Andrzej Jeziorski/SINGAPORE

The Chinese Government is considering a forced merger between flag carrier Air China and China Southern Airlines, the country's biggest airline.

Industry sources in Beijing, Hong Kong and Shanghai say such a proposal is under study, but that many obstacles - including the airlines' own reluctance - stand in the way, Flight International's sister on-line service Air Transport Intelligence reports.

The sources say that a merger has been informally approved by China's State Council, although which section of the council proposed the plan remains unclear. To date, even the airlines have not been formally briefed, according to the sources.

China Southern, based in Guangzhou, is one of only two Chinese airlines listed on the New York and Hong Kong stock exchanges, the other being China's number three carrier, Shanghai-based China Eastern. Beijing's Air China is the country's second largest carrier and has been studying a stock exchange listing for two years. The plans have been delayed by its poor financial performance, however, and some sources suggest that a merger could be a way to a "backdoor listing" for the company.

The New York exchange, however, requires a high level of transparency, so that if China Southern acquired some or all of Air China, the latter's assets and liabilities would have to be disclosed. One analyst says that since it took several years for China Southern to achieve its listing, a merger "is not going to happen overnight".

Other doubts concern rivalries between factions inside the Civil Aviation Administration of China (CAAC), to which Air China reports, plus the 2,000km (1,240 miles) distance between Beijing and Guangzhou.

The CAAC has pushed for consolidation in the airline industry since deregulation allowed the formation of small carriers alongside the big six, created from a split in the late 1980s. The merger of China Northern and China Northwest into China Eastern, and of China Southwest into China National Aviation are regarded as possibilities. Overcapacity and domestic fare competition led to losses last year for all but four of China's 30-plus airlines.

Source: Flight International