Home' Asian Aviation : AAV March 2010 Contents I
n Chinese astrolog y, the Year of the Tiger
which has just beg un – is traditionally
associated with a period of great upheaval.
This thought may well have been on the minds
of the bosses of China Eastern Airlines, who
signed the final documents to seal the carrier’s
merg er with Shanghai Airlines just before the Chinese
New Year holiday.
The first step of the merger of the two Shanghai-based
carriers sees unified pricing , marketing , maintenance
and ground handling . Shanghai Air was reporting losses
before the deal, a fact reflected in its junior-partner status
in the partnership.
The smaller carrier does, however, own 80 percent
of China United Airlines, a former military passenger
airline, which is still used extensively by People’s
Liberation Army top brass and select VIPs. Its loss
would not have been acceptable to the government, it is
thought, which is why the parent company was pushed
in the direction of China Eastern, which has had robust
passenger growth even during the midst of the financial
crisis last year, thanks to the health of the Yangtze River
For example, the larger carrier has just posted an 18
percent increase in traffic measured in revenue passenger
kilometres (RPKs) in July, while international RPKs that
month fell 2 percent year-on-year
The country ’s anti-trust body, the China Se curities
Reg ulatory Commission (CSRC), approved the merg er,
which was announced last July, at the end of last year.
Industry obser vers expect the CSRC to be equally in
favour of other merg ers this year, a s the Civil Aviation
Administration of China’s (CAAC’s) head Li Jiaxiang
quietly pushes for more consolidation.
Former Air China CEO Li has been in his role as
minister of the CAAC ’s g eneral administration for just
over a year and is now flexing his muscles. His view that
China needs fewer – not more – airlines, is in contrast
to his predecessor Yang Yuanyuan.
US model abandoned
Yang had favoured the pre-subprime crisis US model
of six major airlines, with a mix of domestic and
international players . He counselled against merging any
of the big three and actively encoura ged regiona l carriers
to challeng e the big airlines.
By contrast, Li is understood to be in favour of beefing
up Air China , a lthough his public statements carefully
reflect his role as a regulator for the entire industry.
However, Air China’s parent company, the state- owned
China Nationa l Aviation (CNAC), look s like the
biggest winner in the October sale by CITIC Pacific (an
arm of China Internationa l Trust and Investment) of its
stake in Hong Kong flag carrier Cathay Pacific Airways.
Air China increase d its stake from 17.5 percent to 29.9
percent, just below the 30 percent take-over bid trigger.
Air China still lies b ehind the largest shareholder
Swire Group, which now has just under 42 percent of
the publicly-listed company. Meanwhile, Cathay Pacific
itself owns 18 percent of Air China .
The stake will not give Air China significant say in
Cathay ’s management, but analysts point to the role
Cathay’s regional subsidiary Dragonair may play in
competition with China Southern Airlines, whose
market is in Guangdong , the province neighbouring
Hong Kong .
For now, cooperation bet ween the Hong Kong
and Beijing -based companies is limited to a strategic
relationship that includes reciprocal sales representation.
But should it ever be allowed or able to acquire deeper
stake in Cathay, Air China has had practice in operating
dual brands .
The carrier uses its wholly- owned subsidiar y
Shandong Airlines for routes that mainly cater to leisure
travel and family visits. Shandong , a regiona l carrier in
China’s north-east acts as an economy-class feeder airline
for Air China from secondary cities, as well as operating
limited international services to Russian border towns
with significant expatriate Chinese populations.
Similarly, CNAC’s 25 percent stake in budget carrier
Shenzhen Airlines ensures it takes its share of the
lucrative Guangdong market.
Air China is thought to be keen to leverage Hong Kong
as an entry port into mainland China, to help bolster its
domestic network – despite the fact that it and Cathay
Pacific belong to opp osing airline a lliances.
Air China is a member of the Lufthansa and United
Airlines-led Star Alliance, while Cathay is a founding
member of Oneworld, which also includes American
Airlines (AA) and British Airways. Despite this, the two
carriers code-share extensively, especially on Dragonair
The two global groupings have turned a blind eye to
the cross-alliance code-shares, in part because they are
With a change of leadership in China’s aviation administration last year, the country has given new impetus
to consolidation in its airline industry, as Justin Wastnage reports.
Airlines consolidate in China
Asia nAviation | MARCH 2010 19
China Eastern Airlines
recently signed a
merger deal with
Shanghai Airlines that
gives it a 50 percent
share of the capacity
at Pudong Airport.
7/03/10 12:09 PM
7/03/10 12:09 PM
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