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China Eastern Sets Up Budget Carrier, Rivals May Follow

China Eastern Airlines Corp. (670) said it’s setting up its first low-fare carrier in the country, a move that may encourage its two bigger rivals to form similar ventures amid a surge in air travel.

China United Airlines, a subsidiary of the Shanghai-based company, has been converted into a low-fare unit as of today, China Eastern said in a posting on its microblog account. The aim is to make this China’s biggest budget carrier, it said.

Budget airlines are starting to come up across China after carriers in North Asia were slower to embrace a low-fare airline phenomenon that has lured travelers across much of South and Southeast Asia. Bigger competitors China Southern Airlines Co. (1055) and Air China Ltd. (601111) may follow China Eastern’s lead and set up their own iterations offering cut-rate fares in the country where growing prosperity and urbanization encourages air travel.

“It speaks of the liberalization of the industry,” said Andrew Orchard, an analyst at CIMB Group Holdings Bhd. in Hong Kong. “The trend we are seeing is a lot more pro-consumer.”

China United now has 26 aircraft, increasing to a fleet of 31 Boeing Co. 737 by the end of the year, according to James Wang, a spokesman for China Eastern. By 2019, when Beijing’s second airport is projected to be operational, the airline will operate out of that and expects to move 23 million passengers annually using a fleet of 80 planes, Wang said in a phone interview.

Photographer: Nelson Ching/Bloomberg

China Eastern Airlines Corp. airplanes are parked on the tarmac at Hongqiao International Airport in Shanghai. China Eastern said it’s setting up its first low-fare carrier in the country, Close

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Photographer: Nelson Ching/Bloomberg

China Eastern Airlines Corp. airplanes are parked on the tarmac at Hongqiao International Airport in Shanghai. China Eastern said it’s setting up its first low-fare carrier in the country,

“On a global basis, low cost carrier development in China is the slowest,” said Wang. “Since Chinese authorities released late last year a policy that’s supportive of low cost carriers, we’ve been trying to decide on the best way for us to proceed.”

Jetstar Hong Kong

China Eastern setting up its own budget unit raises concerns about the fate of a budget airline joint venture with Qantas Airways Ltd. (QAN)’s Jetstar in Hong Kong and challenge Cathay Pacific Airways Ltd. (293), an analyst said.

“The setting up of the low-cost carrier indicates their growing frustration with the inability to consummate a similar structure in Hong Kong,” said Tim Ross, an analyst at Credit Suisse Group AG in Singapore. “That’s an expression of frustration of the process.”

China Eastern’s Wang said there’s “no relation” between its venture with Qantas and the plans for China United. Hong Kong tycoon Stanley Ho’s Shun Tak Holdings Ltd. also holds a stake in Jetstar Hong Kong.

“We’ve been in touch with the Hong Kong authorities and we remain confident,” said Wang, referring to the Jetstar venture.

Cathay Pacific, Hong Kong’s biggest airline, has opposed the application of Jetstar to start an airline in the former British colony with China Eastern saying it’s against the city’s interest. The partners have been waiting for more than a year to get a license to start flights.

Travel Demand

The number of passengers flying on domestic routes within China, including those to Hong Kong, Taiwan and Macau, last year was 690.9 million, 11 percent more than a year earlier, according to the Civil Aviation Administration of China.

An American makes 1.8 flights per year, a German makes 1 flight annually while people from China and India make a relatively low 0.2 and 0.1 flights, planemaker Airbus Group NV (AIR) said in a 2012 Global Market Forecast report.

To realize that potential, last year China’s government deregulated the nation’s civil aviation industry. That enabled entrants to start new carriers such as Qingdao Airlines and Zhejiang Loong Airlines.

Some 50 so-called budget airlines were established in Asia Pacific since 2002. About half of the low-fare carriers in the region are unprofitable this year, according to industry consultant CAPA Centre for Aviation. Low-fare passengers currently account for 8 percent of total traffic in Hong Kong, compared with almost 60 percent for Singapore, according to data from CAPA. There are over a dozen new or proposed budget carriers in China, it said.

China Southern and Air China are each expected to convert one of their subsidiaries into low-cost carriers, according to Will Horton, a Hong Kong-based analyst at CAPA, and said that there are over a dozen new or proposed budget carriers in China.

To contact the reporters on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net; Clement Tan in Hong Kong at ctan297@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net Subramaniam Sharma

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