China approves more start-up airlines but they risk being starved of scale in a fragmented market

Eleven airlines during the past year have announced their intention to launch in China's domestic market. Increasingly, they are being approved (three so far) by regulator CAAC after a few years of a policy that technically forbade new entrants - although there were exceptions, allowing some new airlines to launch.

The new airlines fulfil the objective of creating growth and inviting private capital into the aviation industry as the state grows weary of its large investments across numerous sectors. Space will have to be created for these new airlines in China's ecosystem where 79% of seats are flown by state-owned carriers or their subsidiaries and affiliates. A full 94% of capacity is flown by airlines part of either the Big 3 - Air China, China Eastern or China Southern - or HNA Group. That leaves just 6% of capacity for independent airlines. So the incumbents are not facing an immediate threat, especially as the new airlines are not being based in first-tier cities.

But the additional airlines come as China already has an over-supply of airlines, despite the enormous potential for growth. The fragmentation means few can gain scale and synergies. That situation could be exacerbated by further airline approvals - yet liberalisation is undoubtedly where the system needs to head, creating a dilemma for the CAAC.