Chinese airline growth collapses
Southern comfort - FT.com
Published: November 27 2008 09:08 | Last updated: November 27 2008 11:35
A climber scaling a rock-face needs three points of contact to make progress. Chinas economic ascent, say officials, will be assured if it maintains a trio of major state-owned airlines.
That commitment made sense on paper six years ago, when the government forcibly consolidated a fragmented industry. Between them, the three carved up the Chinese mainland: China Southern in Guangzhou, China Eastern in Shanghai, and Air China the intercontinental flag carrier in Beijing. But the economic contraction, and the wretched state of balance sheets, should be forcing a rethink.
An industry set up for growth in staffing, order books and capital structure is now experiencing the opposite. Fuel surcharges have priced out travellers who had just started to embrace air travel as a viable alternative to road or rail. Air traffic in China rose 2.4 per cent in the first ten months to 160m passengers, according to the aviation regulator well short of the anticipated 14 per cent surge. The three national champs have lost over four-fifths of their market capitalisations this year.
China Eastern, the weakest carrier, with 15 times more debt than equity, has suspended its shares while it holds out for state aid. China Southern announced late on Wednesday that it had secured a Rmb3bn ($440m) capital injection. Handy, but barely enough to cover one-tenth of the bank loans and aircraft leasing obligations it faces next year.
The state can continue to tweak taxes and ignore unpaid landing fees. But more radical action is needed. As cross-border consolidation is not an option like America, China limits foreign ownership of carriers to 25 per cent for a single shareholder, and 49 per cent in aggregate the answers must come from within.
Li Jiaxiang, former chairman of Air China, now head of the industry regulator, has repeatedly pushed for a megalithic Chinese airline to match Delta-Northwest. Soon, he may find that officials start to listen.
Quick point on Baltic Dry - looks disasterous, and certainly is for some shippers. Point is that it measures short-term spot market charters. In a recession, these marginal charters evaporate, and shippers rely on the long-term contracts already agreed. It is not a measure of total demand, but marginal demand, so careful what conclusions you draw. (i.e. long periods of low indices would be a disaster for everyone - it is a disaster for some only at the moment).