China Eastern is patching up its strained relationship with the Yunnan provincial government by committing to expand its presence in the home of some of China's most popular tourist attractions.

The agreement between China Eastern Air Holding Company, China Eastern's parent, and the State-owned Assets Supervision and Administration Commission (SASAC) of the Yunnan provincial government, calls for the establishment of a joint venture to further develop the air travel market in the southwestern province.

The Shanghai-based carrier will hold a 65 percent stake in the joint venture, with the Yunnan provincial government the balance. Financial details of the agreement have not been disclosed.

Zhao Jinyu, general manager of China Eastern's southwestern branch, said that China Eastern would provide planes and staff, while the provincial government of Yunnan would offer land and capital. "The procedural work required for setting up a joint venture may push the whole process till the end of the year," he said.

According to the plan, three more aircraft will be added to the joint venture's initial fleet of 37 aircraft later this year. The joint venture is planning to increase the number of aircraft to 50 by 2011 when the yearly passenger traffic is expected to reach around 8 million from 6 million now.

Tourism is an important industry in Yunnan, which lags behind the coastal provinces in terms of industrial development.

"There is research showing that around one yuan in carrier receipts can generate around 8 yuan of consumer spending in the local economy. Consequently, the local government is keen on building bridges with the carriers. The carriers will also benefit from favorable governmental policies through the cooperative framework," said Li Lei, industry analyst, CITIC China Securities.

China Eastern entered the Yunnan market after taking over Yunnan Airlines from the Yunnan government in a nationwide restructuring of the aviation industry in 2005. Since then, Yunnan Airlines has been absorbed into China Eastern and ceased to exist as an independent company.

According to insiders, after the merger, China Eastern used most of Yunnan Air's capacity to support Shanghai flight development, which weakened its market presence in Yunnan.

"The Yunnan side had proposed to China Eastern for setting up a branch company with independent financial accounting to better secure and develop the local market, but was given a cold shoulder," said the insider.

Falling revenues and salary cuts have increased the displeasure among Yunnan Air staff, which has also culminated in flight strikes.

Although a new joint venture has been set up, the problems still remain unsolved. The cooperation between the local government and market-oriented enterprises cannot run smoothly all the time. For example, local governments may press for more flights to satisfy local transportation needs, which may be unprofitable to the carrier.

But Li regards this as a positive move by Liu Shaoyong, the president of China Eastern, en route to solve the leftover problem. "By setting up a new JV, the related interests of China Eastern Air Holding Company, the management team of the Yunnan branch, and the Yunnan local government will all get balanced and protected," Li said.

With over 94 percent of the area in Yunnan mountainous, there is a great potential for flights. However, the cold relations in the past two years led to an erosion in the predominant position of Yunnan Air.

"The years of operating experience has helped Yunnan Air garner a broad client base and it still has the most powerful capability in the Yunnan aviation market," said Li.

But he warned that it was tough task to turn around the airline in a short as its profitability depends largely on the market environment.

China Eastern posted a net loss of 13.9 billion yuan in 2008 due to the sagging global economy, and wrong bets on fuel hedging deals. It has also received a 7 billion yuan cash injection from the government.

Shares of ST China Eastern edged down by 1.12 percent to 5.31 yuan apiece yesterday.

(China Daily June 3, 2009)