State-backed Air China, the nation's flagship carrier, may board Star Alliance next year, which will help the airline fly higher globally, suggest sources close to the deal.

Officials of Star Alliance, the global aviation union, announced last week they are negotiating with Air China about the Chinese carrier's possible membership.

"We are busy ... putting the finishing touches on the issue. If everything goes smoothly, we expect Air China to make its own decision very soon, maybe next year," Yoji Ohashi, president and chief executive officer (CEO) of All Nippon Airways (ANA), told China Business Weekly.

Air China should be Star Alliance's top choice in China, in terms of serving as the global air organization's local member, Ohashi said.

"Of course, China has several high-flying carriers, and we also enjoy sound partnerships with them, such as Shanghai Airlines."

If Star Alliance is going to strike a membership deal with one local counterpart, he added, it should be with Air China.

Air China, the country's only flag carrier, has hammered out extensive code-sharing agreements with a dozen of Star Alliance's members, including Deutsche Lufthansa AG (Lufthansa), United Airlines, ANA, Asiana Airlines and Austrian Airlines Group.

Air China, which is owned and supported by the Chinese Government, is the last of China's three gigantic airline groups to list.

It sold 2.805 billion shares, or 31 percent of its enlarged equity, for HK$2.98 (38 US cents) per share during its stock debut in Hong Kong last Wednesday.

Shares in the company closed at HK$3.225 (41 US cents) last Wednesday, after they reached HK$3.25 (42 US cents).

"The timing is mature for Air China to take one more step to further drive its fast-developing business," Liu Weimin, director of Aviation Laws Research Center affiliated with the Civil Aviation Management Institute of China, told China Business weekly.

"After a series of well-designed moves to extend code-sharing deals with international counterparts, and after its successful listing, it is quite natural for the flag carrier to fly further internationally."

Liu said the aviation industry is recovering, both in China and globally, and Air China cannot afford to miss such a golden opportunity.

"The current market circumstance is quite favorable, and compared with its domestic peers, Air China has done a better job in tapping the international market during the past year," Liu said.

"So, I suppose, it is just the right time for Air China to make a decision, and, if managed well, it can benefit from such a deal."

Of course, boarding such a global alliance will mean greater responsibility and more openness on the part of Air China, which is not as strong as some international carriers.

That could have negative repercussions for Air China.

Air China will not confirm whether it will join Star Alliance next year.

An Air China marketing official, who is based in Beijing, suggested it would be sensible for the carrier to join Star Alliance, as it has a sound relationship with the group.

"But it is my personal view. There is no confirmed news from the executives about formal talks with Star Alliance," the official, on condition of anonymity, told China Business Weekly.

Liu said there is no denying that Air China will have to face stricter self-regulation if it joins a global alliance. For example, it will have to share its networks with team members.

But, overall, Air China would benefit, not suffer, as a member of such a grouping, Liu added.

Air China, by negotiating with Star Alliance's members, might be able to reduce the costs of joining the group, Liu added.

"It will be a technical problem, and it will be subject to concrete talks between Air China and Star Alliance's members," Liu added.

Wolfgang Mayrhuber, chairman and CEO of Lufthansa, said: "If Air China is expected to fly further internationally, it should join a global alliance sooner or later. It is subject to their own decision. And I am sure they will make the best decision to select the best partner."

Star Alliance debuted in 1997. It has become the world's largest aviation alliance. The group is composed of 15 members -- Air Canada, Air New Zealand, ANA, Asiana Airlines, Austrian Airlines, bmi, Polish Airlines, Lufthansa, Scandinavian Airlines, Singapore Airlines, Spanair, Thai Airways, United Airlines, US Airways and VARIG.

Star Alliance's network encompasses 772 airports in 133 countries.

Star Alliance held 26.8 percent of the global market in the year's first half. It's market share is 2.2 percent and 8.5 percent higher, respectively, than its rivals Sky Team and OneWorld.

In Asia, Star Alliance held 27 percent.

When asked if Cathay Pacific Airways' (Cathay) decision to buy 9.9 percent of Air China will affect Star Alliance's partnership with Air China, if it comes to fruition, Jaan Albrecht, the alliance's chief executive officer, offered a positive outlook.

"The possible deal with Air China will not be affected by any financial investments by our global rivals," Albrecht said.

"In fact, there are numerous examples within the industry of how financial investments can co-exist with other kinds of partnerships in one airliner."

What is more important is Air China's enthusiasm about joining the global air association has never withered, even after Cathay's investment, Glenn F. Tilton, chairman, president and CEO of UAL Corp and United Airlines, told China Business Weekly.

An official with Cathay recently suggested the two airliners may work more closely together after Air China's listing, especially to find more cooperation opportunities, such as code-sharing or trying to convince Air China to join OneWorld, the global airline alliance in which Cathay plays a leading role.

"There is a possibility Air China may get on board OneWorld, and we will talk about that later," the official added, on condition of anonymity.

The tie-up by Air China and Cathay is a win-win situation that will help Cathay develop its networks on the Chinese mainland. Air China, meanwhile, will be able to take advantage of Cathay's extended international network.

In China, Star Alliance's networks cover most of the economically developed cities in the coastal areas, such as Beijing, Shanghai, Guangzhou, Tianjin, Dalian and Qingdao.

Restricted by China's laws and regulations, a single aviation company cannot establish a network that covers every corner of the world.

But establishing an alliance with other airlines, it can greatly extend its coverage and operating efficiency worldwide.

"Joining a global alliance is surely a good choice, since being more and more open is an unavoidable trend within the industry in China," Liu said.

Air traffic in China is expected to grow at least 8 percent annually for the next 20 years.

The country's aviation industry this year is expected to report its best profits since 1997, as China's passenger load factor reached 70 per cent for the first time since 1996.

The aviation sector, which was hit by the deadly SARS (severe acute respiratory syndrome) virus last year reported 5 billion yuan (US$604 million) in losses last year.

In a recent research report, which was quoted by Reuters, investment house CLSA estimated air passenger travel will grow 12-15 percent in China next year, and air cargo will grow 14-17 percent.

"As China's economic engine keeps driving forward, more air transportation capacity for both cargo and passengers will be required. Only by working with global partners, through either code-sharing or taking on an alliance, will a local carrier's capacity be fully used, and its network further extended," Liu said.

(China Business Weekly December 21, 2004)