The Chinese aviation market continues to expand at a significant pace, although consolidation appears to be the game which airlines are playing.

Consolidation of China airline market

  • In February, Air China Limited and Cathay Pacific Airways Limited signed a framework agreement to establish a jointly owned cargo airlines company. This is Air China Cargo and it will operate from Shanghai.
  • In March, Air China, the country's flag carrier, unveiled a takeover of Shenzhen Airlines in a move that amounted to a re-nationalisation of the beleaguered private airline, whose owner and senior executives were under investigation for unspecified economic crimes.
  • China Eastern Airlines ("CEA") and Shanghai Airlines have recently merged and analysts have reported that CEA has applied for additional funding to build a closer relationship with Guangzhou-based China Southern Airlines. CEA has also announced that it is joining Skyteam, which China Southern Airlines is a member of. Separately, CEA and Taiwan-based China Airlines have signed an agreement to cooperate on cargo and passenger flights, logistics and maintenance.
  • Meanwhile, the vultures have been circulating over Macau with the demise of Viva Macau. It operated regional flights under a sub-concession from Air Macau and there are a number of investors looking at establishing a new carrier.

Whether the authorities will seek to apply China's Anti-Monopoly Law ("AML") to any of these developments remains to be seen. The AML regulates three forms of monopolistic conduct: monopolistic agreements, abuses of dominance and concentrations of business operators. It applies to all undertakings that engage in manufacturing and/or selling of products, or the provision of services, in (or to) China. The only exception stated in the AML is for undertakings operating in the agricultural sector in China

Interpretation of SGHA provisions by the Chinese courts.

Risk allocation: airlines and airport service providers

Long time readers of this publication will recall prior articles on the ground handling regime in China and, in particular, the applicability of key provisions in the IATA standard ground handling agreement ("SGHA").

Some years ago, the PRC Supreme Court held that, since IATA is not a permanent arbitral tribunal, any agreement providing for the resolution of disputes by IATA Arbitration (Article 9 of the main agreement) will not be valid. That remains the case since China does not recognise ad hoc tribunals.

Of more significance, however, is how Chinese courts should interpret the key liability and indemnity provisions in Article 8 of the Main Agreement. Claimants in various ground handling disputes in China have sought to argue that Article 8 amounts to an exclusion clause which Chinese law does not permit, alternatively that the indemnities cannot be upheld on the basis that the other party has been "grossly negligent" (words not found in the Agreement) or "reckless with knowledge that damage will probably result" (Article 8.1). These are important issues as they go to the heart of regulating risks through contracts. Whilst the SGHA lacks the detail and teeth of a bespoke contract, it is nevertheless in use throughout China and is the basic agreement which aviation insurers expect their insureds to adopt.

There are two significant aviation ground handling disputes before the Supreme Court of the PRC. The first concerns the constructive total loss of a Malaysian Airlines A330-200 aircraft in March 2000. The second case concerns damage to a Cargolux B747-400 in Shanghai in January 2006. In the former case, the Beijing High Court ruled in favour of the ground handler but gave little guidance on how the key indemnity and liability provisions of the SGHA should be interpreted. In the latter case, the Shanghai High Court ruled against the maintenance, repair and overhaul (MRO) provider but gave a long judgment devoid of detail on the key issue.

Whether the Supreme Court is now willing to assist the aviation industry and its insurers by providing clear guidance on the meaning and effect of Article 8 of the SGHA remains to be seen. We will keep readers briefed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.