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New worry for China Eastern

By Lu Haoting (China Daily)
Updated: 2008-06-11 11:29

A Hainan Airlines plane at Nanjing Lukou International Airport. [China Daily]

China Eastern Airlines is facing yet another challenge in the lucrative travel market in Yunnan province after the industry watchdog suspended its routes and reduced its flight frequencies last month.

HNA Group, the country's fourth largest airline group and parent of Hainan Airlines, is joining the Yunnan local government to create a new carrier in the southwestern province. The new venture, with government support, is widely expected to challenge China Eastern's dominance in the province.

Based on an agreement signed between HNA and the Yunnan provincial government on Friday, HNA's subsidiary Grand China Air will hold controlling stake in the new carrier, called Yunnan Airlines. The State-owned assets supervision and administration commission of Yunnan will hold the rest of the shares.

The new entity will comprise mainly the assets of Lucky Air, an HNA subsidiary launched in 2006 in Yunnan with a fleet of six aircraft. It plans to expand to a fleet of more than 30 aircraft within three years, said HNA Chairman Chen Feng.

The new airline would be promoted as a local carrier of Yunnan province, according to the agreement.

Yunnan used to have its own airline, which was established in 1993 by the Civil Aviation Administration of China's (CAAC) Yunnan authority. Thanks to the rich tourism resources of Yunnan, the airline was one of the most profitable enterprises in the province. But it was merged into China Eastern in 2002 as the government consolidated the airline industry by establishing three major airline groups - Air China, China Eastern and China Southern Airlines.

But China Eastern failed to consolidate the management and the staff of the acquired business. Media reported that disputes arose between the Yunnan government and the Shanghai-based carrier.

The government hoped the airline would play a bigger role in promoting economic growth of the province, while China Eastern said the Yunnan subsidiary should be subordinate to the overall strategic planning of the group.

The Yunnan government proposed in 2006 to buy 51 percent of shares of the Yunnan subsidiary. But China Eastern refused to sell the stakes.

"HNA Group will be in a very favorable situation given its strategic partnership with the local government," said Li Lei, an aviation analyst with CITIC China Securities. "In the long run, it will increase competition in the local travel market."

The CAAC recently suspended China Eastern from flying two routes and cut its frequency on six routes in Yunnan for flight disruptions that affected over 1,000 passengers in the province. The aviation regulator gave the carrier's routes to its four rivals. The loss of routes is expected to cost China Eastern 405 million yuan ($58.45 million).