Centre for Asia Pacific Aviation notes that reports are circulating in China that the government is considering a new round of airline consolidation, with an intention to consolidate the big three airlines (Air China, China Southern and China Eastern) into two mega carriers.

"Profitability of the big three came under pressure in 2006, mainly due to higher fuel costs, but Shanghai's China Eastern also struggled under the weight of a bloated cost structure from the last round of consolidation initiated in 2002," stated the Centre's Executive Chairman, Peter Harbison.

China Eastern unsuccessfully sought a foreign partner in 2006, so attention could be shifting to a domestic solution.

According to Mr Harbison, "a deal between China Eastern and China Southern is logical, as the latter retains significant operations in Guangzhou and Beijing, but is facing intense competition from the powerful Air China-Cathay Pacific combination".

Air China-Cathay Pacific are also planning to establish a Shanghai-based cargo venture in coming months.

"So, the landscape in China is shifting away from one carrier for each Mainland hub (Beijing, Shanghai and Guangzhou) towards large, integrated carriers with a strong presence in each of these cities, plus Hong Kong," concluded Mr Harbison.

Investors have sent the airlines' shares higher, particularly since the start of 2007 reflecting lower fuel prices, but possibly in anticipation of more mergers and acquisitions?

Big Three Chinese Airlines' Daily Share Prices (HKD): Jan-06 to Jan-07

Source: Centre for Asia Pacific Aviation & Hong Kong Stock Exchange