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Bumpy road ahead for Shanghai carriers
By Wang Ying (China Daily)
Updated: 2009-07-14 08:02

Like filial children of traditional Chinese families, China Eastern and Shanghai Airlines have tied the knot at the wishes of their respective parents, who have not only arranged the marriage but also laid down the ground rules for the couple's future.

But as experts and analysts point out the road ahead is bumpy and marked by turbulence with the dark clouds of economic recession hovering on the horizon.

The Hong Kong and Shanghai listed China Eastern, is controlled by the State-owned Assets Supervision and Administration Commission (SASAC), while the Shanghai-listed Shanghai Airlines is majority owned by the city's municipal government.

The to-be married couple can expect a handsome dowry from their parents in the form of fresh capital infusion to help achieve the ultimate goal of dominating the Shanghai skies. Surprisingly neither airline was deemed fit enough to fill that role on their own.

A strong, dominant and efficient airline is seen essential to Shanghai's long-cherished dream of becoming an international aviation hub that can serve the industrial heartland of East China and the entire Asia-Pacific region. And that is precisely the role envisaged for the carriers by their parents after marriage.

Challenges galore

Judging from the past performances of the two ailing airlines, achieving that goal may prove to be a tough challenge, despite the high hopes and best wishes of their parents.

"Shanghai has always been planning to build an international aviation center," said Chen Jiahai, director, Institute of National Economy, Shanghai Academy of Social Sciences. "To achieve the plan, a dominant local carrier is vital as the current aviation market in the city is highly segmented," he said.

China Eastern holds a 32 percent share of the local aviation market, while Shanghai Airlines has 17 percent. "To support an international aviation hub, the city-based airline should control at least 50 percent of the local market," said Chen. With a combined market share of 49 percent, the merged airline seems to be well on track to achieve its goals.

Beijing-based Air China holds more than 45 percent of the local market share, while Guangzhou-based China Southern Airlines has more than 50 percent of the market share in that city.

The Shanghai government, which first broached the idea of the merger way back in 2002, has important short-term consideration to press for the matter now. The cut-throat price competition between the two carriers has led to a deterioration in the quality of services, something that could seriously undermine the Shanghai government's efforts of perfecting its role as the host of the 2010 Shanghai World Expo.

Hesitant couple

The two carriers have been dragging feet on the merger, as they do not perceive any great advantage from it. Being the smaller of the two, Shanghai Airlines was reluctant for a merger, as it would get merged completely into China Eastern.

The debt-ridden China Eastern posted a net loss of 13.93 billion yuan for 2008, in contrast to a 587 million yuan profit a year before.

To be sure, Shanghai Airlines was not exactly in the pink of health either. The carrier said its 2008 losses widened to 1.25 billion yuan, from losses of 435 million yuan in 2007. The carrier saw no particular advantage in merging itself with a sicker rival.

Bumpy road ahead for Shanghai carriers

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