China Eastern Airlines' $1.3 billion bid for Shanghai Airlines is nothing less than an attempt to survive in the highly competitive Chinese market. While Air China and China Southern had close to a 50% market share in their Beijing and Guangzhou hubs respectively, China Eastern had only just over 30% in Shanghai.Buying Shanghai Airlines will increase that to closer to 50%, give it a wider network and additional aircraft. It could also result in economies of scale that enable allow it to compete with the other two majors.
The problem is that both China Eastern and Shanghai are highly unprofitable and have inefficient operations. Massive changes must be made to make the merger work, and China Eastern must trim its workforce, eliminate unprofitable routes and cut costs.
Government interference in the Chinese airline industry does not help either, especially since the bureaucrats seem determined to snuff out the country's private carriers. Consolidation is important, but so is the freedom to operate as a proper business without worrying too much about big brother. That may be difficult as long as the government remains the main shareholder, but it is not impossible as other regional carriers have shown how it can be done.
China's airline industry has tremendous potential. But without making the necessary changes, it will continue to face problems and China Eastern's merger with Shanghai may not have the impact that its shareholders - including the government - wants.
on July 14, 2009 10:35 PM | Reply
lets just hope they keep to the Shanghai Airlines service model as china eastern seems to have never heard of service! Flying china eastern is hind of like licking sand paper – never a good idea and abrasive at the best of times! - the executive at china eastern really have the work cut out from if they want this to work! But again the good news is there two less airline to consider flying on now!
on July 17, 2009 9:55 PM | Reply
Ahem, the 'chinese commie gods' are at work again to stage another asian puppet show. While I do concur that the market share in Shanghai will increase, I doubt if the amalgation of the 2 chinese entities will lead to significant operational and cost effeciencies.
A better propostion would have been the now defunct Singapore-Shanghai deal. At a minimal, an infusion of management skills into Shanghai Airlines would lkely have taken it to the next level of service quality, Alas, the powers from on-high dictated the grand scheme of the Chinese aviation industry.
And now, another half-baked entity is in the making.