Battle brewing in Chinese aviation sector

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China's largest airline, Air China ( AIRYY , quote ) yesterday said the Chinese aviation sector is not yet ready for budget airlines and Air China will not be competing within the space.

Image courtesy Mehdi Nazarinia: http://www.airliners.net/photo/Air-China/Airbus-A330-243/1635873/L/ A top unnamed Air China official simply cited China's policies and market environment as not ready for low budget services yet.

Air China chairman Wang Changshun stated that the Chinese aviation industry "is facing a more severe situation than that during the financial crisis in 2008... So, Air China will mainly focus on improving its current major services."

This was similar to statements he made three months ago meeting in Beijing after China Eastern Airlines ( CEA , quote ) and Australia's Qantas Airways ( QUBSF , quote ) partnered up to create a low cost carrier now known as Jetstar Hong Kong.

Changshun says the Chinese aviation sector is being impacted on three separate fronts: the euro debt crisis is impacting Chinese airlines, while slowing growth in the U.S., and slowing growth locally within Asia are all hindering the space.

"Passenger transport service is better than cargo", stated Changshun, "the domestic market is better than the international one and regional routes are better than the artery ones." It is important to note that Changshun is referring only to the Chinese aviation sector in this statement.

The Chinese aviation sector is being hit hard. Air China alone saw net profits fall 38.8% in 2011 compared to 2010 net profits. Reports suggest it was mainly due to the price of fuel. Air China's 2011 profits were $1.17 million, or roughly ¥7.5 billion, well off the pre-2008 pace.

Changshun is expecting the market to expand this year, with volume increases of nearly 350 million from last year's 290 million, and Air China snagging about 200 million.

The stage is set for an old fashioned showdown in the Chinese aviation sector, with the largest airline in the business on one side - full service - and the second largest airline partnering up to create a budget airline, effectively creating a new segment in China's aviation industry. Who will win?



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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