Air Transport World

China's New merger math: commercial considerations are driving a new round of consolidation.(Competition)

There is an old Chinese proverb: "The world will unite after being long divided." This may be equally applicable to China's airline industry. Although there appears to be little chance that it will return to the era prior to 1987 when CAAC was the equivalent of Aeroflot in the heyday of the Soviet Union, nonetheless the industry is becoming more concentrated.

Having broken up the CAAC monolith, the Beijing government stagemanaged the first phase of reconsolidation in 2002 following China's entry into the World Trade Organization. The rationale for the restructuring was a concern that the airline industry was too weak and fragmented to compete effectively against foreign carriers. It also is possible that CAAC was concerned about the challenge of regulating what had become a dizzying number of national, regional and local carriers spread across the country.

Individual airlines had little say during this process as CAAC maintained tight control. Air China was merged with China Southwest and China National Air Corp. to form China National Aviation Corp. China Southern Airlines was pushed into a merger with China Northern Airlines and Xinjiang Air, creating China Southern Air Holding Company. China Eastern Airlines was merged with China Northwest Airlines and Yunnan Airlines in what became China Eastern Air Holding Company.

These steps insured that the big three state-controlled airlines retained their primacy during a period that saw the emergence of many new entrants including the country's first LCCs. Successive mergers and acquisitions, however, largely have been owing to the same factors driving consolidation in the US and Europe. These include the desire to grow networks and expand into new markets, remove capacity and competitors and reduce vulnerability to the economic cycle. …

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