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The reorganization of the domestic aviation industry is going smoothly and is expected to be completed within two years, said officials from the General Administration of Civil Aviation of China (CAAC), the industry watchdog.

The three new aviation groups involve Beijing-based Air China, Shanghai-based China Eastern Airlines and Guangzhou-based China Southern Airlines. They will combine assets, aircraft and management.

The plan must still be authorized by the State Council.

Liu Jianfeng, CAAC minister, said most airlines are satisfied with the merger plan, and some had hoped it would take effect sooner.

"But establishing three multi-billion aviation companies does take time," Liu said.

The State Development Planning Commission formally took up the merger last November, but the commission's involvement prompted suspicion from airlines and the media that the plan might be aborted.

Liu, however, said the commission just wanted to help refine the plan. The commission relied on the reform methods of other large-scale State-owned enterprises when polishing the plan.

The commission has now handed the plan to the State Council for final approval, Liu said.

The process of merging CAAC-controlled airlines began in April.

China Southwest Airlines and China Aviation Corporation will combine with Air China; China Northern Airlines and Xinjiang Airlines will combine with China Southern Airlines; and Yunnan Airlines and China Northwest Airlines will combine with China Eastern Airlines.

Each of these three groups is expected to have assets of 50 billion yuan (US$6 billion) and a fleet of 200 aeroplanes.

Liu said the merger is necessary now that China is a member of the World Trade Organization (WTO).

A poorly managed, small-scale industry could not compete with international air carriers, he said.

The merger is designed to help promote market competition and avoid the creation of an industry monopoly.

Now that the three large-scale airlines have been formed, the next step is improving management.

That is more important for CAAC's development than raising money, he said.

CAAC can raise money via State-owned enterprises and State banks while management experience cannot be formed overnight, he said.

He also said he is glad the industry's safety record is good because it gives him more time to work on improving management.

CAAC wants to increase the share-holding of foreign companies in domestic airlines to 49 per cent from the current 35 per cent maximum. That proposal also needs the State Council's approval.

"As long as China's companies hold the major shares, we should include more foreign investment in our companies," Liu said.

He said the investment model for foreign companies could range from buying stocks to direct investment, and CAAC would not impose any restrictions.

CAAC is clearing its more than 170 administrative approval rights; more than half will be cancelled, according to China's commitment to the WTO.

Since the ticket distribution and aircraft maintenance sectors are required by the WTO to open to foreign companies, Liu's administration will strive to create fair market conditions for companies both at home and abroad.

CAAC will also regulate domestic air carriers through legal channels, with the administrative and economic measures serving as necessary substitutes, Liu said.

Air ticket prices, which CAAC now fully controls, will instead be decided by airlines according to market conditions.

A couple of outside factors are contributing to the aviation industry's redevelopment as well and will bring it more passengers. They include China's robust economy and Beijing's hosting of the 2008 Olympics, Liu said.

In addition, aviation oil, which makes up 24 per cent of domestic airlines' operating costs, is expected to decline sharply thanks to a tax cut.

On another front, the new aviation groups will have the right to decide whether they want to join international air clubs or alliances, Liu said.

He urged the groups to act cautiously.

"If one club excludes some airlines, you should think twice about whether the membership is worth it," he said.

In the 10th Five-Year Plan (2001-05) period China's aviation companies plan to buy more planes to handle the increased domestic and international air traffic, Liu said.

He would not disclose how many planes will be bought, though he did say it will be far less than what some airplane manufacturers have predicted.

China is taking care not to buy too many planes, as it did between 1996 and 2000. The move led to price wars among domestic airlines in 1997 and 1998.