UK: When Many Become One – The Polygamous Road Ahead For PRC Carriers

Last Updated: 2 March 2011
Article by Cheryl Guan

Over the last decade, PRC carriers have consolidated around three main carriers. This trend looks likely to continue. This article tracks the historical backdrop, and sets the stage for a subsequent discussion on anti competition issues.

In July 2000, the all-powerful General Administration of Civil Aviation of China (CAAC) ordered the top ten airlines in its fold to consolidate into three airline groups around Air China, China Southern Airlines and China Eastern Airlines.

Other than to prepare for full entry into the World Trade Organisation, the consolidation of PRC carriers was chiefly to streamline airline operations and to improve the overall competitiveness of the PRC aviation industry.

The flurry of consolidation activities that followed thereafter included:

  • the acquisition of Air China Southwest and Zhejiang Airlines by Air China in 2001;
  • the absorption of Zhongyuan Airlines into China Southern Airlines in 2000 and the latter's acquisition of China Northern Airlines and China Xinjiang Airlines a year later; and
  • the takeover of China Yunnan Airlines and China Southwest Airlines by China Eastern Airlines in 2001 and 2003 respectively.

In the same year, military chief Li Jiaxiang was dispatched into civilian service as the head of Air China, a position that he held up to 2008. During this time, Li Jiaxiang reportedly wiped clean (in seven years) the carrier's deficit of US$276 million accumulated since 1998. In late 2007, Li Jiaxiang published an influential book titled "Route to Fly" where he mooted the dream of transforming Air China into an "international super-carrier" through (among other things) a consolidation of PRC carriers. Shortly after the publication of the book, Li Jiaxiang was catapulted to the chief de corps of the CAAC, a position that he continues to hold.

It has been more than three years since the publication of Li Jiaxiang's book and the consolidation activities of PRC carriers show no sign of easing:

  • In July 2009, Air China injected a further US$19.3 million into Air Macau to increase its shareholding stake to 80.90 per cent before spending HK$6.3 billion (c.US$813 million) to raise its stake in Cathay Pacific Airways from 17.5 per cent to 29.99 per cent a month later.
  • In 2010, Air China mounted a takeover of Shenzhen Airlines by injecting c.US$100 million to increase its stake in the beleaguered airline to 51 per cent.
  • China Southern Airlines has now obtained significant stakes in Sichuan Airlines (approx. 39 per cent), Xiamen Airlines (approx. 51 per cent), and Chongqing Airlines (approx. 60 per cent).
  • In 2010, China Eastern Airlines completed a merger with Shanghai Airlines.

As more and more airline unions are forged, the consideration on everyone's mind will be how such consolidation interacts with regulatory concerns and, in particular, the Anti-Monopoly Law of the PRC (the AML) which came into being in August 2008. To date, the long arm of the Anti-Monopoly Commission has seemingly not reached any PRC carriers, although the same cannot be said of telecommunications and technology entities such as China Mobile, China Netcom and Baidu. Having set the historical backdrop, we will review in the next edition of Aerospace News the potential impact of the AML on the consolidation of PRC carriers as well as lessons gleaned from some notable civil cases brought under the auspices of the AML.

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.

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