An easy choice to make

China Daily (Canada) - - HONG KONG -

If you’re tired of con­cept stocks, you can al­ways just pick any of the ma­jor air­lines and re­lax in the com­fort of know­ing they will be sup­ported by the ever ex­pand­ing travel mar­ket on the Chi­nese main­land.

Lately, there’s an­other rea­son to top up on main­land air­line shares, some of which are listed in Hong Kong. Lead­ing State-con­trolled air­line com­pa­nies will see their prof­its boosted by the ex­po­nen­tial growth in over­seas travel as more and more main­land peo­ple go over­seas for busi­ness or leisure.

The av­er­age yield of long­haul in­ter­na­tional flights is sig­nif­i­cantly higher than that of do­mes­tic flights where heavy dis­counts are the norm.

Many stock an­a­lysts and in­vestors be­lieve the fo­cus on de­vel­op­ing in­ter­na­tional busi­ness will re­shape the industry. Not sur­pris­ingly, there have been a num­ber of re­ports of im­pend­ing mega merg­ers among the big air car­ri­ers.

The reg­u­la­tory author­i­ties’ de­nials of such re­ports, ap­par­ently, have not damp­ened in­vestor in­ter­est in air­line stocks. Share prices of ma­jor com­pa­nies in the sec­tor, in­clud­ing Air China, China South­ern and China East­ern, have con­tin­ued to surge.

The rea­son­ing is sim­ple. Merger is the most log­i­cal and prac­ti­cal way for com­pet­ing air­lines to max­i­mize prof­its from in­ter­na­tional flights.

The num­ber of over­seas routes is de­ter­mined by gov­ern­ment-to-gov­ern­ment bi­lat­eral agree­ments. Those routes are then split among the car­ri­ers. Merg­ers, there­fore, would help air­line com­pa­nies bet­ter achieve economies of scale which is of par­tic­u­lar im­por­tance to the industry that’s known for high over­head costs and slim profit mar­gins.

The au­thor­i­ta­tive Shang­hai Se­cu­ri­ties News re­ported re­cently that Bei­jing-based Air China Ltd and Guangzhou-based China South­ern Air­lines Co Ltd were plan­ning to merge, but this was de­nied by both air­lines.

How­ever, stock an­a­lysts and industry sources have been quoted as say­ing that a tie-up be­tween th­ese two air­lines would make sense as it could ease in­fight­ing among State-con­trolled car­ri­ers for the cov­eted routes to des­ti­na­tions in the US, Europe and Aus­tralia — routes that are most fa­vored by main­land trav­el­ers.

On the day Shang­hai Se­cu­ri­ties News pub­lished the re­port, shares of both Air China and China South­ern soared by the daily limit of 10 per­cent, while the stock price of China East­ern, which was not men­tioned in the re­port, picked up more than 7 per­cent.

In­vestors seem con­vinced there’ll be some form of re­struc­tur­ing of the main­land’s air­line industry that would ben­e­fit ma­jor car­ri­ers. If you’re one of them, it should be an easy choice — just go for some of the big­gest industry play­ers.

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