New price rules are under discussion and will be in place by year's end, Yang Guoqing, vice director of the Civil Aviation Administration of China said on Monday during a meeting on expansion of Jiangbei International Airport in Chongqing.

While industry analysts fear the move will lead to unhealthy price wars in the short term, they admit it could be healthy for the industry's development in the long run.

Yang's announcement was confirmed yesterday by a senior official in the Shanghai-based East China Office of the CAAC, who said, "Since China's air carriers are still growing and not strong enough, it's not wise for the government to continue their firm control over ticket prices. Therefore, airliners will be able to attract more passengers by setting their own air ticket prices."

Currently, the CAAC along with the central government set mandatory fares for all domestic airline routes. Under the new rules, the CAAC would set recommended prices that allow airlines a leeway to increase by up to 20 percent or cut by as much as 40 percent.

"If air carriers are free to decide ticket prices, fierce price wars are expected and the aviation market may lose control at the beginning," said Qiu Yanying, an analyst with China Securities.

"Those who are less competitive in both operation systems and services will be gradually phased out of the market if they can not stand losses brought by price competition," Qiu said. "That's also what the CAAC is aiming at - let the market restructure itself."

Some analysts question how well the CAAC would be able to regulate the new system, noting that even under current rules some airlines still offer illegal discounts to many passengers.

The CAAC introduced a revenue-sharing program on about 100 domestic routes in 2000, and increased the number to about 150 last year to stop price wars.

Under the program, airlines pooled their sales from the 150 routes and each received a percentage of sales based on the number of seats they offered.

The CAAC supports the new rules, but does admit there could be some disorder in the market when they first go into effect.

"Airlines complained about rigid control in the past but now that they are facing a free market, they are worried about competition in the near future," said Qiu, adding that the sector should be opened to let airlines grow in a market-oriented environment.

To become more competitive, Qiu suggests domestic airlines should spend more time improving their management and service, "which are far more important than just cutting prices."

Last month, China officially formed three airline groups by merging nine carriers under the CAAC's control.

(eastday.com November 27, 2002)