the most advanced models, creating a market where price is no object.

"Thanks to the fast expansion of personal wealth, China's private aircraft market is widely seen to have the potential to grow by up to 25 percent a year over the next 10 years," said Chen Yiwen, a local consultant with several aircraft making clients. "But the market is still quite small compared with the US. Its growth may depend on the pace of deregulation and other government policies."

There were 137 privately-owned jets officially registered in the Chinese mainland last year, compared to 32 in 2008, according to state aviation authorities. The unregistered private planes may double or even triple the official number, some insiders revealed. In the US, the estimated figure is more than 20,000.

Many industry analysts believe that the number of business jets on the mainland will increase to 1,000 within 10 years, with some predicting 2,360 registered jets by 2030.

Opening up low altitude.

China's civil aviation regulator announced in March that the nation will open up its low altitude airspace from 2015 to enable a growing number of planes for general aviation, a move that is expected to spur the purchase and use of private jets.

A trial operation in the southern Guangdong and central Hubei provinces will be gradually expanded to northeast and south-central China this year and eventually cover the whole country in 2015, according to Li Jiaxiang, director of the Civil Aviation Administration of China.

China's low-altitude airspace, normally below 1,000 meters, is controlled by the air force and the regulator. Every private flights need approval to use this airspace. The strict control of low-altitude airspace had long been regarded as a bottleneck in aviation development.

In 2010, a State Council document said the country's low-altitude airspace will be divided into three sections - controlled areas, monitored areas, and areas where aircraft can fly freely after reporting flight plans in advance.

China has 9.98 million square kilometers of usable airspace, including 32 percent for civil aviation and about 24 percent for military use, according to the China National Airspace Technology Laboratory.

Catering for private jet market.

The potential of China's private and business jet market has caught the eyes of local government officials with the hope of making it become a further source of economic growth. Some pioneers have already begun airspace management reform in view of the potential demand for helicopters and light planes.

The Shanghai municipal government said in March that it is planning to build its second business aviation base at the Pudong International Airport in about three years to cater for a growing private jet market.

The city currently has the Shanghai Hawker Pacific base at its Hongqiao airport, which began operations in 2010 and acquired a license last year to conduct repair and maintenance work on various kinds of private aircraft.

Building the second business jet base is just part of a broader plan to build Shanghai into a major business aviation hub. Shanghai's two airports handled 3,500 departures and landings of business aircraft last year, about a third of the Chinese mainland's total, according to the city's airport authority. The number is expected to rise by about 10 to 15 percent this year and rise to 6,000 over the next two to three years, according to the airport authority.

"We started late but are catching up fast," said Jing Yiming, board president of Shanghai Hawker Pacific. Jing is also an official with the Shanghai Airport Authority. "The potential demand is huge, especially around the Yangtze River delta region," Jing added.

In March, more than a dozen private jets were sold at the three-day Asia Business Aviation Conference and Exhibition held in Shanghai. The Chinese tycoons and firms splurged over 200 million yuan on average on each of the jets, according to the organizer.

Another major aviation fair will be held in November in Southern China's Zhuhai, which market observers believe could help companies sell more jets to the country's most affluent group in southern China.

Calls for tax breaks and other support.

However, in order to realize the ambitious targets for the private jet market, more needs to be done to deal with existing difficulties, such as approval before takeoff, higher taxes, lack of qualified professionals and a shortage of airports.

Although China has already cut the approval procedure to 24 hours for any flight of private and business jets from up to four days previously, many owners have calling for even quicker approval, or at almost a moment' notice. In western countries, an approval can be granted in less than 15 minutes.

In addition, experts are also calling for tax breaks on buying and registering business planes. Currently, for business and private jets, buyers have to pay a 17 percent value-added tax plus a 4-5 percent import duty. The figure was nearly double that of civil aviation planes, currently pegged at 12 percent, according to Allen Fang, vice president of Deer Jet Co, a subsidiary of Hainan Airlines.

Inadequate logistical infrastructure is also a major factor in holding back development of the market. As the world's top market for business jets, the US has about 5,000 airports to accommodate private planes, making it easier to stop and refuel. But in China, there are only 200 airports and many of them don't serve smaller private jets.

"We also call for infrastructure construction and more professional business jet expertise that are far lagging behind the market increase," said Kong Linshan, president of Minsheng Financial Leasing Co Ltd, a business jet buyer. There are far too few airports for business jets, he said.

Li Jiaxiang, the director of CAAC, has said that China is to build 72 new airports, for regional aircraft and private jets, mainly in the country's west, by 2015. Some industry reports have estimated that China needs at least 10,000 more qualified pilots and crewmembers to sustain the growth of the private and business jet market.

Craze for yachts.

If the private jet market is still awaiting a shot in the arm, the yacht market in China should be described as more mature and booming. In April, the 17th China International Boat Show in Shanghai saw its contract value more than double from last year to reach 2.2 billion yuan. More than 32,000 people visited the four-day exhibition, 40 percent more than 2011.

Exhibitors are betting on increased spending on leisure activities by Chinese consumers. At the Shanghai show, the most expensive yacht sold at the exhibition was a 40 meter-long vessel by Sunseeker, costing 140 million yuan. Medium-priced vessels were also popular among buyers. Brunswick sold 13 Harris220s, each valued at 320,000 yuan.

China has 28 yacht clubs and 1,200 to 1,500 vessels, said a report released by China Association of National Shipbuilding Industry.

"China's yacht industry is expected to rise an average of 30 percent in the next few years and will have an annual industry value of more than 200 billion yuan," said Yang Xinfa, director general of the yachts and ships branch of the China Association of National Shipbuilding Industry.

He is optimistic about the prospects for the yacht industry as Chinese people's disposable income increases. But he pointed out that port infrastructure and lack of relevant laws and regulations are the challenges facing the development of the yacht industry in the country.

The booming market has exited yacht makers. In January, A Chinese company bought a 75 percent stake in a major European yacht manufacturer, Italy's Ferretti Group, for 374 million euros in the latest Chinese acquisition in Europe.

Shandong Heavy Industry Group-Weichai Group said it would help Ferretti expand distribution in China and other emerging markets. "Developing the yacht business is one of the group's strategic goals for the next five years," SHIG-Weichai Group's Chairman Tan Xuguang said in a statement. Ferretti, which says it is the world's biggest luxury yacht maker, has eight shipyards in Italy and in Miami, Florida, with nearly 2,000 employees.

Tim Bai, CEO of yacht maker Azimut China, said that the Chinese market is becoming another major player out of BRICS, which make the most of the increase of yacht market currently.

"It is obvious that the purpose of purchasing yachts is to entertain business partners/customers. That's the key motivation of Chinese buyers," said Bai. "Flybridge yachts with beautiful design and bigger space are the best sellers in the market."

Bai noted that for Chinese buyers, the biggest considerations are reliable after-sales service and strong branding awareness. His company now provides tailor-made services for Chinese buyers, especially in the megayachts segment (over 80ft). "It will grow up into a huge and mature marketplace," Bai added.

Returning to entrepreneur Hu, he uses his yachts every summer to entertain his friends and business partners. Now, many visitors to his yachts have bought boats themselves and also invited him to go on a voyage.

"I don't think jets and yachts are symbols of your status or richness," said Hu. "They are just for fun and leisure. As people accumulate their wealth, more individuals will be able to affordable them."

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