Facing growing competition as the country opens its skies, domestic airlines may seek mergers and acquisitions with its rivals to fend off increased rivalry from home and abroad, analysts said.

 

A tieup with their counterparts will help enhance the domestic carriers' regional network, reduce costs and boost their bottom line.

 

Welcoming Singapore Airlines as a stake holder will help Shanghai-based China Eastern Airlines Corp Ltd benefit from SIA's premium brand and managerial expertise.

 

The Singapore-based carrier announced earlier this month that it would pay about US$918 million together with its parent Temasek Holdings for a combined 24 percent stake in the airline as it eyes a bigger market share in the Chinese mainland's booming aviation market.

 

The deal will see SIA helping out in six areas - flight management, operations, service, procurement, training and marketing. A limited overlapping between the two carriers' routes will reduce competition and help expand the route network of both companies, officials at both carriers said.

 

The Singapore carrier has seconded middle-to-senior management officials to work with its Chinese partner in marketing, service and finance.

 

After the share sale, China Eastern's debt-to-asset ratio will decrease to 80.2 percent from 95 percent.

 

Net asset value per share will rise to 1.8 yuan from 0.62 yuan now, compared with 2.6 yuan of Air China Ltd and 2.3 yuan of China Southern Airlines Ltd.

 

"The deal will do much good to China Eastern as Singapore Airlines' brand, service and management is among the world's top," said Ma Ying, an analyst at Haitong Securities. "And that also poses some threat to China Eastern's domestic rivals such as Air China and China Southern Airlines."

 

Increasing competition and the tieup of their rivals have caused other domestic carriers to consider a merger in the Chinese market which is expanding at a pace three times that of the global rate.

 

Air China, 20-percent owned by Hong Kong's biggest carrier Cathay Pacific Airways Ltd, wouldn't "exclude the possibility" to restructuring with other domestic airline companies, including rival China Southern, to consolidate even deeper as the country opens its skies, its president, Cai Jianjiang, told reporters last month in Hong Kong.

 

Though both Air China and China Southern issued statements denying such a deal was in the pipeline, analysts said if the merger proceeded it would be in line with the government's policy of consolidating the country's aviation industry.

 

The State Assets Supervision and Administration Commission of the State Council said in the "Guiding Opinion for Promoting State-owned Capital Adjustment and Reorganization of State-owned Enterprises" that the adjustment and reorganization of large-scale state-owned enterprises should be accelerated given the increasing competition in the civil aviation industry.

 

The air transport industry has been growing rapidly by an average 16 percent annually in recent years and the commission has noticed an increasing shortage of technical staff, air space resources and insufficient airport services. Therefore, a consolidation among domestic airlines can reinforce their domestic networks and help Chinese carriers to fend off competition from abroad.

 

The General Administration of Civil Aviation, the regulator, said in August that it would not accept any applications to set up new airlines to prevent the country's aviation market from growing too fast. The suspension of new applications will last until 2010 and carriers, in the meantime, are also facing tougher controls as they try to expand their fleets. The CAAC will also apply stricter conditions on approving new airlines currently awaiting licenses.

 

The CAAC said in August that the nation's aviation sector swung from losses to profits in the first half of this year.

 

China Eastern has posted a net profit of 58.21 million yuan (US$7.73 million) in the first half of 2007, following a loss of 2.78 billion yuan for all of 2006.

 

Cao Jianxiong, president of the Shanghai-based carrier, said the company will "definitely" return to the black in 2007 after losing money last year.

 

 

(Shanghai Daily September 19, 2007)