Xianping Wang discovers that China is beginning to realise the huge economic potential of the airport city.

The ‘airport city’ phenomenon is fast gaining momentum in the People’s Republic of China (PRC) with an ever-increasing number of gateways expressing an interest in the concept.

Indeed, since 2003 when all commercial Chinese airports were transferred to local government by the Civil Aviation Administration of China (CAAC) – with the notable exception of Beijing Capital and Lhasa–Gonggar and Chamdo–Bangda airports in Tibet – virtually all major PRC airports have announced an airport city development project or an intention to draw up plans for one.

Some airports have even gone as far as to complete land-use masterplans, usually with multi square-kilometre properties and billions of RMB Yuan investment schemes.

Changsha Huanghua Airport in Hunan province and Nanjing Lukou Airport in Jiangsu province are just two of the latest gateways to unveil ambitious proposals to transform themselves into airport cities.

In fact it is probably not an understatement to say that PRC gateways are positively rushing to adopt the airport city concept for a number of strategic reasons, though none of the efforts so far appear to have yielded material commercial benefits.

And as you would expect from a country as huge and diverse as China, the understanding of what constitutes an airport city can vary quite dramatically from one airport to another.

A key reason why Chinese airports are attracted to the idea of an airport city is the fact that it provides them with the opportunity to expand their property boundary in a most cost effective way.

It is, after all, much cheaper – or even sometimes free – to obtain land from local owners, invariably city governments, than having to pay market prices for premises elsewhere.

In addition, since most of the large PRC airports are profit-driven commercial entities (usually incorporated locally), the airport city concept fits in well with their need or desire to generate new revenue streams.

And since airport city projects are widely deemed as a ‘natural expansion’ of aviation activity at an airport, and in most cases built on land adjacent to a gateway, who could argue against them being the next logical step in the evolution of the world’s airports? Finally, surrounding landowners are usually eager to have a share of the benefits and opportunities created by aviation, meaning that they are often only too willing to collaborate with airports with respect to their development programmes.

Indeed, in China, this sometimes manifests itself by offering lucrative commercial terms or even offering the right of management control over neighbouring properties.

However, while there is no lack of enthusiasm among airport management teams and property owners to develop airport cities, until recently relatively little real progress had been made in China in terms of actual airport city development.

The causes of such a lack of tangible progress vary from one project to another, the most common and perhaps the biggest cause for concern for potential investors is the governance issue.

One has to remember that until recently Chinese airports were properties of the central government and are still somewhat detached or even isolated from the local communities in which they are located in terms of the exchange of human resources, management communication and business relationships.

In addition, the relationship between an airport and its controlling local government varies substantially from one city to another, meaning that the type of bond enjoyed between the two could help or possibly hinder any airport city projects.

For example, some airports may find it difficult to successfully liaise and co-operate with all the parties that might have a vested interest in the development of an airport city.

Mainly due to the difficulties associated with the ownership/administrative structure, efforts of lining-up the different business interests and motivations of all relevant parties have certainly not proven to be easy.

So who are the different interested parties? Invariably provincial governments, city and district governments and the ‘supervisory agencies’ of airport authorities that differ from one airport to next but could include the State Assets Supervisory Commission (SASC); State Development and Planning Commission (SDPC); local transport bureau; local land management authorities; public utilities; private property owners; and investors and service providers.

The best case to date is perhaps the new Kunming International Airport (under development as a provincial government project) and the airport city plan launched by the Kunming City and its district governments.

History suggests that without unified (or at least closely co-ordinated) effective governance, most airport city projects may well remain on the drawing board or run the risk of being developed in a fragmented, and ultimately less effective, way.

Notwithstanding the difficulties and obstacles, some airport city programmes in China have begun to make progress in recent years.

Among the biggest success stories is the case of Beijing Capital, a Public Private Partnership (PPP) initiative that involves the airport authority, the local government and private sector players.

Also noticeable for making some progress are the airports where the municipal governments play particularly strong roles in ‘directing’ developments through use of their executive powers.

Good examples of these are Tianjin and Chongqing.

However, although some government-driven programmes are starting to bear fruit, at least in the planning and design stages, some are of concern as they might be at odds with the driving forces really needed to kick-start a healthy airport city programmes; namely, market demand and commercial interests.

Elsewhere some PRC airports and their local government owners have decided to seize the initiative and begun allocating land next to their gateways to the airport authority, specifically for the purpose of developing airport cities or projects such as airport industrial parks or aviation economic zones.

Cities adopting this new strategy include Changsha and Zhengzhou, and the bold moves promise to change the business scope of their respective airport authorities.

In fact their advanced governance structure and more effective coordinating process, along with the administrative and financial powers gained as a result of the new strategy, will differentiate them from other airports/airport city projects in China.

Though these initiatives are in their infancy and technically still in the planning stage, there now seems little doubt that this type of local government driven airport city project draws ever closer for China.

While some solutions to the most pressing obstacle – governance – are appearing, other challenges remain and new ones continue to emerge.

Among them are the lack of the management skills in China necessary to make such ground breaking projects happen, and the ability of airports to fund such capital-intensive developments.

With regards to the management skills, China appears to be pinning its hopes on a combination of gaining experience as projects progress and looking externally for help.

In fact, to date PRC airports have not been shy in coming forward with the funds to get consultants and other industry experts from outside China onboard.

Outside investors are certainly interested in the ‘appreciation potential’ of real estate adjoining airports and any regulatory reforms (either locally or nationally) that make this land available for development, could make Chinese airports much more appealing from an investor’s perspective.

If that airport is enjoying healthy traffic growth, has a large population base and is located in a business friendly environment then it becomes an even more attractive proposition to investors.

Few could dispute the fact that the airport city concept appears to have accelerated in China over the past year, particularly in eastern and central/southern regions, where Hongqiao Airport in Shanghai, Nanjing Airport (Jiangsu province) and Shenzhen Bao’an Airport (Guangdong province) are all developing plans.

Domestic real estate developers are the main players so far, but other sectors, such as private equities, international hotel chains and integrated logistic service providers are starting to show an interest.

And with quite a few local governments and airport authorities engaged in negotiations over “large-scale investments”, it is considered only a matter of time before more international investors sign up.

While some domestic and overseas investors will no doubt view the key investment areas in PRC airport city projects as logistics (including bonded warehousing) and light manufacturing, it is interesting to note that the large transactions so far have principally focused on real estate development.

Earlier this year, China launched a massive economic stimulus programme which has a heavy focus on infrastructure development, and as a result of this quite a few key airports are viewed as obvious beneficiaries.

Indeed, the programme is expected to act as a catalyst for large-scale airport development in China, with many new capacity-enhancing projects either being launched or their completion accelerated, triggering a new wave of airport city programmes either within or just outside the perimeter fence.

Many cities are expected to use the economic stimulus package as an opportunity to upgrade their ground transportation links and, in this regard, Hongqiao International Airport in Shanghai provides an eye-catching illustration.

With Hongqiao Airport’s new terminal (T2 at the west side) as the core, the municipal government has unveiled plans to build an enormous ground transportation hub (the Hongqiao Comprehensive Transport Centre) that will be capable handling over one million passengers daily as well as boasting a residential area and office complex.

By combining air, rail (inter-city, subway, high-speed and maglev) and road (public buses and taxis) links, the centre is expected to play a significant role in connecting Shanghai with seven satellite cites in the Yangtze River Delta region.

Investors, developers and operators such as international hotel chains and management firms are literally queuing up to get involved in the project, which is scheduled to open ahead of the Shanghai World Expo in 2010.

Such is the importance of the project to Shanghai’s development that it is being described as a new district for the city that, in the words of the mayor, will play a vital part in the future growth of the Chinese city.

Though not labelled as an ‘airport city’, the Hongqiao project is the first real attempt in China to make air transport the anchor of local economic growth, and thus the first to create a real impact, rather than being merely a concept that may or may not become a reality.

Other Chinese cities and airports are watching the project with interest and are expected to try and follow Shanghai’s lead and approach in their own airport city developments, though few may match the magnitude or duplicate the value of the Hongqiao programme.

And without wishing to labour the point, one of the most attractive aspects of the Shanghai project to potential investors is the governance of the programme – the mega-project being driven by a special purpose vehicle (SPV) created by the local government, and majority-owned and led by Shanghai Airport Authority.

There is little doubt that airport cities and the diverse range of business activities that they encourage will soon start to become key economic drivers in dozens of large Chinese cities.

Indeed, the new source of income that they generate will make airports less dependent on passenger revenues and possibly provide them with an economic buffer when traffic throughput dips.

Quite a few airports in China are reaching the “magic threshold” of 10mppa that will put them on the radar of airport city investors wishing to diversify their business and transform them into multi-billion dollar assets.

Among them are Changsha, Qingdao, Dalian and Xiamen, the latter, of course, having already attracted the interest of Fraport, which paid €50 million for a 24.5% stake in 2007.

As the newly finalised corporate development strategy of one key PRC airports states, “aviation investment and management companies will spearhead the growth of many local Chinese economies for years to come”.

China really is the land of opportunity.

Asia-Pacific Airports 2009 Issue 4