For someone with such an enormous job to do, Yan Zhiqing should be far more stressed than he appears. As chairman of China Southern Airlines and president of parent company Southern Airlines Group (SA Group), he is overseeing a project that is, without question, a massive business undertaking.

Apart from ensuring that China's largest airline continues to expand on the back of double-digit traffic growth rates, Yan is guiding the carrier through an industry consolidation exercise never before seenin China: folding majors China Northern and China Xinjiang Airlines into China Southern. But he is taking it all in his stride. "We are confident we can do it smoothly," Yan says coolly, adding: "It is both quite an easy job, but also a complicated one."

He is not big on small talk. While pleasant and accommodating, every statement he makes is well thought out, and his tone is that of a drill sergeant - answers to queries are usually given as if in the form of bullet points. But his no-nonsense personality is clearly ideal for a demanding job.

In mid-2000, in an attempt to reduce cut-throat competition that was badly harming indigenous carriers, the Civil Aviation Administration of China (CAAC) called for the 10 airlines under its direct control to merge into three major groups.

Under the consolidation plans, approved by the CAAC early last year, the SA Group is to take over China Northern and China Xinjiang to create a company worth around ´50 billion ($6 billion). National flag-carrier Air China will acquire both China Southwest Airlines and China National Aviation Corporation (CNAC), which controls Zhejiang Airlines. Finally, China Eastern Airlines, the last of the so-called "big three", will take over China Northwest, Great Wall and Yunnan Airlines.

While Air China and China Eastern are reported to be having difficulty with some of their prospective merger partners, China Southern claims plain sailing in its acquisitions. A key step in the takeover efforts should be finalised shortly, Yan says, when the CAAC transfers ownership of the two smaller carriers to the state-owned SA Group, which holds 65% of Hong Kong-listed China Southern.

The CAAC has already fully approved the mergers, while other government departments have given verbal endorsements, says Yan. Final written approval from the State Council should come soon, he believes.

The second stage in the process will cover SA Group transferring Northern's and Xinjiang's assets to China Southern - and this will probably run until early 2004. "If all the procedures go smoothly, I think it is possible the first step can be done early this year. For the second, I think that it may take one or two years," says Yan.

Stronger presence

Yan says Northern and Xinjiang will cease to exist in their own names after the second stage is completed, leaving China Southern with a truly national reach. Not only will it have a stronger presence at its own Guangzhou headquarters - where a large new airport is due to open in 2003 or 2004 - it will be a bigger player at Shenyang in the north-east, which is China Northern's home, and at Urumqi in the far west of the country, where Xinjiang is based.

The CAAC's call for consolidation came about after the Chinese industry started suffering as a result of intense competition which led to overcapacity in the market. These problems came after years of growth greater than anywhere else in the world.

Merging with one carrier is challenging enough - to do so with two would seem nightmarish. But Yan sees the task in purely positive terms. The former high-ranking CAAC official says the industry's mergers will create a far more stable marketplace and make China Southern a much stronger airline, in part helping it better compete internationally. He says the that ultimately, the consolidation exercise will also help boost profitability for the industry in general, as it will stabilise the crowded and fragmented domestic market.

"I think there will be three major benefits," Yan says. "The first is the optimisation of resources. In the past there have been some airlines with either a large or small scale competing with each other. After the mergers we can bring into full play the economies of scale, and we can optimise the resources of capacity, the schedules and human resources.

"The second is it can lead to a more regulated market situation for all the airlines. In the past there have been too many airlines fiercely competing with each other, and they ruin the market, especially on fares. After the establishment of the three major airline groups, there will be a less competitive situation, so we can have more stable fares and we can also have a more regulated environment for the market.

Increased competitiveness

"The third benefit will be the enhancement of international competitiveness for the whole of Chinese aviation. For the time being, I do think that Chinese airlines are in quite a weak state compared to their international counterparts, but after the mergers, after getting the above two benefits - the optimisation of resources and the more regulated market environment - Chinese airlines' competitiveness can be increased."

Yan stresses that mergers are not being carried out without regard to the cost, however. He says he is taking care to ensure that size is not China Southern's only consideration. The airline has in recent years taken over other airlines, such as Guizhou Airlines in 1998 and Zhong Airlines in 2000 - but both were far smaller than Northern and Xinjiang. "I think for the competitive improvement there may be two aspects: the first is we will be larger and the second is stronger," he says. "To be larger is no doubt an objective, but to be larger does not mean we will be stronger. So our main objective is to be stronger." Yan indicates that SA Group is likely to acquire more airlines, although formal talks are not being held. Discussions did take place with Wuhan Airlines, but he describes this as only "initial contact". China Eastern has also said it has spoken to Wuhan.

Some observers believe the mergers will spark a second wave of consolidation, resulting in the elimination of smaller second- and third-tier "independent" airlines. However, Yan argues that there is room in the market for more than just a handful of players - although it seems certain that there will be more restructuring. "In the USA, there are very large and very many small airlines, and they survive. I personally think there will be no more than 10 airlines operating in China within 10 years", Yan says. However, he qualifies this prediction by quickly adding: "I don't guarantee this," he says.

Alongside the consolidation exercise, the CAAC is working to give up its proprietary role in the local industry and focus on regulatory tasks. Ownership of airlines and other related companies will be transferred to other government-controlled investment arms as part of a major change for the administration agreed by government officials early last year.

Yan says this will be good for the industry, giving airlines more freedom to take decisions. But there will be problems, as the fact that China's economy remains a planned one means approvals for large purchases or major changes in business plans need to be secured from many government agencies. The CAAC handles the co-ordination of approvals, but that will probably change after it gives up ownership.

"As the Chinese saying goes, every coin has two sides. There will be a benefit, but there will also be some bad sides," he says. "But I do think the benefits will outweigh the bad sides."

One frequent question in China asks when one of the country's major carriers will join a global airline alliance. The big three have been heavily courted by the world's major groupings in recent years, but Yan says a changing domestic market and uncertainty surrounding the global airline industry after 11 September and the ensuing crisis, means that it will be a while before a Chinese carrier is able to make a commitment.

"I think there may be a clearer picture in two years. The alliances want to select one of the Chinese airlines, and all of the airlines are doing their own studies about which alliance they want to join. But I observe that after the events of 11 September, there are some changes for global aviation alliances, so we are still looking at the situation," he says. "I don't think that China Southern's waiting is a passive action. We are actively improving ourselves. I don't think airlines can develop only by joining an alliance. They have to grow themselves, and to improve. That's a necessity for joining an alliance." China Southern has so far established bilateral partnerships with several foreign carriers, including Asiana, Delta, Garuda Indonesia, Japan Air System, KLM and Vietnam Airlines.

Domestic benefits

While airlines around the world have been suffering as a result of 11 September, China Southern claims not to be feeling too many ill effects, given that it is supported by its still-growing domestic network. For example, towards the end of last year, while airlines in Europe, the USA and many parts of Asia suffered sharp drops in demand, China Southern saw increases in passenger and cargo traffic. In November, the carrier saw a 12% annual rise in passenger traffic and a 9.4% in terms of tonne kilometres. The number of passengers carried also increased, by close to 13%, while the amount of cargo tonnes carried went up by 3.2%. On those figures, China Southern is on course to report traffic growth of around 15%for 2001 as a whole.

However, Yan expects 2002 to be more difficult for all Chinese carriers, as domestic growth slows, in part due to a fall in foreign visitors. He cautiously forecasts "slight growth" in the domestic market for the year ahead. But when asked what that means he suggests around 10% - a figure which most other major carriers in the world would consider a boom.

This should result in continuing profits, especially as China Southern claims to be boosting its domestic market share, increasing aircraft use and improving staff productivity and efficiency. The carrier earns around 75% of its revenue from domestic operations, but it plans to make international services a bigger part of its profit picture, with plans for additional flights on higher-yield routes within Asia to points in South-East Asia, Japan and South Korea.

On the back of positive growth forecasts, China Southern is expanding its fleet. In October, the Chinese government ordered 20 Boeing 737-800s on its behalf for delivery between 2002 and 2005. China Southern also ordered two Boeing 747-400 freighters for delivery in June and September 2002.

The carrier only launched dedicated cargo services between Shenzhen, in the south near Hong Kong,and Chicago in 2000, and it has a single 747-400F operated on its behalf by Atlas Air. Yan says the Atlas aircraft will be returned when the 747-400Fs arrive. They will be used to boost US frequencies, and may allow for the launch of European freighter services.

"It has been difficult" for China Southern's cargo operation since early 2001, Yan says, as exports tothe USA in particular have slowed. But China's recent entry into the World Trade Organisation (WTO) is expected to give freight traffic a fillip in the years ahead. "After joining the WTO there will be a great improvement in trading between China and outside, and also the imports will develop quickly," Yan says.

He also sees more room for growth in cargo after Guangzhou's new airport opens to replace the ageing Baiyun International Airport, which is bursting at the seams in the booming Pearl River Delta area. To be known as New Baiyun International Airport, it will be located north of the existing airport and will firmly establish the city as one of China's three main aviation gateways, the others being Beijing and Shanghai. This is giving an already confident Yan yet another reason to feel secure about the carrier's future.

Source: Airline Business