China Eastern Airlines turns Beijing unit into budget carrier

Reuters

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* China Eastern converts full-service subsidiary into budget carrier

* Budget carrier to use 80 Boeing aircraft, sees fleet expanding to 100 by 2019

* China Easter chairman sees explosive growth in budget air travel in China

BEIJING, July 2 (Reuters) - China Eastern Airlines Corp Ltd launched on Wednesday its budget airline, becoming the first state-run carrier to tap the low-cost travel segment long dominated by privately run Spring Airlines.

China Eastern said it would use the 80 Boeing 737 planes it had ordered from Boeing Co last month in a $7.4 billion deal for the budget airline China United, which was created by converting a full-service subsidiary.

China United aims to have up to 100 planes in its fleet by 2019 from 26 now, China Eastern Chairman Liu Shaoyong told reporters in Beijing.

"We'll see explosive growth of LCCs, especially in China," Liu said. "In Asia alone, LCC (low-cost carriers) have already accounted for over one third of the market."

Low-cost carriers, led by Shanghai-based Spring Airlines, account for up to 7 percent of air travel market in China, compared to Europe, where they control 50 percent of the short-haul market.

A slew of incentives issued by the Civil Aviation Administration of China earlier this year, including cutting airport charges and simplifying approvals, has encouraged more budget airlines to take to the skies.

Industry analysts say China Eastern's foray into the budget segment may encourage other state-run carriers such as Air China and China Southern Airlines Co Ltd to follow suit.

China Eastern Airlines intends to bring in a strategic or financial investor to shore up the budget carrier, Liu said, without giving further details.

China United will continue to fly to 54 domestic cities but with tickets priced at a 20-40 percent discount to the fares it sold as a full-service carrier, its President Zhang Lanhai added. It could also expand into neighbouring countries.

The launch of China United could raise questions about the fate of Jetstar Hong Kong, a budget carrier jointly owned by China Eastern, Macau gambling mogul Stanley Ho and Australia's Qantas Airways Ltd.

Intended to be the only low-cost carrier flying from Hong Kong, Jetstar Hong Kong has faced delays in securing its airline licence.

Liu declined to comment on Jetstar Hong Kong.

China's airline market, which is dominated by state-owned carriers China Eastern, China Southern Airlines and Air China, is believed by analysts to be on the cusp of a low-cost travel boom.

Northeast Asia, especially, is seen to be a laggard in the low-cost air travel market, with only a handful of small carriers flying in Japan and South Korea. ($1 = 6.2115 Chinese Yuan Renminbi) (Reporting by Fang Yan and Koh Gui Qing; Editing by Miral Fahmy)

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