NICHOLAS IONIDES SINGAPORE
The last regulatory hurdles in a sweeping overhaul of China's airlines and aviation bureaucracy have been overcome, with the top-level State Council approving a long-studied package of changes.
The restructuring has been worked on for nearly two years, and is designed to restore the sector to profitability after several years of losses.
Under the changes, state-administered airlines will be merged into three huge groups. The Civil Aviation Administration of China (CAAC) will give up its equity to the industry, and the country's route network will be reworked. Also, provincial governments will take over airport management. The biggest changes will come with mergers among the 10 carriers under the direct "control and administration" of the CAAC.
Air China will take over China Southwest Airlines and China National Aviation (CNAC); China Eastern will take over China Northwest and Yunnan Airlines; and China Southern will take over China Northern and Xinjiang Airlines. China Eastern has already taken over Great Wall Airlines as part of the process.
The exercise is aimed at reducing cut-throat competition which has been blamed for widespread losses in recent years. The CAAC says each of the three main groups will have assets of 50 billion ($6 billion) and around 150 aircraft. Final approval for the mergers was granted late last month by the State Council, China's de facto Cabinet, says CAAC minister Liu Jianfeng.
The CAAC briefed airlines on the restructuring at an annual two-day meeting of industry officials in Beijing on 4-5 February. As part of the overhaul, the CAAC will give up ownership of the airlines under its direct control, and focus solely on a regulatory role. Ownership of the enlarged airlines will be transferred to other government agencies.
The CAAC will also take steps to reduce bureaucracy. It says it will abolish 24 local arms, leaving only seven CAAC "regions" across the country. Aviation service companies, such as jet-fuel supplier China Aviation Oil Supply, will also be restructured, while management of most airports will pass into the hands of provincial governments.
The entire process is expected to take around two years to complete. While it is going forward, the CAAC says, the country's route network will also be revamped. From this summer, only airlines based at the Beijing, Guangzhou and Shanghai hubs will be able to operate lucrative services between those cities.
Starting from this winter, flights by smaller carriers that transit through the three cities will also be barred. Flights to the three main cities from points not provincial capitals or key tourism destinations will eventually be restricted or banned outright. Liu says airlines will also be encouraged to develop more short-haul operations between provincial capitals and smaller cities, as part of a blueprint for a US-style hub-and-spoke route network. He adds that the changes are aimed at boosting services between secondary cities and eliminating "disorderly" competition.
China's airline industry has been suffering for around five years, after experiencing huge growth between the late 1980s and mid-1990s. Over that period the number of airlines in the country went from just a handful to more than 30.
Liu says 2001 was a better year for the industry, which made around 690 million yuan. Some debt-plagued carriers, including Air China, China Southwest, China Northern and Xinhua Airlines, even managed to record "slight" profits last year, he says.
The CAAC is forecasting earnings for the industry this year of 1-2 billion yuan. Around 83 million passengers are expected to be carried this year, up from 75 million last year. The 2001 figure represented an increase of 11% on 2000.
Other regulatory changes are alsoin the works. Liu says the CAAC is seeking State Council approval to ease foreign ownership limits on the country's airlines, which is currently capped at 35% - the CAAC wants the ceiling raised to 49%. The proposed change is partly related to China's entry last year into the World Trade Organisation. The CAAC expects China's industry to face more intense competition in the years ahead from international carriers, and wants foreign funds to help improve operations.
China Eastern and China Southern are already publicly traded overseas, while Air China has been seeking an international listing for years. A unit of CNAC, the commercial arm of the CAAC, which is merging with Air China, is also listed in Hong Kong, and is the largest shareholder in Dragonair.
Hainan Airlines, which claims to be the country's fourth-largest airline grouping, was the first Chinese carrier to be approved for foreign ownership. In 1995 an investment fund part-owned by US financier George Soros took a 25% shareholding, although this was diluted after the carrier sold shares through an initial public offering in Shanghai.
Source: Airline Business
