China Southern Airlines plans to invest 720 million yuan (HK$727.63 million) to form a regional carrier in Chongqing, aiming to tap passenger and cargo business in western China.

Company secretary Su Liang said the company will hold 60 percent of Chongqing Airlines, while Chongqing city's investment arm will own the remaining 40 percent.

China Southern will bring in three Airbus A320 aircraft and hopes to launch new routes from Chongqing to coastal cities and Beijing.

"We want to set up a Chongqing-based hub to develop western China, even though China Southern already operates a few routes from Guangzhou to Chongqing," Su said.

News of the joint venture sparked concern among market observers that a fares war could break out after the new airline is set up, as Air China and China Eastern Airlines, serves the same routes.

Su said the new airline would spark competition among the three carriers.

He said setting up aviation hubs is the trend in China.

Beijing-based Air China set up a base for domestic and international air services in Shanghai in March 2005, throwing down the gauntlet to China Eastern Airlines, which is based in the financial hub.

China Southern's investment in Chongqing is in line with the government's directive to boost air traffic and speed development in the relatively poor western regions.

China will spend 52 billion yuan on western airports by 2010, according to the aviation regulator.

The joint-venture partners are waiting for regulatory approval for the Chongqing-based carrier, which will have a registered capital of 1.2 billion yuan.

Meanwhile, Shenzhen Airlines is also setting up a Xian-based airline for 500 million yuan in partnership with a US-based carrier.