Mainland flag carrier Air China lost out in the auction for a controlling stake in Shenzhen Airlines to two privately run firms that jointly bid 2.72 billion yuan (HK$2.56 billion).

Its final bid for the 65 percent stake in the regional carrier was 2.71 billion yuan, just 10 million yuan shy of the winning bid from Yi Yang Group and Hui Run Investments. The mainland's second-biggest carrier in terms of passenger miles carried already owns 25 percent of Shenzhen Airlines.

Air China had sought to gain control of the carrier in order to boost its presence in the rapidly-growing air travel market of south China, which is now dominated by the mainland's biggest airline, China Southern. Air China recently won approval to set up an operational base in Guangzhou, China Southern's main hub, to supplement its own extensive operations in Beijing and its dominant role in international routes.

Air China will retain its existing 25 percent stake in Shenzhen Airlines, the carrier said.

Analysts had favored Air China to win the auction, which went to 93 rounds before the Beijing-base carrier and its partner Shenzhen Investment Holding, threw in the towel.

``The final price was too high,'' Air China spokesman Wang Kai said.

The seller is state-owned conglomerate Guangdong Holding Group, a subsidiary of Guangdong Development Bank, which is shedding non-banking assets as part of a restructuring plan.

The Shenzhen-based carrier, with more than 80 domestic routes and 27 Boeing 737 aircraft, employs some 4,000 staff. It is one of the country's more profitable airlines, having turned in a profit for the past 10 years, even during the SARS outbreak in 2003 which decimated air traffic throughout Asia and pushed most airlines into losses.

It posted a net profit of 200 million yuan last year, down from 330 million a year earlier, according to mainland media reports,

The carrier plans to increase its fleet to about 100 aircraft by 2010. It ordered five Airbus A320s last month.

carol.chan1@singtaonewscorp.com