The bidding war between Air China's parent and Singaporean investors for a slice of China Eastern Airlines is really all about control of the hugely lucrative Shanghai skies that hold the key to success for any airline aiming to make it big in this part of the world and beyond.

 

Earlier this week, China National Aviation Corp (CNAC) promised it would make a counteroffer of at least HK$5 per share - or 32 percent more - for its Shanghai-based rival if shareholders rejected its union with Singapore Airlines and investment agency Temasek.

 

The winner of the deal will gain a 24 percent stake in China Eastern and, more critically, access to Shanghai, which is striving to become an international airline hub.

 

It's estimated that by 2015, when the financial center fully establishes its position as an international airline hub, the city will have doubled its capacity for passengers and nearly tripled airfreight at its two airports of Hongqiao and Pudong International.

 

"The war is centered on the dominance of Shanghai," said Li Lei, an analyst with CITIC China Securities Co. "The city is an attractive market with tremendous potential for growth and is strategically important for any airline, so who will let go of this lucrative piece of meat?"

 

As outlined in a strategic plan by the General Administration of Civil Aviation and the municipal government, Shanghai will complete the frame construction for an international airline hub - with an annual capacity of 84 million passengers and 4.1 million tons of airfreight - by 2010, when the city will host the World Expo.

 

By 2015, Shanghai will fully establish itself as an airline hub, as its passenger and cargo capacities are expected to surge to 100 million and 7 million tons.

 

Even now the city has emerged as a global cargo hub after the world's two top carriers DHL and UPS created their hubs at the Pudong International Airport, whose cargo volume ranked sixth globally at the end of 2006.

 

As for passenger volumes, Shanghai is almost at the same level as Beijing, but has a better customer base because a significant part of them are business travelers, and has tremendous growth potential, analysts said.

 

Authorities have stressed the goal of establishing Shanghai as an international transfer point for passengers.

 

"So the contest between Air China and China Eastern Airlines is all about market share in Shanghai, and that is critical in their future positions in China as well as globally, and in their strategic planning - though it's very hard to calculate the benefits in dollars," said Xia Fulu, an analyst with Industrial Securities.

 

The market share of China Eastern in Shanghai is now nearly 40 percent, followed by Shanghai Airlines, with 18 percent, and Air China, about 13 percent.

 

Air China, the nation's largest airline, has gained a dominant role in its home base of Beijing and significant market share in another regional hub, Hong Kong, owing to its partnership with Cathay Pacific Airways. But it has yet to find a favorable position in Shanghai, which has the potential to outperform Beijing and Hong Kong to become a national hub.

 

In a statement, the company has made it clear that it is "dedicated to bringing about full-frontal partnership between China Eastern and its biggest rival Air China as well as the Beijing-based company's partners, particularly in establishing Shanghai as an international airline hub with joint effort".

 

It expects to restructure the industry to strengthen its foothold in Shanghai over the next two years and prepare for the harsh competition when China's aviation market fully opens up in 2010, Xia said.

 

"Its weakness in Shanghai has always been a sore point. Merger and acquisition is the fastest and the most convenient way to enhance its market share in Shanghai."

 

The practical significance of investing in China Eastern is the benefit of gaining rights to more air routes without the lengthy government examination and approval process.

 

China Eastern has stressed that its partnership with Singapore Airlines excludes cooperation in route development, but analysts doubt that.

 

"The promise is hardly persuasive. Who believes that Singaporean investors are paying about $900 million just to help a domestic airline overcome its difficulties?" Xia said.

 

A partnership between China Eastern and Singapore Airlines would no doubt deal a setback to Air China, which at least expects to maintain the status quo. "Without Shanghai, Air China's dream of becoming a 'super carrier' will be empty talk," Xia said.

 

Li Shurong, an analyst with Guosen Securities, said: "China Eastern's proposed sell-off to Singaporean investors cannot enhance the Chinese company's competitiveness immediately. But it could serve as an obstruction for Air China to restructure the industry and bring about cooperation with the Shanghai-based company."

 

Analysts believe the bidding war will not produce a result soon as new prices are offered and government approval of the new offer (by Air China) will also take time.

 

"Air China is doing what it can to block the early entry of foreign competitors," Xia said.

 

(China Daily January 9, 2008)