Consolidation in the China air market

Over the last few years, airline consolidation in China has gained momentum as major carriers seek suitable partners to withstand competitive challenges, including fuel costs, as well as to expand their market reach and speed entry into both the international and domestic markets.

The pace of consolidation was accelerated after the Civil Aviation Administration of China (CAAC) introduced new rules in July 2005, to further open the civil aviation industry to domestic investors, including private-sector investors, resulting in the establishment of more new Chinese airlines and creating morecompetition.

Excluding foreign airlines, China’s three leading carriers Air China Ltd, China Southern Airlines Company Ltd and China Eastern Airlines Corporation Ltd – popularly known as the ‘Big Three’ – and Cathay Pacific Airways, Hong Kong’s de facto flag carrier, are the principal players in the China market, whose air cargo is forecasted to rise 12 per cent to 4.45 million tonnes this year.

Looking back four years ago, Air China and China Eastern, a majority stakeholder in China Air Cargo Airlines, attempted a merger of their cargo divisions, and despite reaching an agreement, they failed. History repeated itself when another proposal last year by the two carriers’ parent companies to merge also collapsed with Singapore Airlines taking on a spoiler’s role.

Over the same period, there was also speculation that China Southern would merge with a Chinese airline, but it did not happen. However, the airline recently formed a cargo joint venture with AirFrance-KLM.

“As at December 31, 2007, Air China, China Southern and China Eastern accounted for 28.2 per cent, 25.7 per cent and 21.4 per cent, respectively, of the total commercial air traffic (as measured in RTKs) handled by Chinese airlines”, an aviation official said.