A country's airspace is an important area related to national security and sovereignty.

Compared with domestic air passenger transport, international flight operations not only require prerequisites such as airport capacity and abundant airspace, but more importantly, correspondingly abundant traffic rights between the two countries.

Therefore, traffic rights have naturally become a bargaining chip and commodity in the diplomacy of various countries. By exchanging different levels of air traffic rights, cooperation and mutual benefit can be deepened.



Traffic rights are of a diplomatic nature
The concept of ""traffic rights"" began with the Chicago Conference in 1944, which adopted the Convention on International Civil Aviation, the International Flight Transit Agreement and the International Air Transport Agreement. Since then, a hierarchical system of international traffic rights has been formed.
Specifically, international air rights can be roughly divided into nine types.
In a normal sense, the international routes we understand are third and fourth freedom rights.
At present, the two major regional alliances, the EU and ASEAN, have deepened economic cooperation and closeness among countries by opening up the traffic rights of member states and sharing sky resources.
The liberalization of traffic rights within the EU began in 1990, and the third, fourth and fifth freedom of traffic rights were opened among EU member states.
In 1997, all nine major traffic rights within the EU were opened. Since then, airlines from EU member states can open any routes within the EU as long as they have a common EU license.
Due to its more decentralized organizational form, ASEAN has been promoting the ""Common Aviation Market"" (SAM) within the alliance, but the opening up of traffic rights has been slow.
Third and fourth freedom rights opened in 2008;
In 2010, ASEAN opened restricted fifth freedom rights;
In 2015, ASEAN completely liberalized fifth freedom rights.
Judging from the structure of the global air passenger transport market, Europe and the Asia-Pacific are the busiest regions on international routes, which is also related to the substantial opening of air traffic rights in these two regions.

As of July 2016, the passenger turnover of international flights in the European region accounted for 37% of the global international passenger turnover, and the passenger turnover of international flights in the Asia-Pacific region accounted for 27% of the global international passenger turnover.
 
The international flight passenger turnover in the North American market accounts for 13% of the global market. Although the number is relatively small, considering that the North American market is dominated by the United States, Canada and Mexico, the activity of its international flights is also very impressive.

In general, Europe, Asia-Pacific, and North America are the three most important markets for international air passenger transport in the world, and they are also the main areas for China's international flights.

Looking at supply constraints based on traffic rights between China and the United States
For countries in regions such as the EU and ASEAN, due to the deeper opening of air traffic rights and the basic establishment of a unified aviation market, airlines affiliated to each country have fewer restrictions on opening international routes and have freer supply.
For example, Ryanair can freely open international routes between two third-party countries in continental Europe without being hindered by non-domestic airlines.
This also laid the foundation for Ryanair and easyJet to occupy and maintain their leading positions in the European air passenger transport market.




For non-regional countries, in addition to the degree of openness of air traffic rights that will affect the opening of international routes, the traffic rights quota between the two countries will also become the upper limit of the supply of international air routes in the short term.
Most of China's international routes are in this situation.
As of now, the traffic rights quotas for many important European and American routes such as China-US and China-Germany have been basically saturated.
If a new round of traffic rights negotiations does not begin, it will be difficult for airlines to achieve a new round of supply expansion on these routes through new flights.
Among them, the traffic rights quota system for China-US routes is the most typical.
According to the traffic rights quota between China and the United States established through four negotiations between 1980 and 2007, airlines from the two countries need to gradually increase the number of weekly scheduled flights within the provisions of the agreement.
In 1980, China and the United States signed the ""China-US Civil Air Transport Agreement"" for the first time, establishing Beijing-Shanghai-Japan-Honolulu-Los Angeles-San Francisco-New York as the first China-US air route.
Airlines can choose at least two points on the route to operate China-US routes.
At that time, the only navigation points in China were the airports in five cities: Beijing, Shanghai, Guangzhou, Hangzhou and Tianjin.
Limited access to fourth freedom of navigation between China and the United States.
In 1999, the number of scheduled flights between China and the United States had increased to 27 flights per week, and the two sides revised the transportation agreement again.



In addition to allowing additional navigation points through code sharing, the traffic rights quota between China and the United States will also gradually increase from 27 flights/week to 54 flights/week within 3 years.
Compared with the United States, China can fully use 54 flights for passenger transportation because it can freely switch between passenger flights and cargo flights.
In 2004, China and the United States further revised the transportation agreement.
On the one hand, the number of scheduled passenger flights will be significantly increased again by 84 flights per week within 6 years.
On the other hand, navigation points have been greatly expanded, and China’s exit airports are divided into three parts.
Among them, the first region of China is Beijing, Shanghai and Guangzhou, and the second region of China is the central and eastern provinces. Both flights are within the quota limit. Among the 84 new flights, 28 flights can only be used in the second region of China.
The third region of China consists of most of the remaining provinces, and there is no quota limit for flights between China and the United States.
In 2007, China and the United States carried out the last recent revision of the transportation agreement.
The passenger flight quota will be increased by 70 flights again before 2012.
At the same time, a large number of central provinces in China's second region have been transferred to China's third region and are no longer subject to flight quota restrictions.
Only seven eastern coastal provinces and municipalities are left in China's second region: Fujian, Guangdong, Hebei, Jiangsu, Shandong, Tianjin and Zhejiang.
At the same time, fifth freedom rights will be opened between China and the United States.

By the end of 2015, the number of flights from China's first region to the United States has reached 165 classes/week, while the current total quota of the first region is 180 classes/week, that is, there are only 15 flights/week from Beijing, Shanghai and Guangzhou to the United States. In fact, the quota of these remaining flights is basically allocated before the end of the year. China Eastern's Chicago route did not start as scheduled in 2015, but it started this year.



Judging from the quota, all quotas for China, the United States, Beijing, Shanghai and Guangzhou have been used up.
Since China's second region includes the eastern provinces with high national income levels and air travel demand, it has become the second battlefield for various companies.
Among the second-zone routes announced and successfully launched before 2015, the only direct Nanjing-Los Angeles route operated by China Eastern Airlines runs three times a week.
According to the Civil Aviation Administration of China’s announcement, a total of 34 flights between China and the United States have been applied for in Zone 2 since 2015, exceeding the remaining 25 flights in Zone 2.
It is expected that the bureau will eventually reduce the amount based on the application, but the quota for China-US routes in the second zone has most likely been allocated.
Judging from the estimated launch time, most of them will be completed before June this year, which means that the subsequent increase in supply in the second area will be very limited.




At the same time, cities in the three districts including Wuhan, Changsha, Chengdu, and Kunming have successively opened flights between China and the United States. However, we believe that the probability that the three districts will continue to open a large number of long-distance routes between China and the United States is low.
There are mainly the following reasons:
The newly opened routes can bring back the local demand for departures from Zones 1 and 2, but the existing demand is not enough to support the continued rapid growth of flights;
Different from the second district, the third district is far away from the three major hubs of Beijing, Shanghai and Guangzhou, so the cost of diverting water to the first district is higher and the diversion capacity is low;
Unlike short-haul routes in Japan, South Korea, and Southeast Asia, the fixed costs of operating long-haul routes between China and the United States are relatively high, and if the flight performance rate is too low, the Civil Aviation Administration will face cancellation of the permission to fly the route;
Due to the complexity and diplomacy of international traffic rights, there is a phased ceiling in the supply of international routes.
A new round of traffic rights negotiations between China and the United States and most European countries has not yet started, and the existing quota for first-tier cities has basically been run out.
Before the start of a new round of negotiations, the growth rate of international line supply will be limited.
Since 2013, the number of scheduled flight routes in China's civil aviation industry has continued to increase.




According to the data released by the Civil Aviation Administration, China opened 257 new regular routes and fixed charter routes in 2015, of which 94 were opened in the first half of the year and 163 in the second half of the year.
According to the type of airline, 172 full-service airlines opened, and 75 low-cost airlines opened.
Among them, the growth rate of newly opened international routes is faster than that of domestic routes.
For the whole of 2015, China's 15 airlines opened 202 international routes, reaching a record high.
In the first half of 2016, China added 118 international routes, continuing to maintain rapid growth.




Judging from the deployment of the three major shipping capacity, the capacity deployment of the three major airlines in international routes has accelerated in the past three years, and the capacity deployment of international routes has continued to be higher than that of domestic routes.
In 2015, the ASK (available seat kilometers) growth rates of China Southern Airlines, China Eastern Airlines, and Air China for international routes were 30.71%, 24.34%, and 18.95% respectively, which were higher than the 7.24%, 9.64%, and 7.62% for domestic routes.
In the first half of 2016, the ASK growth rates of China Southern Airlines, China Eastern Airlines, and Air China were 30.17%, 32.42%, and 21.43% respectively, and international routes continued to grow at a high rate.
Internal rules: competition intensifies, sustainability is limited, and the ceiling of external traffic rights determines that under the same conditions, the expansion of international routes has more restrictions than domestic routes.
The development pattern of international aviation lines also reflects that the intensified competition will not last for a long time.
Whether it is from the adjustment of supply by domestic airlines or the slowdown in price-cutting competition from international airlines, the competitive environment on the supply side of international routes is improving. In the fourth quarter of 2016 or 2017, the revenue per passenger kilometer of international routes is expected to further improve.



Industry characteristics: expansion speed alternates between peaks and troughs. From the 1990s to the present, China’s aviation network has maintained rapid development.
International routes began to expand rapidly after 2000;
In 2011, 141 new international routes were added, the expansion reaching the peak in 20 years;
International routes exploded again in 2015, with the number of new routes exceeding that in 2011.
The main new routes are international routes around Japan, South Korea, Southeast Asia and other areas.




Although the overall international routes of the civil aviation industry maintain an expansion trend, it is worth noting that its growth process shows a phenomenon of alternating peaks and troughs.
In 1994, 13 new international routes were added, and in 1995, only 1 new international route was added;
In 1998, 22 new international lines were added, and in 1999, 3 international lines were reduced;
In 2004, 50 new international lines were added, and in 2005, 11 international lines were reduced;
In 2011, 141 new international routes were added, and in 2012, 62 international routes were significantly reduced.
Leqing Think Tank (WeChat public account: lqzk168) believes that this change in the number of routes is not only affected by global international passenger traffic, but also because:
International traffic rights have the characteristics of a quota system. Each round of negotiation for traffic rights is discontinuous, and the supply space of international routes shows a pulse-like growth.
Due to the shortage of international air traffic rights, when conditions permit, airlines tend to open major routes to the United States, Europe and other areas in advance to seize scarce resources, and traffic rights quotas are concentrated and consumed in a single year.
After concentrated and rapid expansion, on the one hand, existing routes will bear fare pressure; on the other hand, new non-mature routes will need to go through a cultivation period and there will be operating pressure in the early stage.
This will easily lead to lower returns on encrypted routes. In addition to squeezing out companies with poor ability to withstand pressure, it will also prompt airlines to make structural adjustments and ground some low-yield and low-strategic routes.
Finally, there is a phenomenon that after the international line has increased significantly, the volume will shrink or even decrease next year.




Judging from the route mileage, it basically reflects the same trend.
According to the applications for new routes announced by the Civil Aviation Administration of China, most of the newly opened routes in the first three quarters of 2015 were to Japan, South Korea, and Southeast Asia. Therefore, the mileage of the new routes and the duplication of previous routes are relatively small.
Judging from the characteristics of the industry, international routes have the characteristics of concentrated supply explosion and gradual digestion of demand. Low oil prices since 2015 have reduced the cost of opening new routes.
It is expected that starting in 2017, international lines will enter a stage where demand digests existing supply.




Competition from foreign airlines: Short-term route earnings are under pressure
In the market structure of China’s civil aviation industry, domestic routes still account for the majority.
Since there are basically no foreign airlines among the domestic civil aviation passenger operating entities, about 70% of the market share is concentrated in the three major state-owned airlines, and the market competition environment is relatively orderly and controllable.
Different from domestic routes, international routes will not only be affected by macro factors such as the global economy, but also face competition from foreign airlines, and their business strategies will directly affect the income of relevant international routes.
Beginning in the fourth quarter of 2014, international oil prices began to plummet;
In the first half of 2015, although oil prices fluctuated, they remained at a low level compared with previous years;
In the fourth quarter of 2015, oil prices fell rapidly again and bottomed out in the first quarter of 2016.
In airline operations, aviation fuel costs account for a high proportion, and fluctuations in oil prices have a greater impact on airlines' (especially short-term) profit fluctuations.




This time, the decline in oil prices has greatly improved the profitability of airlines and reduced their marginal costs through expanding routes and lowering fares.
Since foreign airlines are less restricted in the introduction of aircraft, the aviation industry in developed regions such as Europe and the United States is mature and local demand growth is relatively weak,the price reduction strategy of foreign airlines on their corresponding Asia-Pacific and other international routes has also exerted downward pressure on the revenue level of China's international routes.