Business

Rumors about the impending merger of two Shanghai-based carriers, China Eastern and Shanghai Airlines have been doing the rounds despite denials by managements of both the companies.

This time the rumors have been attributed to a journalist who claims to have overheard China Eastern Chairman Liu Shaoyong confirming the news at a recent dinner party.

The incessant merger news has also had an impact on the share prices of the two carriers. Shares of the smaller Shanghai Airlines rose 0.35 percent to 5.67 yuan in the past three days, while those of the ailing ST China Eastern fell 1.86 percent to 5.27 yuan in the same period.

Analysts said despite the slight fall in China Eastern shares, both companies have gained from the rumors.

“The share prices of the two airliners showed that the market is expecting something big to happen. Otherwise, the two debt-stricken carriers cannot carry such a high price, or we can say they are over-valued,” said Yao Jun, industry analyst, China Merchants Securities.

“It is true a merger between the two will be an opportunity for the carriers to get out of the current problems,” Yao said.

The idea of merging the two airlines was first broached in 2002 by the Shanghai municipal government, as it was keen on building a superpower local carrier. Although the proposal has been dogged by political and inter-regional complicities, the stock market has never given up its imagination of a super airline based in China’s busiest air traffic hub.

The latest merger rumors have been denied by both companies. Luo Zhuping, board secretary with China Eastern, said he has not heard of any new development on the merger front, while Xu Junmin, board secretary of Shanghai Airlines denied any knowledge of an impending merger. “Our airline has been operating normally as usual,” he said.

Plagued by fluctuations in fuel prices and falling demand due to the financial crisis, the two carriers have required massive government bailouts.

Falling demand along with hefty losses on hedging contracts saw China Eastern report a net loss of 13.93 billion yuan in 2008, a free fall from previous year’s 604 million. Its debt-to-equity ratio hit 115.13 percent by the end of March.

Shanghai Airlines is in no better situation, with its net loss widening to 1.25 billion yuan in 2008 from 2007’s 435.12 million yuan. The carrier’s debt-to-equity ratio touched 97.26 percent in March.

Analysts said that there are a number of ways that the two carriers could be restructured. China Eastern could acquire Shanghai Airlines or else downsize itself to a local enterprise controlled by the State-owned Assets Supervision and Administration Commission of the Shanghai government. There is a third proposal to merge selective assets of China Eastern and Shanghai Airlines.

The forthcoming World Expo 2010 will provide a golden opportunity for Shanghai-based carriers. If they can produce a win-win merger this time, they can benefit from the surging demand triggered by the expo, analysts said.

Li Lei, aviation analyst, CITIC China Securities, said: “China Eastern currently has a 33 percent share of the Shanghai market, while Shanghai Airlines holds around 20 percent. A merger would guarantee the dominant position in Shanghai for the resultant entity.”

(China Daily June 5, 2009)

AirAsia, the largest low-cost carrier in Asia, plans to continue its expansion in China this year by flying to two new destinations in the country while other airlines ground jets and cancel flights amid the global economic downturn.

The Malaysia-based airline will start flying to Chengdu and Xi’an from Kuala Lumpur in the second half of this year. It will also launch flights from Thailand to Shenzhen, Guangzhou and Hangzhou, to which the airline is already flying from Kuala Lumpur, by the end of the year.

“We will continue expanding. We still believe there is a big market out there and will maintain the philosophy of offering low fares to stimulate demand,” AirAsia Chairman Dato’ Aziz Bakar said yesterday.

As one of the fastest growing airlines in Asia, the seven-year-old AirAsia reported a 33 percent year-on-year growth in sales and posted $59 million net profit in the first quarter of this year while other large full-service carriers suffered plummeting revenues or even slipped into the red.

“People still have to travel. They are just becoming more sensitive to prices,” Bakar said.

AirAsia which used to mainly target leisure travelers and small- and medium-sized business owners, has seen a rising number of corporate travelers as large corporations cut travel spending and switch from legacy carriers to low cost services. But he declined to give specific figures on the breakdown of its passenger types.

Asian businesses are expected to reduce their travel spending by as much as 20 percent this year to cut costs amid the global economic downturn, according to a report by business travel management company Carlson Wagonlit Travel.

AirAsia, operating a fleet of 72 aircraft, has placed a huge order of 175 Airbus A320 jets and 25 A330 wide-body aircraft. Delivery of the airplanes is to complete by 2013.

Last year it launched six new routes to China, which was the most aggressive expansion by a foreign carrier. It began to fly to Tianjin in April.

Shanghai-based Spring Airlines is the only Chinese budget carrier. AirAsia’s smaller rivals, Tiger Airways from Singapore and Cebu Pacific from the Philippines, are also operating in China.

(China Daily June 4, 2009)

China Eastern is patching up its strained relationship with the Yunnan provincial government by committing to expand its presence in the home of some of China’s most popular tourist attractions.

The agreement between China Eastern Air Holding Company, China Eastern’s parent, and the State-owned Assets Supervision and Administration Commission (SASAC) of the Yunnan provincial government, calls for the establishment of a joint venture to further develop the air travel market in the southwestern province.

The Shanghai-based carrier will hold a 65 percent stake in the joint venture, with the Yunnan provincial government the balance. Financial details of the agreement have not been disclosed.

Zhao Jinyu, general manager of China Eastern’s southwestern branch, said that China Eastern would provide planes and staff, while the provincial government of Yunnan would offer land and capital. “The procedural work required for setting up a joint venture may push the whole process till the end of the year,” he said.

According to the plan, three more aircraft will be added to the joint venture’s initial fleet of 37 aircraft later this year. The joint venture is planning to increase the number of aircraft to 50 by 2011 when the yearly passenger traffic is expected to reach around 8 million from 6 million now.

Tourism is an important industry in Yunnan, which lags behind the coastal provinces in terms of industrial development.

“There is research showing that around one yuan in carrier receipts can generate around 8 yuan of consumer spending in the local economy. Consequently, the local government is keen on building bridges with the carriers. The carriers will also benefit from favorable governmental policies through the cooperative framework,” said Li Lei, industry analyst, CITIC China Securities.

China Eastern entered the Yunnan market after taking over Yunnan Airlines from the Yunnan government in a nationwide restructuring of the aviation industry in 2005. Since then, Yunnan Airlines has been absorbed into China Eastern and ceased to exist as an independent company.

According to insiders, after the merger, China Eastern used most of Yunnan Air’s capacity to support Shanghai flight development, which weakened its market presence in Yunnan.

“The Yunnan side had proposed to China Eastern for setting up a branch company with independent financial accounting to better secure and develop the local market, but was given a cold shoulder,” said the insider.

Falling revenues and salary cuts have increased the displeasure among Yunnan Air staff, which has also culminated in flight strikes.

Although a new joint venture has been set up, the problems still remain unsolved. The cooperation between the local government and market-oriented enterprises cannot run smoothly all the time. For example, local governments may press for more flights to satisfy local transportation needs, which may be unprofitable to the carrier.

But Li regards this as a positive move by Liu Shaoyong, the president of China Eastern, en route to solve the leftover problem. “By setting up a new JV, the related interests of China Eastern Air Holding Company, the management team of the Yunnan branch, and the Yunnan local government will all get balanced and protected,” Li said.

With over 94 percent of the area in Yunnan mountainous, there is a great potential for flights. However, the cold relations in the past two years led to an erosion in the predominant position of Yunnan Air.

“The years of operating experience has helped Yunnan Air garner a broad client base and it still has the most powerful capability in the Yunnan aviation market,” said Li.

But he warned that it was tough task to turn around the airline in a short as its profitability depends largely on the market environment.

China Eastern posted a net loss of 13.9 billion yuan in 2008 due to the sagging global economy, and wrong bets on fuel hedging deals. It has also received a 7 billion yuan cash injection from the government.

Shares of ST China Eastern edged down by 1.12 percent to 5.31 yuan apiece yesterday.

(China Daily June 3, 2009)

China Southern Airlines looks set to be the first mainland carrier to fly out of the financial turbulence after getting a capital injection of 3 billion yuan from the government.

A company official told China Daily that the money would be used to help reduce outstanding debt, which is weighing down not just China Southern but also the other major carriers like China Eastern and Air China, which had borrowed heavily in the past to finance their expansion spree.

Among the trio, China Southern has proved the most resilient in the face of surging fuel prices in early 2008 and the sharp fall in demand since the outbreak of the global financial crisis.

More importantly, the Guangzhou-based airline has largely avoided the fuel hedging losses that have sapped the financial strength of the other two carriers.

Indeed, the performance of China Southern’s management was so highly regarded that its former president Liu Shaoyong was installed at the helm of ailing China Eastern, which has a debt exceeding the value of its total assets.

Yao Jun, analyst, China Merchants Securities, expects the ailing aviation industry to get a boost in the coming peak season.

“We should not underplay the potential demand from the domestic market and the resilience of national carriers. With the backing of the central government, the carriers will change the bleak picture during its traditional peak season, or the second and third quarter of the year,” said Yao.

With a healthier performance record and strong financial structure, China Southern is widely seen to be in a better position than its rivals in taking advantage of an upsurge in traffic demand.

“We can expect a two-digit growth in May and June,” Yao said.

Shenzhen-listed China Southern said on Monday in a statement that the China Securities Regulatory Commission (CSRC) had cleared its plan to issue 721.1 million A shares at 3.15 yuan each and the same amount of H shares at 1 yuan each to its State-owned parent company China Southern Air Holding Co.

China Southern had started to prepare for the new share issue as early as the end of 2008 itself. It is not clear why the plan was not approved till now.

Hit by declining passenger traffic, China’s three major carriers reported an aggregated loss of 27.9 billion yuan in 2008. China Southern booked a loss of 4.829 billion yuan in 2008.

To bail out the national carriers, the central government agreed to inject 3 billion yuan to China Southern’s parent company last November.

China Southern shares were unchanged at 5.25 yuan yesterday in Shanghai, while its H shares declined by 7.083 percent to close at HK$ 2.23.

“The market has already digested the brunt of the additional issuance in the previous months, and the new announcement is in line with market expectations,” said Li Lei, industry analyst, CITIC China Securities.

An insider from China Southern, who asked not to be named, said the funds raised would be used cautiously and wisely, and there won’t be any big purchases.

“With the new money, China Southern’s debt-to-equity ratio will be diluted by 3.55 percent from 88.39 percent in the first quarter,” said the source.

During the first quarter of 2009, China Southern reported a net profit of 222 million yuan, a drop of 71.32 percent from the same period in 2008.

According to Yao, the aviation sector has received special “treatment” from the central government.

“Since June, prices of petrol and diesel have been hiked by 400 yuan per metric ton, the second price rise after the Chinese New Year. But the price of jet fuel stayed at the same level as April, much lower than the same period last year, which provides carriers a substantial profit at the critical moment,” said the analyst.

Li said it is important for the carriers to keep the debt-to-equity ratio at a low level.

“Chinese carriers are now poised for fast growth, and they should keep tabs on the rising debt. In foreign countries, carriers usually maintain their debt-to-equity ratio at 60 percent,” Li said.

Si Xianmin, chairman, China Southern, said there still remains a lot of uncertainty for 2009, and it is hard to predict whether they would make a profit or not.

“Our basic judgment is that the domestic aviation market will outperform the overseas market, and the second half of this year would exceed the first half,” Si was quoted as saying by the Securities Daily on Monday.

(China Daily June 3, 2009)

What is the benefit of merging two airlines?

“You have two restaurants and one kitchen,” said Arved von zur Muehlen, managing director for Greater China of Lufthansa German Airlines Group, which merged with Swiss International Air Lines three years ago.

“As a passenger, you can choose either restaurant. You can even have the main course in the German restaurant and the dessert in the Swiss restaurant. One way you fly Lufthansa and on the other fly Swiss. We have only one cashbox,” said Muehlen, who is also in charge of Swiss’ sales and marketing in China.

By offering more choices to customers, the merger has allowed Lufthansa to become more competitive, driving up its passenger traffic despite an industry downturn caused by the global economic slowdown, Muehlen said.

“Industry consolidation will continue,” Muehlen predicted.

Lufthansa’s next targets are Austrian Airlines and Brussels Airlines.

The German carrier made a public offer to purchase the stock held by all free-float shareholders of Austrian Airlines AG in February. More than 85 percent of the shareholders of Austrian Airlines had accepted the offer by last month.

Lufthansa also plans to take a 45 percent stake in Brussels Airlines, which may later be increased to 100 percent.

Muehlen declined to say how his Chinese operations would adjust to the two mergers as the two deals are currently undergoing regulatory reviews by the European Commission.

Analysts said consolidation is expected to pick up speed this year as airlines resort to mergers to fend off the economic downturn. Consolidation helps airlines cut costs as it allows airlines to share resources.

Lufthansa’s major European rivals such as Air France-KLM and British Airways have also showed great interest in consolidation.

Air France-KLM, Europe’s largest airline by revenue, finalized a deal on May 20 with Delta to operate as one airline over the North Atlantic. Air France and KLM merged in 2004 and Delta bought Northwest Airlines last year, which paved the way for a four-way partnership. The pact between the two largest airlines on each side of the ocean involved sharing revenues and costs on more than 200 trans-Atlantic flights.

Air France-KLM completed its purchase of a 25 percent stake in Alitalia earlier this year. It has also submitted a non-binding offer for Czech Airlines, while British Airways said last year that it planned to merge with Iberia, the Spanish flag carrier.

Core market

While some airlines cut their capacity amid falling traffic demand, Lufthansa increased its from 50 to 56 flights per week in the summer schedule starting from March 29 in the Chinese market.

“China is a strategic core market for us. The development of the Chinese market in the long run is very positive,” said Muehlen, who is also chairman of the German Chamber of Commerce in China, which has over 1,100 corporate members on the Chinese mainland.

“We don’t see any of our members leaving China. Everybody says this is a strategic market and has a good future although there are some problems now. For an airline this is a very encouraging outlook because we follow where these businesses go,” Muehlen said.

The Chinese market currently accounts for 25 percent of Lufthansa’s revenues in the Asia-Pacific region and has experienced robust growth in recent years.

Lufthansa started to fly between Nanjing and Frankfurt and between Shenyang and Munich via Seoul last year, which allowed the airline to serve five gateways on the mainland, including Beijing, Shanghai and Guangzhou. The German carrier is the only foreign airline to fly to five Chinese mainland cities.

Talking about the impact of the A/H1N1 flu outbreak, Muehlen said Lufthansa had some cancellations from Chinese passengers as some group travelers postponed their trips and were waiting until the situation became clearer. But he said the airline has generally maintained stable seat load factors as the cancellations were made up with demand from European passengers. Currently, 30 percent of Lufthansa’s passengers are Chinese.

“I strongly believe the situation will relax in June,” Muehlen said.

Rising concerns over the flu outbreak could have a significant impact on air traffic demand, said Giovanni Bisignani, director-general and CEO of the International Air Transport Association (IATA).

“It is still too early to judge what impact the flu will have on the bottom line. But it is sure that anything that shakes the confidence of passengers has a negative impact on the business. And the timing could not be worse given all of the other economic problems airlines are facing,” Bisignani said.

International passenger air traffic demand fell 11.1 percent year-on-year in March, according to IATA figures. The organization represents some 230 airlines that comprise 93 percent of scheduled international air traffic.

IATA said earlier that international air travel demand to and from China is expected to contract by between 5 and 10 percent over the year due to the economic downturn in the country’s major trading partners such as the United States and Europe.

Deutsche Lufthansa AG, the airline’s parent, reported revenue of 5 billion euros in the first quarter of this year, down 10.3 percent year-on-year. It posted a net loss of 256 million euros in the first three months of this year, against a net profit of 44 million euros in the same period last year.

(China Daily June 1, 2009)

China’s jumbo jet maker has selected the first group of domestic suppliers to help it build its 150-seat jumbo jets.

Commercial Aircraft Corp of China selected nine suppliers from 50 candidates and signed memorandums of understanding with them on Tuesday to produce undercarriages, doors and wings, the company said in a statement on its Website.

Names of suppliers were not released, but Zhejiang-based Xizi United Holding Corp, which produces elevators and Metro screen doors, was thought to be the only private company among the suppliers. It is expected to produce doors for the jets.

Zhang Qingwei, chairman of the jet producer, said it will select system suppliers and begin seeking overseas suppliers by the end of this year.

China will invest 200 billion yuan (US$29 billion) in developing the 150-seat jet, called the C919.

All stages of the process – from design to sourcing and production – will be done in China, with aims to reduce the country’s reliance on overseas firms such as Boeing and Airbus.

An initial design of the jet has been completed. The aircraft is scheduled to make its first flight in 2014 and is to be delivered to customers by 2016.

The Aviation Industry Corp of China, the country’s largest aircraft maker and parent of the jumbo jet producer, said on Tuesday it is seeking a group listing abroad for its newly built unit.

China Aviation Technology International Holding Co was inaugurated on Tuesday as a trade and logistics platform for the AVIC. It has total assets exceeding 50 billion yuan, accounting for 16.67 percent of the AVIC.

Its parent will seek strategic investors, according to Lin Zuoming, president of AVIC.

(Shanghai Daily May 29, 2009)

Though Chinese airliners, particularly China Eastern, have managed to trim their hedging losses thanks to recent rise in oil prices, analysts aver that the worst is still far from over for the beleaguered carrier.

The Shanghai-based carrier had reported a net loss of 13.93 billion yuan in 2008, a sharp fall from a net profit of 604 million in 2007, due to falling demand and huge hedging losses.

The carrier’s earning per share (EPS) was negative 2.86 yuan, compared with 0.12 yuan in 2007.

According to its annual report, as of Dec 31, 2008, China Eastern’s debt totaled 84.249 billion yuan, while its assets stood at 73.184 billion yuan, showing a deficit of 11.065 billion yuan.

With oil prices crossing the $60 mark, China Eastern is finding welcomed remiss from the running losses in fuel hedging contracts. Analysts said there still remains uncertainty over the hedging losses as its contracts are mostly due in 2010.

They add that much can change on the oil front between now and then. The actual magnitude of the loss will depend on the price change in coming months with the possibility of prices slumping again if the recession worsens.

In recent months, crude oil jumped 30.79 percent from a low of $48.65 per barrel, with benchmark crude for July delivery being quoted at $63.45 a barrel on the New York Mercantile Exchange on Wednesday.

Luo Zhuping, the carrier’s board secretary, admitted that China Eastern has got some respite from the mounting losses. “With crude prices going up, China Eastern’s hedging loss is decreasing,” Luo was quoted by Securities Daily as saying.

In a statement issued on May 13, China Eastern said it had settled 916 million yuan losses in the due hedging deals in the first quarter.

But analysts said its paper loss associated with the fuel hedging in the first quarter crossed 5 billion yuan, meaning the windfall from the hedging deals can hardly wipe out the astronomical loss.

“Statistics indicate that the hedging deals have limited effect in protecting domestic carriers from possible price swings,” said Li Qing, analyst, Hongyuan Securities.

“In the first quarter, crude oil dropped 40 percent year-on-year, while jet fuel costs fell 15 percent from the same period of 2008,” he said.

Currently, rumors are rife that the Shanghai-based carrier is planning to scale back its hedging deals with seven investment banks.

A source close to the matter said China Eastern is in talks with Credit Suisse Group, Citibank, Merrill Lynch, Deutsche Bank AG, UBS AG, Goldman Sachs Group Inc and Morgan Stanley, for restructuring the signed derivatives trading deals.

“It is hard to exit the already signed contracts because of losses. It’s the rule of the game. You take the gamble and respect the result,” said the source. But he added, “If you can prove the contract has deceptive or ambiguous wording, things are different.”

Li Lei, analyst, CITIC China Securities, said any reckless move could further hurt the carrier’s deficit.

“Oil prices will see a steady pick-up from quarter to quarter as the worst is more or less over. Now, the only question lying ahead is when the economy will bottom out,” said Li.

Calls to China Eastern went unanswered and reports said the carrier’s negotiation with the investment banks was ongoing.

China Eastern said revenue hit 8.94 billion yuan in the first three months this year, down 15.7 percent, due to fewer passengers. During the same period, it realized a net profit of 40.10 million yuan, down 53.3 percent from a year earlier.

But analysts believe that the underdeveloped domestic demand, will see an upsurge soon and help narrow the carrier’s huge losses.

In the last six months, the Shanghai-based carrier got a 9 billion yuan cash injection from the central government. China Eastern reported a 13.928 billion yuan net loss, with 115 percent debt-to-equity ratio in 2008.

(China Daily May 29, 2009)

TAG Aviation Asia Ltd, a subsidiary of TAG Aviation Holding S.A. from Switzerland, on Wednesday announced its business expansion in Hong Kong.

The company has already hired additional staff and moved into a larger office in Wanchai in response to growing demand for their services, company officials said.

“TAG Aviation Asia’s business plan for Hong Kong is long-term. We have significantly invested in our people and infrastructure locally. This city is the ideal starting point for our strategic expansion in Asia and as we continue to grow in the future, Hong Kong will remain our regional headquarters,” said Neil Gibson, CEO of TAG Aviation Asia.

Simon Galpin, director-general of Investment Promotion at Invest Hong Kong, welcomed the company’s business expansion, saying “TAG Aviation Asia’s continued investment and expansion in our city is an illustration of the opportunities in, and strong support of, Hong Kong’s aviation industry.”

Established in Hong Kong in 2006, the company is responsible for the Asian expansion of its parent company TAG Aviation’s global business aircraft services. The company currently operates over 200 business aircraft worldwide.

(Xinhua News Agency May 28, 2009)

Aerospace material maker Cytec Engineered Materials inaugurated a US$40 million plant in Shanghai’s Fengxian District Thursday as it seeks potential opportunities in China’s jumbo jet project.

The 11,500 square meter plant will mainly produce a composite material, prepreg, used in making reinforced plastics, for aircraft and serve clients in the Asia-Pacific region.

“Cytec has cooperated with Chinese aircraft makers such as AVIC Xi’an Aircraft Industry (Group) Co Ltd and Harbin Aircraft Industry Group, and its products have been used in the country’s first homemade regional jet, the ARJ21,” said William Wood, vice president of the United States-based firm, at the opening ceremony yesterday.

The plant now mainly serves Boeing and it is looking forward to cooperating with China’s 150-seat jumbo jet maker.

“It’s an excellent chance for Cytec to expand business in China as the country is developing a string of aircraft, including jumbo jets, the Xinzhou700 and civil helicopters,” said Rong Yichao, a senior official working at AVIC Technology Foundation Establishment.

“Significant amounts of composite materials are used in the Airbus A380, A350 and Boeing 787 jets, and they will also be used in China’s homemade jumbo jet,” Rong said.

Cytec set up its first plant in China in 1997, also in Shanghai, which makes coating resins for aircraft.

China will invest 200 billion yuan (US$29 billion) into a program to develop its jumbo jet.

(Shanghai Daily May 22, 2009)

The National Development and Reform Commission yesterday raised domestic jet fuel prices by about 11 percent to keep pace with rising global oil prices, sources said.

Fuel prices rose to 4,450 yuan (US$652) a ton from the previous 3,990 yuan a ton, which is estimated to cost the country’s three largest airlines an extra 2 billion yuan this year.

An official with China Petroleum and Chemical Corp, also known as Sinopec, confirmed that the company yesterday received a notice from the NDRC, the country’s top economic planner, about the price increase.

“The price increase tracks the rising global oil prices,” said Ma Xiaoli, an analyst of CITIC Securities Co.

Ma estimated the fuel price rise will cut profit for Air China by 490 million yuan, China Southern Airlines by 990 million yuan and China Eastern Airlines by 500 million yuan.

The oil price increase is also set to cost Shanghai Airlines 190 million yuan and Hainan Airlines 230 million yuan in profit.

“China Southern and Shanghai Airlines will face more challenges than the other carriers as they focus on domestic routes,” she said.

Fuel costs account for about 40 percent of an airline’s expenses and are the biggest expenditure component, market observers said.

But an analyst does not see airlines raising their ticket prices as demand for air travel is already weak.

“Domestic carriers are not likely to raise ticket prices following the increase as they still have to consider the demand,” said Li Lei, an analyst at China Securities Co. “With demand waning, carriers have to undertake the rising costs by themselves rather than pass them to passengers.”

The domestic carriers suffered heavy losses because of slumping demand and higher fuel prices last year, with the three biggest airlines losing a total of 28 billion yuan.

The jet fuel price rise is also seen as a signal that the NDRC will soon raise gasoline and diesel prices.

There was widespread talk that the government would raise oil prices by nearly 10 percent earlier this month, but the plan was canceled.

(Shanghai Daily May 20, 2009)