Air China takeover of Shenzhen Airlines to enhance competitiveness

Merger and takeover activity in China continues to change the competitive scene, and Air China is potentially in an even stronger position, while China Eastern and Shanghai Airlines' merger moves ahead.

Speculation about a Shenzhen Airlines takeover has arisen as CAAC has reportedly assigned Air China, the second largest shareholder, to oversee the smaller carrier, while the major shareholder and senior adviser of Shenzhen Airlines, Li Zeyuan, is being investigated by police for alleged economic crimes.

Air China owns 25% of Shenzhen Airlines and Li Zeyuan's private company, Huirun Investment Co, owns 65% (Huirun partnered with Bright Oceans Corp in 2005 to acquire a 65% stake in the airline from the Guangdong Provincial Government's Investment Company, which was auctioning the asset. At the time, the two firms offered CNY2.7 billion (USD398 million) for the stake, outbidding Air China). Air China will reportedly continue to support the carrier to maintain normal operations.

Shenzhen Airlines, founded in 1992, is China's largest unlisted carrier in terms of assets, which total approximately CNY20 billion (USD2.9 billion). It operates a fleet of more than 80 passenger and cargo aircraft.

The addition of Shenzhen Airlines to the Air China armoury would be a valuable move, especially where there is no immediate need to acquire any assets. Although the two were working together, effectively full ownership would deliver the Beijing carrier a welcome response to China Eastern's expansion.

Air China also received another, albeit smaller, boost when it reportedly won a public bid to take over major assets of small bankrupt carrier East Star Airlines, according to the China Business News.

China Eastern's Shanghai Airlines takeover approved

Meanwhile, China Eastern Airlines gained approval from The China Securities Regulatory Commission to take over Shanghai Airlines, in a deal worth USD1.3 billion. Following the merger, China Eastern will have more than half the market share in Shanghai, China's financial hub. China Eastern has been struggling financially and the additional market share in China's most commercial city, on the eve of the 2010 Shanghai World Expo, will be welcome.

The Big Three Chinese carriers are steadily enhancing their market strength. Absorbing the round of merger/takeovers in the late 1990s/early 2000s has almost been completed and, with still-soaring growth rates, profitability is the next serious goal. Ironically this is not easy with continuing double digit growth rates. Adapting to change on that level, now that the Chinese domestic market comes off such a large base, is a constant challenge - at the same time as having to secure market position against other large - and small - aggressive competitors.