Where is Shenzhen Airlines Headed?

Now the world's largest aviation market (according to IATA this week), China's market remains heavily regulated by the Civil Aviation Administration of China (CAAC), which also actively encourages airline consolidation. This was originally aimed at stemming revenue losses, but is increasingly intended to create more globally competitive carriers that can also withstand competition in the domestic market.

For instance, in February China Eastern merged with its smaller rival, Shanghai Airlines to consolidate their respective positions in the Shanghai market.

Now, Air China is weighing up the merits of a possible merger with its regional competitor, Shenzhen Airlines, in which it has a 25% stake.

What Does Shenzhen Airlines Have to Offer?

The carrier plays an important role at its largest domestic hub in Shenzhen with 569 of its 589 weekly departures being domestic routes (to 47 destinations). That is 96% of its overall network from Shenzhen.

Taking into account its domestic and international frequencies from China, Shenzhen Airlines is the fifth largest carrier.

Competition is summarised:

Source Flightbase March 14-20 2010

What About the Network in Shenzhen?

Air China serves Shenzhen with 220 scheduled weekly flights from 10 Chinese cities.

Gaining control of Shenzhen Airlines would enable Air China to build a strategic network in the south, where it would take a leading position in the Shenzhen market. It would be able to compete more aggressively with China Southern, which operates 514 weekly flights from Shenzhen to 40 destinations. While a merged Air China/Shenzhen, Air China will have access to 45 new routes that are currently operated by Shenzhen Airlines to complement its existing operation in Shenzhen.

Routes News has also analysed what Air China could gain from Shenzhen Airlines' international network.

Current schedule:

Source Flightbase (March 14-20, 2010)

Shenzhen Airlines' International Network from Shenzhen

Shenzhen Airlines' much smaller international network comprising 24 weekly departures to seven destinations from Shenzhen compares with Air China's 485 weekly international network departures, of which 266 weekly flights are served from Beijing.

However, Air China offers no international services from either Shenzhen in the south - demonstrating why the carrier would benefit from access to this network.

The Alliance Perspective

Geographically, Shenzhen is located on the eastern side of the Pearl River Delta. In this region, Hong Kong is a oneworld alliance hub, while Guangzhou is a SkyTeam hub.

Each of these airports connect international traffic into China via their based carriers: Cathay Pacific and Dragon Air in Hong Kong and China Southern in Guangzhou.

Air China and Shanghai Airlines - each Star Alliance members - have been limited to their Beijing and Shanghai hubs. A hub in Southern China would also provide Air China with a better geographical routing from the west to the south and east of China.

What Would Air China Do with Shenzhen Airlines?

Air China is now actively developing its secondary hub in Chengdu and has plans to base aircraft there to operate regional international services. The carrier could potentially do the same with Shenzhen, by making use of Shenzhen Airlines' assets.

It is likely that Shenzhen Airlines will only be beneficial to Air China if the airline operates medium-haul to long-haul international services from Shenzhen, or if more Star Alliance carriers operate International services into the hub.

Without these new international services, the only benefit Air China will get from Shenzhen will be a valuable share of the domestic market in southern China.