Back in December 2006, local travelers had an interesting choice to make. With 1 yuan, they could have opted to travel 12 km by bus in Beijing.

Or with the same cost, they could have taken a plane from Shanghai to Jinan, hundreds of km away, made possible by Spring Airlines.

Last November, Spring Airlines declared a newly launched route from its base, Shanghai, to Jinan, capital city of Shandong Province. Further, it announced it was offering 10 percent of the route seats, or 400 seats, from November 30 to December 10, for the price of only 1 yuan compared to the full price of 760 yuan. In just three days, the 1-yuan air tickets were sold out.

However, on December 14, Jinan Price Bureau decided to punish this sale with a 150,000-yuan fine on the grounds that the Spring Airlines price was lower than the lowest government-guided price, which is 55 percent of the full price.

The "1-yuan air tickets" triggered an argument not only over the reasonableness of low-price air tickets, but also over how budget airlines would ever find their way out of financial difficulty with or without such schemes.

The discount plan

Spring Airlines, one of the first private airlines in China, positions itself as a budget carrier.

Spurred by commitments accompanying China's accession to the World Trade Organization, the Chinese Government has, over the past few years, begun to deregulate the domestic civil aviation market, a market long dominated by state carriers. Since 2004, Chinese aviation authorities have granted licenses to 10 small air carriers, including Spring Airlines, Okay Airways, Junyao Airlines, United Eagle Airways and China United Airlines.

In order to compete with the established state airlines, most of the newly born private carriers, learning from their overseas counterparts, adopted a low-pricing strategy. Spring Airlines posted fares as low as 199 yuan for a flight from Xiamen to Shanghai, which is less than a hard sleeper cabin train ticket for the same distance.

Spring Airlines in 2005 suggested it would restrict or end food service, limit the size and weight of passenger luggage and avoid using "gates" at the airport. Passengers would instead be taken to airplanes by lining up along a runway. Some other private carriers have sought allowances to pay less in compensation to passengers for flight delays.

Consumers can benefit as cheap carriers slash prices to compete for market share, though often the rock-bottom prices that get advertised only apply to a few tickets for flights at odd hours.

On the other hand, private airline service is satisfactory. Passengers are hoping Okay Airlines will fly more routes, for instance, because they are generally satisfied with its service.

"The service is about the same as the others," said Wang Zhaoping, a recent Okay Airways passenger. "Not only is there more leg room, but there are also real leather seats onboard this Okay Airlines Boeing 737. Their planes, compared with Air China, are very spacious and rather comfortable."

Survival of the cheapest?

Low-cost airlines have been a success in the United States and Europe, and a new batch now is swooping into China to see if the formula works here. They are popping up fast, promising travelers more choices and cheaper fares. But experts note that China is quite different from the United States and Europe, which have huge, open aviation markets. This is very likely to stop Chinese low-cost carriers from enjoying the same success. as their Western counterparts.

Many low-cost airlines keep expenses down by flying out of secondary airports, avoiding major hubs where takeoff and landing fees are much higher while still getting passengers close enough to their destinations. That works fine in U.S. cities like Dallas and Chicago, as well as in major global hub London with its multiple airports, but there are few similar places in China.

"At present, most secondary or even smaller airports have been merged or held by the three largest aviation groups," Zhou Hengjia, an air ticket agent in Beijing, told Beijing Review.

Besides, there are still a string of costs that are out of their control. Conventional wisdom suggests that 85 percent of overall airline operational costs in China are fixed. People can only find margins in the remaining 15 percent, most of which involves personnel and their income and benefits, although Liu Jieyin, President of Okay Airways, said he can control as much as 20 percent of his costs. Despite effective attempts to control fixed operating costs, variable costs, such as rising fuel prices have dampened the new airlines' optimism.

The bulk of uncontrollable costs involve jet fuel, airplane maintenance and takeoff and landing fees. These days, in particular, jet fuel prices have upset airline bosses the most. Along with international oil prices, domestic jet fuel prices have continuously risen over the past two years. In the first five months of 2005, China's domestic airline industry posted a loss of 340 million yuan as a result of rising jet fuel prices. In the first half of 2006, the cost hemorrhage accelerated, resulting in losses of about 2.5 billion yuan. This prompted the entire domestic airline industry, including non-state carriers, to seek fuel surcharges, which were approved on August 26, 2006, and passed on to passengers. As of September 2006, the Chinese Government had approved four fuel surcharge hikes for the year. Yet, to the embarrassment of the newly approved airways, the resulting ticket price increases have undermined their reputation as economy alternatives.

"In China, if you want to be a low-cost carrier, where do you find your pilots?" said Liu. "If you pay more to hire foreign ones, your costs will be higher than others. Oil prices cost the same for everyone. How do you compete?"

The Chinese budget carrier also claims that current civil aviation policies hinder long-term planning and that this affects the hiring of pilots, the buying of planes and sourcing for funding. To survive, Okay Airways is planning to diversify into aircraft servicing as well as cargo transportation within China.

"If we are following the model of Air Asia and Singapore's Tiger Air as budget carriers, I think it's tough to achieve this in three to five years," said Liu. "We need the support of policies so that we can import planes at a much lower price, and in terms of petrol supply, use of airports and sale of tickets, we can get strong support from the market."

Zhou, the ticket agent, added, "A low-price strategy should be supported by low cost, but costs of domestic private airlines are fairly high. Unable to avoid competition with large airlines and without preferential state policies, how can budget airlines survive easily?"