Though this week's public hearings on China's airline business are an encouraging sign that consumers' needs are becoming more of a factor in setting fares, there is very little chance they will have any effect on the government's immediate fare deregulation plans. A proposal to allow prices to fluctuate in a band 40 per cent above and 25 per cent below the current official fares has had government endorsement for months and will likely be executed soon after the hearings. Even if it is not the full price deregulation that airlines and travellers need, it is a step in the right direction. The goal, of course, has to be freedom for the airlines to set the prices they require in order to be both competitive and profitable. Getting to that point from the current government-dictated pricing of 75 fen (70 HK cents) per kilometre would be difficult enough, but the parallel challenges include rationalisation of unprofitable and overserved routes, the absorption and closure of unprofitable airlines, and opening the market to foreign competition as required under World Trade Organisation rules. The underlying logic driving all reforms has to be introducing a clear economic relationship between the cost of providing services, and fares, revenue and profit. Under the current arrangements, these relationships are murky at best. Fares are meant to be the same no matter where flights originate or land, and there is no flexibility for differences based on location or carrier efficiency. Official prices, however, are largely ignored and travel agents work with airlines to provide deep discounts, sparking destructive cycles of price competition that have put most domestic airlines in a precarious financial state. Consumer demand and market dynamics will also need to play a leading role as the government extricates itself from daily operation of the airlines and steps back to concentrate on safety regulation. The General Administration for Civil Aviation of China (CAAC) is both the controlling shareholder of the country's three biggest airlines and the industry regulator. Rules are in place for foreign airlines to buy as much as 49 per cent of any Chinese airline and domestic investors are also being allowed to invest in the industry. Well-run airlines operating on routes which are profitable will surely draw domestic and foreign capital, and outside investment can help speed up the industry's transformation. Under the regulated fare system, some discounting based on CAAC formulas is allowed, though in practice much more takes place. The short-term aim of the new pricing band is to undermine and eliminate this discounting. If consumers and the industry respond well to this intermediate step, full price deregulation should be allowed quickly. Smaller and less solidly managed airlines may be fearful of the effect speedy deregulation will have, but such fears should not be allowed to slow reforms. Instead, the government should give guidance on the time frame and allow companies leeway to assess their options, which may involve merging or taking on new investment. This week's public hearings are being held to comply with a 1998 law requiring monopoly industries to consult consumers before raising prices. The CAAC is to be commended for conducting what appears to be more of a genuine consultation than the one carried out by China's railways earlier this year. The new pricing band is a done deal, no matter what this week's consumer panel says. However, the views expressed should play some role in shaping future reforms, as it will be the consumers who decide which routes and which airlines are viable once the industry is fully deregulated and open to foreign competition.