China Eastern Airlines' strategic sales of equities to Singapore Airlines have sharply focused attention on the restructuring of the booming Chinese aviation industry to meet the rapidly growing demand for global travel.

 

Outgoing airline passengers from China are seen to be increasing at a faster rate than those on domestic flights. In July, for instance, passengers on international flights increased 20 percent year-on-year compared with 15 percent for domestic flights.

 

The trend is widely seen by aviation industry experts to have touched off the race between domestic airlines to search for equity partners to expand their global reach and to quickly lift the standard of management and service to international levels.

 

Air China, the nation's largest carrier, forged a cross-shareholding partnership with Hong Kong's Cathay Pacific last year. The agreement between China Eastern and Singapore Airlines, which is pending shareholders' approval, is simply a move in the same direction by another major domestic carrier.

 

These alliances are the opening moves of what aviation experts expect to be a grand restructuring of the airline industry. Some analysts say Air China, with the most balanced route structure among all the aviation companies, is likely to lead the industry restructuring by merging other companies.

 

"Consolidation is an inevitable trend in the global aviation industry, you can find examples in developed countries such as Germany and the United States where only a few airlines have survived," Air China Chaiman Li Jiaxiang recently said while releasing his new book Route to Fly in Beijing.

 

"As one of the world's fastest growing aviation markets, China needs an internationally competitive airline. That's Air China's target. And that must be realized through consolidation," Li said.

 

China has more than 40 airlines. Consolidation and restructuring could avoid "redundant investment and excessive competition" in the aviation industry, Li added.

 

Experts and analysts say domestic carriers should improve their management and services and reduce the operating cost to alleviate the rising cost of fuel oil.

 

Shanghai is one of the three largest aviation centers in China. All airline companies have put a premium on Shanghai in their future development strategies.

 

China Eastern Airlines takes the leading position in the Shanghai market with 35 percent of the market share, followed by Shanghai Airlines with 18 percent and Air China with 12 percent.

 

Wang Wanlong, director of communications of Shanghai Airlines, told China Daily that the company so far has no plan to team up with either domestic or foreign aviation companies.

 

In the coming year or two, Shanghai Airlines plans to expand its flight routes from domestic cities to international business cities by opening long-haul flight routes in major global business cities, like Vienna, Hamburg, Zurich and Seattle, according to Gu Jiadan, deputy manager of Shanghai Airlines.

 

Ma Ying, an analyst at Haitong Securities, says the fast-growing domestic aviation market calls for an industry conglomerate by incorporating several domestic airline companies. "The country is stepping up efforts to build its own super carrier with an international competitive edge," Ma said.

 

Largely driven by strong passenger demand and the rising value of the Chinese currency, the local aviation industry has shown unprecedented growth momentum in the past year.

 

Statistics from the Central Administration of Civil Aviation of China show the industry developed quicker than ever before. In the first six months of this year, the customer to seat ratio of the whole industry averaged at 73.9 percent, up 1.6 percentage points from a year earlier.

 

The combined turnover from the main business in the industry reached 85.9 billion yuan, up 19 percent and the aggregate profit notched up was 1.5 billion yuan, up by 3.9 billion yuan from last year's loss.

 

In these first six months, five listed aviation companies posted an aggregate turnover of 79.9 billion yuan, up 16 percent from a year earlier. Despite a 15 percent increase in costs resulting from the surging oil prices, these companies found their average gross profit rising from 12.7 to 13.6 percent.

 

(China Daily November 9, 2007)