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 Travel demand by an increasingly affluent Chinese population is
set to soar long-term, a huge business opportunity for both
countries' carriers. But China's major airports are already heavily
congested, limiting the potential for good slots and creating a
roadblock to an aviation accord that would deepen ties between the
world's two largest economies.
In exploratory talks held in May in Washington, details of which
have not previously been reported, China offered to permit more
flights to and from Beijing, Shanghai and Guangzhou while lowering
caps for other domestic cities, U.S. officials said.
The talks, the first in four years, ended with the U.S. side
refusing to pursue formal negotiations until China presents plans to
reform what the United States calls an opaque allocation system that
tends to give big Chinese state carriers the best time slots, the
U.S. officials told Reuters in a telephone interview.
A senior Chinese aviation official said the U.S. was dragging its
feet.
 "In the past, the Chinese side was not as enthusiastic as the
Americans when it came to market liberalization because we didn't
need that many flights," the source told Reuters. "But it's the
other way around now."
Washington has made clear the ball is in Beijing's court and is
waiting for the Chinese side to respond, one person said. It has
encouraged China to follow guidelines from the International Air
Transport Association (IATA) to accommodate carriers despite
congestion.
Officials from both countries spoke on condition of anonymity.
China's aviation regulator did not respond to requests for comment.
While there is interest in a new bilateral air services pact,
industry experts say an 'Open Skies' agreement, which would remove
market restrictions and allow airlines to coordinate capacity and
pricing if they have government approval, is likely years away.
HUGE DEMAND SEEN
Under existing agreements, Chinese passenger carriers are limited to
180 round-trip flights per week, while U.S. passenger carriers are
allotted 160 weekly round-trip flights between the United States and
three of China's mega cities.
 But airlines are already brushing up against these limits. The top
four Chinese airlines have on average scheduled 148 round-trip
flights per week from July through September this year, while their
U.S. rivals have hit 128 weekly round-trips on average, according to
aviation data and analytics company OAG.
Moreover, the number of air passengers traveling to, from and within
China is set to nearly triple by 2034 to some 1.3 billion,
surpassing an expected 1.2 billion for the United States, according
to IATA. (For graphic: http://reut.rs/1L5QPVA.)
Although China is investing heavily in new airports, its major
airports are operating at above or near capacity, limiting the
country's ability to assign new attractive time slots to carriers
equally. Military restrictions on flight paths are also exacerbating
congestion.
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Industry experts say U.S. airlines could end up less commercially
competitive if Washington were to rush into a deal that resulted in
bad flight times and lengthy layovers for their connecting
passengers.
"They would be losing a lot of money running flights that arrive and
depart in the middle of the night," Joe Tymczyszyn, former executive
director of the US-China Aviation Cooperation Program, told Reuters.
He did not speak on behalf the program.
Capping capacity for the time being helps U.S. airlines, the most
profitable in aviation, as they try not to overshoot demand to keep
fares from falling.
Airlines for America, the trade group representing the largest U.S.
carriers, said in a statement it supports efforts to liberalize
aviation markets even though challenging issues must still be
resolved.
An executive at state-controlled Air China Ltd said the airline had
not been affected by the slow pace of bilateral talks but might be
in the future if it needed to add more flights.
In the long run, the biggest U.S. carriers are keen on an Open Skies
agreement as it would allow airline partners to request immunity
from antitrust law. Joint ventures with Chinese carriers could then
crowd out smaller competitors and boost profits on trans-Pacific
routes.
United Continental Holdings Inc has told investors of its interest
in a Chinese joint venture once Open Skies are in place.
Delta Air Lines Inc is set to become the first U.S. airline to own
part of a Chinese peer, announcing plans last month to buy a 3.55
percent stake in China Eastern Airlines Corp Ltd for $450 million
and gaining an "observer" seat on the Chinese carrier's board.
(Reporting by Fang Yan in BEIJING and Jeffrey Dastin in NEW YORK;
Additional writing by Joseph White; Editing by Matthew Miller and
Edwina Gibbs)
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