The long-awaited consolidation of the domestic aviation industry has finally occurred. While this brings hope that the restructuring will enhance the industry's efficiency and benefit consumers substantially, systemic obstacles still remain and cloud the much hoped-for growth of the industry.
Under the reshuffling plan, the three newly-organized companies - Air China based in Beijing, China Eastern Airlines in
Shanghai and China Southern Airlines in
GuangZhou - must cut economic links with the General Administration of Civil Aviation of China (CAAC). CAAC will retreat to functioning as an industry regulator, not a "manager" as before.
The merger is seen as a vital step for the industry to move the market-oriented model forward.
Previously, companies were bogged down in red tape, failed to operate based on market demand, or indulged in wild price cuts regardless of their financial balances.
In 1998, the industry recorded a 2.24 billion yuan (US$270 million) deficit. Although the airlines netted some profit in the following years, the profit was mainly attributed to CAAC's ban on price cuts, price hikes and the huge and rapidly growing market.
Now that the reshuffle has been hammered out, it is expected that the new companies will
have more room to manoeuvre to grow faster and more smoothly.
They will also be more cost-conscious and adjust ticket prices flexibly according to market demand in order to gain more profits.
They now must develop themselves into stronger competitors facing the increasing menace of foreign giants entering the domestic market in the wake of the country's World Trade Organization (WTO) entry.
But there are worries about whether the restructuring will prepare them well enough for the coming competition.
A merger is usually a business deal in which companies are willingly combined together for better and mutual profit prospects. The companies involved should be left free to choose their business partners and the government should not play the leading role.
In this case however, what concerns people is that CAAC, a governmental department, has directed the merger. It is not clear whether the companies coming together will work well.
It seems that CAAC, the former owner of State assets in the aviation companies, has attached much importance to preventing the depreciation of State assets during the reorganization.
After the merger, the leading company in each of the groups will shoulder the responsibility of shoring up the weaker companies in the group so that, as CAAC hopes, the value of the State's whole assets will be maintained or appreciated.
But the directed reform frustrates market competition, which has proven to be a better force to allocate resources.
The prospects for a formal combination of separate companies are vague. Although they are in the same group, the companies are roughly what they were except for the retreat of CAAC as the direct asset manager. These worries are not groundless.
Those companies were previously incompetent in cutting costs and gaining profits befitting the huge domestic market. They had hundreds of thousands of redundant employees and they failed to demonstrate good managment abilities.
These problems remain and are still hard to resolve. Take the issue of redundant employees for example.
The issue has long been a thorny problem hindering the growth of Chinese airlines. The proportion of personnel to planes is 200 to 1 among the three groups. This proportion is only 80 to 1 in developed countries.
The high operational costs of domestic airlines are another problem they face.
Experts have said the price of plane tickets is disproportionately high. Tickets cost more than 10 per cent of the average annual income of passengers while in developed countries the proportion is below one per cent, according to Hu Angang, director of the Centre for China Study co-sponsored by the Chinese Academy of Sciences and Tsinghua University.
The irrational prices come from low efficiency and poor management, but there are also other factors.
A considerable part of the price of airline tickets is the cost of oil.
The power of importing oil is in the hands of a State monopolistic company. The price of oil imported via the China Aviation Oil Group, for example, is 60 per cent higher than the import oil price in Japan and 2.5 times that in Singapore.
Strict controls and a high tariff policies have also pushed up the costs of maintenance and purchasing new equipment at airline companies.
The consolidation is thus just a start. There is still a long way to go for domestic airlines to be truly market-oriented, efficient and able to make sustainable high profits.
Authorities should further open up the industry, introduce investors from both home and abroad to improve the asset structure of the groups and reform monopolistic supporting industries.
