China's 'big three' ready for airline mergers


Air China will be one of three big airline groups under the consolidation plan

SHANGHAI, China -- Three Chinese mega-carriers will emerge under aviation industry consolidation plans approved by China's State Council, airline sources said Tuesday, according to a Reuters report.

China Eastern Airlines, China Southern and Air China will form the core of the three airline groups, the sources said.

While last year was the worst in the aviation industry's history, China is regarded as having the best prospects for growth in 2002, analysts say.

The cabinet endorsement is the final green light required for the mergers, unveiled last April by aviation regulator the Civil Aviation Administration of China (CAAC) to boost the competitiveness of domestic airlines, the sources told Reuters.

"The State Council approved the merger plan for the airlines recently so that top airline officials can discuss their new year plans based on this big picture," said a source at one of the three carriers who declined to be identified.

The airlines are meeting CAAC officials in Beijing Tuesday and Wednesday.

'Crunch' time for industry

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Regional aviation industry analyst the Center for Asia Pacific Aviation said in its 2002 outlook released last week that this year would be the "crunch" time for China's airlines.

It said it expected Beijing to push ahead with consolidation, but compromises would be necessary to get the airlines to agree.

"If, as appears probable, price floors are officially removed on major routes, traffic growth can be maintained, but it will be at the expense of airline profitability," the center said.

Under the CAAC's consolidation plan, the nine carriers under its direct control will merge into three groups.

China Southern biggest

China Southern will tie up with China Northern and Xinjiang Airlines to form the group with the biggest fleet of 180 aircraft, 50.1 billion yuan ($6.05 billion) in assets and more than 34,000 employees, the CAAC has said.

Flag carrier Air China will merge with China Southwest Airlines and China National Aviation Corp, combining assets of 56.05 billion yuan, 118 planes and more than 20,300 employees.

China Eastern will merge with Northwest Airlines and Yunnan Airlines to form a group with 47.3 billion yuan in assets, 118 planes and more than 25,000 employees.

The aim of the overhaul is to consolidate a fragmented aviation sector of about 30 carriers and create big, internationally competitive airlines.

Chinese carriers have been discussing how to combine disparate fleets, rationalize routes and combine operations, but analysts said final completion of the consolidation would take longer as it involved a lot of assets and debts.

Three other groups

Another airline source said the CAAC revamp of the sector would also include setting up three additional group companies to trade jet fuel, supply aviation equipment and run aviation computer systems.

"The CAAC earlier planned to set up one company for information systems and another for oil and aviation equipment. But the final plan will separate the oil and equipment into two groups," the unidentified source told Reuters.

He said the CAAC also planned to surrender control of about 120 Chinese airports to their city governments and retain ownership of the airports in Beijing and Tibet.

The Center for Asia Pacific Aviation says the most pressing issue for overall airport development is funding for expansion, particularly in the western provinces.

"The CAAC is increasingly seeking outside investment to assist with this," it said.

The center also said China's large and growing domestic market provided a hedge against uncertainty facing the international sector.

Additionally, any decline in inbound numbers should be offset by a growth in outbound tourism, it said.

This would happen as more countries were added to China's list of approved tourism destinations.