A booming tourism market will lead China's aviation industry to a peak in the next few years thanks to big events such as the 2008 Olympic Games in Beijing and the 2010 World Expo in Shanghai.

The two events will undoubtedly draw more visitors to the host cities. Five million overseas visitors and more than 120 million domestic travelers are expected to visit Beijing next year, according to the organizer of the Beijing Olympic Games.

The Shanghai World Expo is expected to draw 70 million visitors, the city's officials have said.

The events will benefit the host cities' aviation industry as well as neighboring cities, which will profit from a spillover effect.

The country is expected to be the most popular tourism destination in the world in 2015, when domestic airports will handle 450 million passengers annually.

In the third quarter of this year, domestic carriers flew 52 million passengers, a rise of 15.3 percent year on year, according to the General Administration of Civil Aviation of China (CAAC).

A rising passenger volume and a strong yuan led profit to rise 66 percent in the third quarter of this year to 9.1 billion yuan (US$1.23 billion), the administration said.

The appreciation of the yuan is another key fact that secures profit for the carriers. The yuan has climbed more than 10 percent against the US dollar since a peg was scrapped in July 2005, which cuts the repatriated value of US dollar-denominated debts for the airlines.

China's swelling trade surplus has triggered pressure from the United States and European countries for the yuan to appreciate even more.

Stephen Green, a senior economist at the Standard Chartered Bank (China) Ltd, expects the yuan will appreciate aggressively against the US dollar next year.

"We revised our forecast to 7.4 by the end of this year and 6.84 by year end of 2008," Green has said.

However, the industry isn't free from the impact of surging oil prices.

The spike in fuel prices is expected to add US$14 billion to the global aviation industry fuel bill in 2008, driving it up to US$149 billion (based on an average price of US$78 per barrel), the International Air Transport Association (IATA) said in its latest financial forecast.

The association sharply revised downward its profit outlook for 2008 to US$5 billion from the previously forecast US$7.8 billion. The broadening impact of the credit crunch is expected to slow revenue growth to 4.7 percent and traffic growth to four percent.

But an increase in fuel surcharges on the mainland will cover part of the added expense. The CAAC has allowed domestic airlines to increase fuel surcharges on domestic flights by as much as 25 percent from November. The passenger fuel surcharge was raised from 50 yuan to 60 yuan per passenger for flights under 800 kilometers. For long-haul flights, the fee was raised from 80 yuan to 100 yuan.

Potential mergers and acquisitions will also bring dramatic changes to the domestic aviation industry next year.

The battle among China Eastern, Air China and Singapore Airlines is still grabbing headline.

Singapore Airlines Ltd and its parent Temasek Holdings Pte signed an agreement last month to buy 24 percent of China Eastern Airlines Corp at HK$3.80 a share.

However, before the deal was made, Air China's parent considered pairing with Hong Kong's Cathay Pacific Airways to bid for a stake in China Eastern although Cathay has since abandoned the plan.

The US$926-million deal with Singapore Airlines and Temasek still needs approval from China Eastern's minority shareholders, including Air China.

"Air China's decision may reshuffle China's aviation industry," said Shenyin and Wanguo Securities analyst Li Shurong.

"Shanghai Airlines will be the next acquisition target for carriers that want to grab the Shanghai market," Li said.

Grand China Airlines, the nation's fourth-biggest, was inaugurated on November 29 after the merger of four air carriers, including Shanghai-listed Hainan Airlines, to compete with the top three national players in a market that continues to boom.

Meanwhile, major domestic carriers are stepping into international aviation alliances to expand overseas networks.

China Southern Airlines joined SkyTeam in November. Air China and Shanghai Airlines jointed Star Alliance in December. China Eastern Airlines is in talks to join British Airways Plc and AMR Corp's American Airlines in oneworld.