The bidding war between Air China's parent and Singaporean
investors for a slice of China Eastern Airlines is really all about
control of the hugely lucrative Shanghai skies that hold the key to
success for any airline aiming to make it big in this part of the
world and beyond.
Earlier this week, China National Aviation Corp (CNAC) promised
it would make a counteroffer of at least HK$5 per share - or 32
percent more - for its Shanghai-based rival if shareholders
rejected its union with Singapore Airlines and investment agency
Temasek.
The winner of the deal will gain a 24 percent stake in China
Eastern and, more critically, access to Shanghai, which is striving
to become an international airline hub.
It's estimated that by 2015, when the financial center fully
establishes its position as an international airline hub, the city
will have doubled its capacity for passengers and nearly tripled
airfreight at its two airports of Hongqiao and Pudong
International.
"The war is centered on the dominance of Shanghai," said Li Lei,
an analyst with CITIC China Securities Co. "The city is an
attractive market with tremendous potential for growth and is
strategically important for any airline, so who will let go of this
lucrative piece of meat?"
As outlined in a strategic plan by the General Administration of
Civil Aviation and the municipal government, Shanghai will complete
the frame construction for an international airline hub - with an
annual capacity of 84 million passengers and 4.1 million tons of
airfreight - by 2010, when the city will host the World Expo.
By 2015, Shanghai will fully establish itself as an airline hub,
as its passenger and cargo capacities are expected to surge to 100
million and 7 million tons.
Even now the city has emerged as a global cargo hub after the
world's two top carriers DHL and UPS created their hubs at the
Pudong International Airport, whose cargo volume ranked sixth
globally at the end of 2006.
As for passenger volumes, Shanghai is almost at the same level
as Beijing, but has a better customer base because a significant
part of them are business travelers, and has tremendous growth
potential, analysts said.
Authorities have stressed the goal of establishing Shanghai as
an international transfer point for passengers.
"So the contest between Air China and China Eastern Airlines is
all about market share in Shanghai, and that is critical in their
future positions in China as well as globally, and in their
strategic planning - though it's very hard to calculate the
benefits in dollars," said Xia Fulu, an analyst with Industrial
Securities.
The market share of China Eastern in Shanghai is now nearly 40
percent, followed by Shanghai Airlines, with 18 percent, and Air
China, about 13 percent.
Air China, the nation's largest airline, has gained a dominant
role in its home base of Beijing and significant market share in
another regional hub, Hong Kong, owing to its partnership with
Cathay Pacific Airways. But it has yet to find a favorable position
in Shanghai, which has the potential to outperform Beijing and Hong
Kong to become a national hub.
In a statement, the company has made it clear that it is
"dedicated to bringing about full-frontal partnership between China
Eastern and its biggest rival Air China as well as the
Beijing-based company's partners, particularly in establishing
Shanghai as an international airline hub with joint effort".
It expects to restructure the industry to strengthen its
foothold in Shanghai over the next two years and prepare for the
harsh competition when China's aviation market fully opens up in
2010, Xia said.
"Its weakness in Shanghai has always been a sore point. Merger
and acquisition is the fastest and the most convenient way to
enhance its market share in Shanghai."
The practical significance of investing in China Eastern is the
benefit of gaining rights to more air routes without the lengthy
government examination and approval process.
China Eastern has stressed that its partnership with Singapore
Airlines excludes cooperation in route development, but analysts
doubt that.
"The promise is hardly persuasive. Who believes that Singaporean
investors are paying about $900 million just to help a domestic
airline overcome its difficulties?" Xia said.
A partnership between China Eastern and Singapore Airlines would
no doubt deal a setback to Air China, which at least expects to
maintain the status quo. "Without Shanghai, Air China's dream of
becoming a 'super carrier' will be empty talk," Xia said.
Li Shurong, an analyst with Guosen Securities, said: "China
Eastern's proposed sell-off to Singaporean investors cannot enhance
the Chinese company's competitiveness immediately. But it could
serve as an obstruction for Air China to restructure the industry
and bring about cooperation with the Shanghai-based company."
Analysts believe the bidding war will not produce a result soon
as new prices are offered and government approval of the new offer
(by Air China) will also take time.
"Air China is doing what it can to block the early entry of
foreign competitors," Xia said.
(China Daily January 9, 2008)
