(Yicai Global) Sept. 13 -- State-owned Aviation Industry Corp. of China, or AVIC, is selling its controlling stake in domestic carrier Joy Air as insufficient demand and expensive tickets put a dampener on China's regional airlines.

AVIC affiliate Joy Air Holding plans to sell half of its 48 percent stake in Joy Aokai Airline Management, which lists Joy Air as its main asset, China Beijing Equity Exchange said yesterday. Joy Air is the only Chinese regional airline to list the Modern Ark 60, a turboprop plane made by AVIC Xi'an Aircraft Industry Group, among its fleet.

Joy Aokai lost CNY222 million (USD32.4 million) last year on operating income of CNY395 million, according to an audit published by the exchange, which said that the company is in a deficit because the MA60s are expensive to run and the country's vast high-speed rail network is proving steep competition for air travel.

The problem isn't unique to Joy Air. Many Chinese airlines have been struggling with their regional routes due to high costs, particularly fuel, and fewer passengers.

The Civil Aviation Administration of China introduced subsidies to for the firms and small- and medium-sized airports last year in a bid to drum up business. It spent CNY2.7 billion (USD400 million) on those discounts last year, with around a third going to the carriers. The subsidies are exclusively for operations and other funding is available for the airlines and airports, such as infrastructure investments and discounted loans.

There is a lack of demand because of the price of tickets sold by regional airlines, said Lin Zhijie, an insider at the aviation administration. Rail is an important mode of transport in China and it has a direct impact on smaller airlines because of trip lengths, he added, noting that internal flights are much more expensive for smaller carriers.

Regional airlines target third-tier cities where citizens earn less than half of those in first-tier cities, he said, adding that despite them spending less money, tickets are more expensive and there is a huge gap between supply and demand.

The government has no choice but to offer subsidiaries, reducing a CNY800 (USD118) ticket to CNY500, or even CNY200, he continued, so that travelers can afford the tickets.

Editor: James Boynton