China's civil aviation industry has recently been shocked by a series of scandals and many powerful officials from the Civil Aviation Administration of China (CAAC), the National Development and Reform Commission (NDRC) and the major State-owned airlines have been either arrested or placed under investigation for corruption.

For seasoned China watchers, these scandals should not have come as surprise. Corruption scandals in China are about as common as sexual innuendos about sports stars in the West.

The intricate details of corruption have all the ingredients of a best-selling airport, pulp-fiction thriller. The rent-seeking ecology of the aviation industry was exposed by a recent audit of China Southern Airlines (CSA). An abnormally large amount of 'air route coordination fees' were uncovered on CSA's books. According to the Caixin reporters, these fees amounted to a staggering 200 million yuan. Further forensic investigation uncovered a money trail that led all the way up to two kingpins in the industry, who had the power to allocate air-routes to carriers, namely the head of the East China Bureau of the CAAC, Huang Dengke, and the CEO of the Beijing Capital Airport, Zhang Zhizhong.

Under China's rules governing the establishment of new air routes, administrative approvals must be obtained from the regional offices of the CAAC and the air traffic control authority, which is effectively the People's Liberation Army (PLA) Air Force, then the final nod from the CAAC head office. The administrative approval process concentrates enormous power in the hands of key aviation officials as they have control over the most lucrative air routes between major metropolis and best time slots.

In addition to the administrative approval process, development of the aviation industry has also been hamstrung by Beijing's discriminatory industrial policy favoring three major state-owned carriers. It is the so-called 'tri-base strategy', which basically allowed three state giants to divvy up three of China's most lucrative regional markets, namely Beijing, Shanghai and Guangzhou and their surrounding areas.

So powerful is the entrenched power patronage network within the industry that even privileged state carriers found it hard to obtain permission to establish new air routes originating from their rivals' base areas. On many occasions, they had to turn to shadowy middlemen intimately connected with the powerful air mandarins to get their blessing to establish new air routes, in return for a hefty public relations fee of course.

Justin Li
Forbes
July 13, 2010

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