China May Consolidate Three Airlines into Two

The profitability of the big three -- Air China Ltd, China Southern Airlines Co Ltd and China Eastern Corp Ltd. -- came under pressure in 2006, mainly due to more expensive fuel.


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SYDNEY (XFN-ASIA) - China is considering a fresh round of reform in the airline industry that would see it consolidating the country's big three airlines, Air China Ltd, China Southern Airlines Co Ltd and China Eastern Corp Ltd, into two mega carriers, the Center for Asia Pacific Aviation (CAPA) said, citing industry sources.

The Sydney based aviation consultancy said profitability of the big three came under pressure in 2006, mainly due to dearer fuel, while Shanghai's China Eastern also struggled due to its bloated cost structure.

It noted that China Eastern unsuccessfully sought a foreign partner in 2006 to help improve its finances, adding that it now appears the Chinese government is looking for a domestic solution to the sector's troubles.

CAPA said a deal between China Eastern and China Southern is logical, as the latter retains significant operations in Guangzhou and Beijing, but is facing intense competition from the powerful Air China-Cathay Pacific combination.

Air China-Cathay are also planning to establish a Shanghai-based cargo venture in coming months.

'The landscape in China is shifting away from one carrier for each mainland hub (Beijing, Shanghai and Guangzhou) towards large, integrated carriers with a strong presence in each of these cities, plus Hong Kong,' CAPA said.

It noted that investors have pushed airlines' share prices higher recently, reflecting lower fuel prices, but also because the possibly anticipate of more mergers and acquisitions.

Earlier, Hong Kong newspaper, The Standard, reported that Beijing is likely to inject at least 10 bln yuan into the 'big three' mainland airlines to lower their gearing and improve their profitability.

Citing a senior Air China official, the newspaper said the government injection for Air China, China Eastern, and China Southern could be as much as 20 bln yuan.



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