Chinese consolidation talks begin

It’s happening. After months of speculation that more consolidation is set to come to the Chinese airline market, Air China has confirmed that its parent company is in talks to acquire some or all of much smaller East Star Airlines. (For more see the story below from our on-line news service Air Transport Intelligence).

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East Star has been in financial difficulty and its privately owned parent company probably needs a deal more than Air China’s parent does. But the very fact that Air China has confirmed that talks are taking place is telling as it is another sign that the government wants to see more consolidation. It had already been widely known that China Eastern Airlines’ parent is in talks to merge the carrier with Shanghai Airlines, for example.

An initial wave of consolidation took place in China early this decade, when the government merged many of its smaller carriers into Air China, China Eastern and China Southern Airlines to create three main airline groups. But several years ago it decided to allow new airlines to launch and a number of privately owned carriers took flight. Nearly all of them have struggled, however, and ownership changes have already taken place among several of them.

Pushing for more consolidation now is Civil Aviation Administration of China (CAAC) chief Li Jiaxiang. Li took over as head of the industry regulator a year ago and has made no secret of his desire to see the country’s major airlines – in particular Air China, which he used to head up – enlarged. This was in contrast to the views expressed by his predecessor, former CAAC chief Yang Yuanyuan.

One airline CEO who has met Li told me the CAAC chief considers China’s smaller airlines a “nuisance” and he would prefer to see many of them disappear. If Air China’s parent does end up buying East Star it may spark a wave of similar deals – and Li may just get his wish.

Air China parent in talks to buy East Star

Nicholas Ionides, Singapore (13Jan09, 01:08 GMT, 291 words)

AirChina’s parent company is negotiating to acquire some or all ofprivately owned East Star Airlines in another sign that moreconsolidation is likely in the Chinese market.

Star Alliancecarrier Air China says in a Hong Kong stock exchange filing that itsstate-owned parent company, China National Aviation Holding (CNAHC),”is making preliminary communication with the relevant parties inrelation to the acquisition of the entire or part of the share capitalof East Star Airlines”.

It adds that “no formal agreement hasbeen entered into with respect to the transaction and it is not yetcertain if the transaction will eventually materialise”.

Air China also says it has “not been involved in the transaction but will pay close attention to its progress”.

EastStar is based in Wuhan and is owned by a privately held travel agencygroup. It launched operations in 2006 and according to Flight’s ACASdatabase has three CFM International CFM56-powered Airbus A319s and sixA320s, all on lease from GE Commercial Aviation Services. It also hasA320-family aircraft on purchase order with Airbus.

Last year East Star fell into financial difficulty and reportedly lost some of its domestic traffic rights.

China’sair transport market underwent a major wave of consolidation early thisdecade when the country’s three main airlines, Air China, China EasternAirlines and China Southern Airlines, acquired several smallerstate-owned carriers.

In more recent years several privatelyowned carriers have launched but most have found it tougher thanexpected to compete and as a result some have undergone ownershipchanges.

There have also been signs that more consolidation iscoming in China as government-endorsed talks are currently being heldon a merger of China Eastern Airlines and fellow Shanghai-based carrierShanghai Airlines.

Source: Air Transport Intelligence news

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