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Chinese airline industry applies the brakes

At a time when the Chinese airline market was truly beginning to open up in a measured process of change, politics has intervened to derail the progress that was made under ousted Civil Aviation Administration of China minister Yang Yuanyuan

Just when China's airlines were learning to accept less government protection in an increasingly competitive international marketplace, the country's aviation policies have been thrown into disarray and politicking has reared its ugly head.

In recent years China has done almost everything right in terms of the development of its airline sector. It restructured its industry in the early part of this decade through badly needed consolidation and created three main groups, Air China, China Southern Airlines and China Eastern Airlines, around the key hubs of Beijing, Guangzhou and Shanghai. It then progressively opened up the market to more competition, both at home and abroad, seeing this as the best way to help strengthen the enlarged players in those cities by forcing them to raise their game.

Led by respected minister Yang Yuanyuan, it then encouraged the country's airlines to learn from their counterparts in other parts of the world by adopting operational best practice and boosting safety and service levels. Flag carrier Air China brought in Hong Kong's Cathay Pacific Airways as an equity partner, for example, and ­recently joined the Star Alliance.

For some it has been a painful journey. China Eastern, for one, has been struggling amid more intense competition in Shanghai, but the big picture has seen major benefits for the industry as a whole. China now has one of the world's best aviation safety records and the country's airlines for the most part have stronger balance sheets and a clearer understanding that protectionism cannot last forever.

But in just a few weeks between late December and early January all that clarity was blurred and questions are now being raised about ­China's ­willingness to continue pushing those positive policies forward.

The first signs of trouble came in December when Yang was abruptly replaced as the head of the CAAC by Li Jiaxiang, Air China's well-connected chairman. Li favours Air China becoming a "super carrier" through acquisitions of other airlines and he had been making no secret that weaker China Eastern was in his sights. Yang had meanwhile been saying publicly that he was not in favour of further consolidation, which suggests Air China worked to have him ousted for not ­supporting its grand plans.

Within days of Yang's departure, Air China parent CNAC went public with its opposition to a proposed deal in which Singapore Airlines and Singapore government investment arm Temasek Holdings would have bought 24% of China Eastern and helped to turn it around (see p24). CNAC's unprecedented public opposition and promises of a superior offer ultimately prompted minority shareholders to vote against the buy-in.

The apparent change in government thinking - by virtue of its silence while Air China was boldly talking down the SIA deal - says worrying things about doing business in China. The buy-in had been approved after seven months of consideration by a multitude of government bodies and formal backing had come from the highest ­administrative levels.

While it was a shareholder decision to reject the bid, CNAC clearly had government support to work behind the scenes to create the atmosphere of uncertainty that ultimately helped derail it. Other Chinese airlines that were thinking of bringing in foreign partners may now think twice as a result.

China Eastern probably wanted to bring in SIA not so much to learn from it as to make it more difficult for a stronger Chinese airline to take it over. But whatever its true motives, it was certainly the right thing to do and in line with ­government policy.

There is still much to play out in this high-stakes game of empire building by Air China and there is a chance that China's leadership will decide once again that China Eastern tying up with SIA is the right move.

But the signs are not good, and this ugly episode may well turn out to be a missed opportunity. Rather than supporting China Eastern, which was doing exactly what the CAAC had been calling for when it teamed with SIA, the government has allowed politics to potentially reverse several years of genuine progress.

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