Passengers queue to check in at Shanghai Pudong International Airport in June. Photo: CFP

With mergers of State-owned enterprises (SOEs) again in the news, is it also possible that the same thing might happen in China's civil aviation industry?

On Tuesday, the State Council Information Office issued guidelines on the restructuring and merging of the country's centrally administered SOEs, planning to consolidate, innovate, reorganize or close down a number of such enterprises by 2020.

Civil aviation-related SOEs made the list twice, which shows the central government is determined to make some changes.

At present, the State-owned Assets Supervision and Administration Commission of the State Council oversees six SOEs in the civil aviation industry.

There are the parent companies of the national airlines Air China, China Eastern and China Southern.

The other three are the supply groups: China National Aviation Fuel, China TravelSky Holding Co and China Aviation Supplies Holding Co.

The guidelines aim to have these companies pool their resources and cut overcapacity.

However, overcapacity is not one of the civil aviation industry's major problems because the three major airlines all have distinct territories without much crossover.

Furthermore, the three airlines are all performing well. In June alone, revenue per kilometer for China Eastern, China Southern and Air China grew by 14.3 percent, 9.6 percent and 8.9 percent year-on-year respectively, according to data from the companies.

In terms of international passenger transport, revenue passenger kilometers grew by 42.7 percent, 30.6 percent and 13.6 percent respectively.

This is a result of the airlines' overseas expansion strategy as each company is busy exploring the overseas market and working with overseas companies to expand their networks.

It seems that now is the right time for the airlines to expand further into the international market due to low fuel prices and rising global demand.

And I don't believe the regulators would halt the airlines' robust expansion through a so-called merger.

So, which sectors will undergo restructuring?

The guidelines clearly state that the government encourages the air freight, telecommunications, electric power, and automobile sectors to set up shareholding companies to reduce disorderly competition and to improve efficiency.

Over the past few years, there have been several rumors claiming that the three carriers' cargo businesses would be consolidated.

Last year, there were even media reports quoting official sources who said authorities were interested in integrating the three air freight businesses of the three airlines.

The interest in consolidation stems from the poor performance of the airlines' cargo businesses, which have been raking up losses for years.

But the problem is that the airlines' freight businesses don't only involve cargo aircraft. They also transport cargo in the bellies of passenger aircraft, so it's not as if the airlines can simply amputate their freight businesses.

Take Air China Cargo as an example. It is a joint venture between Air China and Hongkong-based Cathay Pacific. Its registered capital rose 62 percent to 5.2 billion yuan after an injection of 2 billion yuan in 2014. By the end of 2015, it has 15 freight aircraft, including eight B777Fs, 3 B747-400s and four B757-200SFs.

China Cargo Airlines was once the biggest carrier in the industry with the largest fleet, but as of June 2015 it had only 11 freight aircraft. Last year, domestic media reported that China Southern's air freight arm had just 13 freight aircraft.

If the three air freight carriers merged, they would have fewer than 40 aircraft, not enough to compete with powerful foreign counterparts.  Most of their bases are in Shanghai, a highly competitive area, where most of business is shared among foreign carriers such as DHL and FedEx.

The consolidation of the three major State-owned air cargo businesses would make them more competitive with their foreign peers.

But the problem for China's air freight companies isn't so much their scale as their business model. They don't have the right to set their prices, which explains why prices have fallen even as volumes have risen.

Meanwhile, private express delivery firms are growing fast, posing a major challenge to the State-run companies. Some of the private firms have even considered getting listed.

SF-Express alone has 30 freight aircraft. It is now seeking to go public via a merger with a listed rare-earth minerals producer.

So, to merge or not to merge, that is one question.

But how to win the market after a merger is the another question worth considering.
Newspaper headline: To merge, or not merge?