Part of Beijing’s reform and opening policy package was the deliberate fragmentation of China’s once-monolithic airline sector. While it was intended to stimulate competition, the result has been a sustained "quasi-market" saturated with unprofitable, localized (but not privatized) airlines running unprofitable routes. At present, China has more than 30 airlines, but six of those airlines handle more than 90% of passenger traffic.
However, in the context of the severe drop in air travel and the ensuing clamor from airlines for bailouts, Beijing has begun to gently press the pace of consolidation.
One of the first moves in this direction was China Eastern Airlines’ recent merger with Shanghai Airlines, the city’s second-largest carrier. This merger will give the new airline around a 50% market share in Shanghai. But the post-merger integration plan looks shallow. Shanghai Airlines will keep its brand and continue to operate independently. How economies of scale will be realized under such an arrangement is unclear.
"What they are trying to do is to create a powerful hub carrier in Shanghai that can become equal with the international carriers and compete with Air China and China Southern nationwide," said George Hamlin, president of US-based aviation consultancy Hamlin Transportation Consulting. China Eastern did not respond to interview requests.
China Eastern will still face stiff competition on its home turf. As Hamlin points out, an airline with a 50% market share at its hub isn’t particularly impressive by American standards. In the US, it is not uncommon for a single airline to enjoy a near-monopoly (80% of traffic) in its hub city. China Eastern is unlikely to be so lucky. Air China has already announced that it will schedule 80% of its international flights out of Shanghai in preparation for next year’s World Expo.
Meanwhile, private low-cost carrier Spring Airlines, also based in Shanghai, plans to expand its fleet from 13 to 100 planes by 2015. In July the airline separately announced plans to sell "standing-room" tickets – which CEO Wang Zhenghua compared to bar stools – and do a stock market listing. Fortunately, both ideas are subject to regulatory approval.