More airline consolidation appears to be in store in China, with flag carrier Air China holding talks to acquire a sizeable stake in domestic operator Shandong Airlines.

State-run media reports confirm that Air China, which is Beijing-based, is seeking to take a direct 20% stake in the smaller airline, as well as a 26% share in its unlisted parent company, Shandong Aviation Group.

Jinan-based Shandong has expanded rapidly since its establishment in the 1990s and operates around 25 Boeing 737s, Bombardier CRJ200s and Saab 340s. It is listed on the Shenzhen stock exchange and has grown in recent years, particularly by focusing on regional jet operations.

However, Shandong has been losing money on its regional jet operations, and has been looking for a strategic investment partner from one of the country's "big three" airline groupings since early this year.

Analysts see Shandong's talks with Air China as a sign that the country's smaller "semi-independent" airlines are finding it increasingly difficult to compete in a market where the three main airline groupings are boosting their market share.

Last year the Chinese government gave final approval for a long-planned consolidation exercise, which would amalgamate the 10 airlines under direct state control into three airlines led by Air China, China Eastern Airlines and China Southern Airlines.

Takeovers of smaller carriers controlled by provincial governments or other government bodies have also taken place.

Source: Flight International