China's largest air carrier to run a terminal in the capital.

China Southern Airlines Co is trying to optimize its domestic network through gaining a foothold in the country's three hub airports.

The Guangzhou-based carrier, the country's largest in terms of fleet, recently set up a joint venture to run one of the terminals at Beijing Capital International Airport.

It will serve only airlines in which China Southern has a stake and itself.

"We hope to turn Beijing into one of the hub cities in our domestic flight map," said Cai Zhizhou, a China Southern official. "After taking over two smaller carriers, we need an airport to serve as a transferring point for passengers in the northern part of China."

Last year, the airline took over two northern regional carriers, China Xinjiang Airlines and China Northern Airlines. The move came in the wake of a government reshuffle of the country's airlines, merging nine carriers into three air groups.

In the capital, China Southern will hold a 50 percent stake in the 18 million yuan (US$2.2 million) joint venture operated with Beijing Capital International Airport.

The terminal, known as Terminal No 1, is an old building which is designed to handle 8 million passengers annually. It will start serving all units under China Southern in about a year's time.

Although the terminal is capable of receiving more passengers, Cai said they won't use it for other carriers.

"We didn't buy the terminal for making money from handling airport business," Cai noted. "We only want to use it to serve our transferring passengers better and to be operated according to our requirements, something which public terminals are unable to offer."

China Southern Airlines posted a record loss of 1.23 billion yuan in the first-half after passenger numbers plunged because of the SARS outbreak.

That was worse than the median forecast of 922 million yuan loss from five analysts surveyed by Bloomberg News.

China Southern Airlines' move will make Beijing another hub in the company's domestic network in addition to its home base, Guangzhou. There the company has invested nearly 4 billion yuan in the new Baiyun International Airport which is currently under construction. When completed, it will be the second-largest airport in Asia behind Hong Kong.

Analyst say it will be a trend for domestic airlines to invest in airports nationwide after the two sectors have been freed from central government control.

"The central government used to control tightly on investment in airlines and airports. Now as they have been operating by themselves, they're able to invest freely to raise profits," said analyst Zhu Anping of Shenyin & Wanguo Securities.

The shift comes as domestic carriers try to turn their traditional flight arrangements of point-to-point service into hub cities and feeder lines, an international practice in foreign countries.

"Chinese airlines are still operating by the model of flying passengers directly between cities. But they have already started to make the shift such as establishing hubs across the nation," Zhu said.

China Eastern Airlines Co, another of the country's big three air groups, is expanding its operations at its Shanghai home by launching international transferring services.

Earlier this month, the carrier set up two special counters at Pudong International Airport to handle transferring international passengers in hopes of making Shanghai a hub for travelers taking its international flights.

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