Air China seeks to beef up before liberalisation

Leading carrier considers merging with mainland rivals

Facing stiff competition as the mainland prepares to open its air corridors, Air China said for the first time yesterday that it was considering acquiring other domestic airlines.

'We have to grow bigger in light of the speeding up of the open skies policy in China,' Air China president Cai Jianjiang said. 'We are not ruling out consolidating with 'brother' companies.'

Mr Cai said such 'brother' companies included Shanghai Airlines, Hainan Airlines and China Southern Airlines.

Pressure to consolidate is intense. Under the new air service agreement signed last month, Beijing agreed to allow three new United States carriers into the country and to more than double the number of flights between the US and the mainland to 23 from 10 in five years.

The agreement comes as air traffic is expected to grow 14 per cent or more each year from now until 2010.

Currently, transpacific flights operated by US carriers outnumber those of mainland carriers, largely because they are more efficient and have greater brand recognition. The US has already used up its existing quota of flights to the mainland.

A spokesman for China Southern offered no comment on Air China's statement.

'The combined market share of China Southern and Air China would exceed 50 per cent,' Credit Suisse transport analyst Karen Chan said. 'It may or may not happen since many local carriers will object to the merger, which will create a supercarrier.'

Shanghai Airlines also rejected the suggestion of a merger.

'There is no chance that we will merge with Air China,' said Shanghai Airlines' senior vice-president Gu Jiadan.

'Instead of merging by administration forces, airlines should increase their competency through market forces.'

Shanghai Airlines is owned by the Shanghai government and Hainan Airlines, which is owned by chairman Chen Feng and US investor George Soros.

Mr Cai said Air China had yet to submit a proposal to the central government, nor did it have a timetable for consolidation.

A long-speculated merger between China Eastern Airlines Corp and Shanghai Airlines was aborted earlier this year after Shanghai's government rejected the proposal.

'It is a hard job for the central government to balance the interests of different parties, especially when Shanghai Airlines is owned by the Shanghai government while China Eastern is controlled by the State Council,' Ms Chan said.

The mainland civil aviation industry has undergone periodic reshuffles in the past 30 years. In the late 1980s, Beijing split the single CAAC airline into regional carriers, which was followed by the advent of many new airlines.

But upset by the safety records of the new carriers, the industry regulator put the brakes on expansion.

In 2002, Beijing consolidated nine state-owned carriers into three groups. China Southern absorbed China Northern Airlines and Xinjiang Airlines.

China Eastern acquired China Yunnan Airlines and China Northwest Airlines, which was near financial collapse, while Air China took over the remaining two carriers.

Now, airlines are jockeying for position. China Eastern is to sell a combined 24 per cent stake to Singapore Airlines and Temasek Holdings for US$933 million.

Air China sold its stake in Hong Kong Dragon Airlines in return for 17.5 per cent of Cathay Pacific Airways. Cathay raised its stake in Air China to about 17.5 per cent after the transaction and gained a foothold in the lucrative Shanghai market.