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| Controlling the Sky of Shanghai |
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The takeover battle between the powerful Air China, the cashed-up Singapore Airline (SIA) and the beleaguered China Eastern Airlines (CEA) in the past few months will no doubt reshape the Chinese aviation landscape in 2008. The Year of Rat will be a consolidation and reshuffling year for not only the aviation industry in China, but also the Asian-Pacific aviation market. It is well accepted that the fast-growing Chinese aviation market will be a decisive factor for the Asia-Pacific aviation market, but it doesn’t necessarily mean that Chinese airline companies will be the decisive players.
Win Shanghai, Win the market
The failed takeover deal of CEA has been characterised by commentators as a pinnacle of the war between major Asian-Pacific airlines, including Air China, SIA, Cathay Pacific Airways and even Emirates Airlines, in 2007. All these parties have implicitly reached a consensus, that is, Win Shanghai, Win the market.
Shanghai is becoming one of the three most important aviation hubs in the world, along with London and New York, and this trend will be more obvious in two to three years' time. According to International Air Transport Association (IATA), it is forecasted that from 2007 to 2011, global air passenger traffic will grow at 5.1% per annum, and the growth rate will be 5.9% in Asia-Pacific region. In this period, there will be 300 million new passengers added to the Asian market, with about one fifth of this total coming from Shanghai region. In 10 years time, Asia may surpass North America and Europe to become the largest air passenger market. IATA has also conservatively predicted that Shanghai's air traffic will exceed 60 million passengers in 2008.
Clearly, the easiest way to capture the Shanghai market would be to take over the Shanghai-based CEA, which dominates 30% of the Shanghai market. Same as SIA, Cathay Pacific and Emirates have also realised the importance of Shanghai. By controlling CEA or the smaller Shanghai Airlines, multinational airline companies can readily get access to the China-North America route, which will be the future battleground for major Asian airline companies. |
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Although the deal for SIA to gain control of CEA was boycotted by Air China, SIA has already tasted the sweetness of the Chinese aviation market. SIA is currently operating the air cargo transportation route between China and US from Chinese cities of Nanjing, Tianjing and Xiamen, and it accounted for 4.3% of total China-US two way air cargo volume in the first half of 2007. So if SIA can start transporting cargoes from Shanghai to US, its market share can at least increase 2 percentage points.
More importantly, SIA and its base airport, Changi Airport, one of the most important transit hubs in the world, can benefit immensely from controlling the Shanghai market. SIA and Changi Airport have long been feeling the pressure from its competitor, Emirates, on the so-called Kangaroo route between London and Sydney. In the next two to three years, these two arch-rivals will meet again in Shanghai, and it is likely that the cash-up Emirates will form some kind of strategic partnership with Shanghai Airlines.
China Southern Airlines
While the battle between Air China, CEA and SIA were in a stranglehold on 22nd January 2008, executives from the previously silent China Southern Airlines suddenly showed up in Shanghai. On this day, China Southern Airlines, the largest airline in Asia by fleet size, promptly signed ten cooperative agreements (non-equity related) with CEA. Compared to Air China's high profile activities, China Southern Airlines' CEO, Mr Liu Shaoyong, a former Chairman of CEA, said that they were not interested in participating in any restructuring of CEA.
Air China has already taken a large chunk of traffic out of Guangzhou, China's southern aviation hub, by establishing direct routes from Beijing to Hong Kong with the Hong Kong-based Cathay Pacific. The implications for the Guangzhou-based China Southern Airlines from a successful investment in CEA by either Air China or SIA, will that Guangzhou Baiyuan Airport may become even more marginalised on international routes. And this is the reason why Liu Shaoyong rushed to sign business cooperative agreements with CEA.
Air China: Full control of Shenzhen Airlines
Air China may not gain much from Shanghai in 2008. With the ownership of CEA still muddled between stakeholders, this powerful deal-breaker may have to form a partnership with Shanghai Airlines, in order to increase its market shares in Shanghai. But as a national carrier, Air China is probably equally uncertain about how much it can get from investing in a small and regional airline. But on the other hand, Air China is looking to make some worthwhile progress in Shenzhen, Hong Kong's neighbourhood city in mainland China.
As the corporate funds embezzlement scandal from New China Insurance being exposed recently, the ownership structure of Shenzhen Airlines will have to be restructured in 2008. And Air China stands to gain from this event by lifting itself from the second biggest to the biggest shareholder in Shenzhen Airlines.
It is widely known that among the Board of Directors of Shenzhen Airlines, the New China Insurance-affiliated Huirun Investments, also the largest shareholder of Shenzhen Airline, has long been conflicting with Air China. Despite being the second largest shareholder, Air China has seldom participated in the operation and decision making of Shenzhen Airlines. It is doubtless that Air China will become more hands-on in Shenzhen Airlines in 2008, but it will still be far from achieving dominance in the Asian-Pacific market with its partner Cathay Pacific.
Second-tier airlines in China
Non-state-owned, second-tier airlines in China may not have much impact on the Asian-Pacific aviation market, but 2008 may be a year for them to prosper.
Mr Chen Feng, the Chinese aviation entrepreneur who once attracted investments and praise from legendary investor George Soros, is building a Chinese aviation conglomerate based on international aviation management models. Under the umbrella of China Xinhua Airlines, Chen plans to merge five domestic regional airlines to form a multi-level flight network and operational model. Along with two more Hong Kong airlines, China Xinhua Airlines will consist of everything from trunk routes, regional routes, business and tourism charter flights, air cargo transports and budget airlines, making it an interconnected hub network.
Other second-tier airlines will also come to the stage, with Juneyao airlines, Spring Airlines and East Star Airlines all raising expansion capital from the stock market. The participation of these second-tier airlines will surely make the Chinese sky more colourful.
Produced by China Business Intelligence; Source: www.cnemag.com.cn
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