The Financial Express Friday, August 02, 2002
Foreign Cash To Propel Chinese Airline Revamp Shanghai, August 1: China's easing of caps on foreign investment in the aviation sector on Thursday will propel its airlines into the global jet set and give foreign carriers a bigger share of the coveted domestic market, analysts said. The relaxation would draw more foreign capital andexpertise to the sector, beefing up China's top three airlines - Air China, China Eastern and China Southern - and accelerating an industry-wide consolidation, they said. China now allows foreign investors larger stakes in its airlines and airports - formerly capped at 35 and 49 per cent - by merely requiring that domestic shareholders have a controlling stake. The move was announced in early July and aimed at deepening reforms of the tightly controlled aviation sector after China joined the World Trade Organisation last December. "We believe the potential introduction of foreign strategic shareholders could be the first step toward Chinese airline membership into one of the three principal global airline alliances," Goldman Sachs said in a research report last month. Chinese state-owned airlines now trail foreign counterparts due to low prices and poor management of the oil-price and currency risks that all carriers have to face. Air fares and fuel costs are under government control and bloated pay rolls and heavy financial costs eat into bottom lines. China's massive market potential is a huge drawing card for foreign investors. But the country guards its aviation market fiercely and has no plans to grant domestic flight rights to foreign airlines, analysts said. Most countries forbid foreign-controlled airlines from flying their domestic routes. "Foreign airlines can't own flights within China, so buying a stake in our airlines seems to be the only way to share the market growth," said analyst Luo Wen of Guotai Junan Securities. Foreign capital and technology are essential to fuel the global ambitions of China's Big Three airlines, analysts said. China Eastern Airlines Co Ltd was the top pick because of its attractive base in Shanghai, they said. The thriving commercial hub is China's largest gateway for international flights and is well connected to other Chinese cities. Analysts said Eastern was also hungry for cash as its low return on equity of about two percent prevents it from issuing more shares domestically under exchange rules. Guangzhou-based China Southern Airlines Co Ltd is another attractive target as it has the biggest fleet in China, although the carrier is weaker on international routes than Eastern or flag carrier Air China. The flag carrier will benefit from the investment relaxations as it is planning an overseas listing and can now float more than 35 per cent of its share capital, analysts said. Although foreign firms cannot take a controlling stake in a Chinese airline, having a large shareholding can give them enough influence on operations, especially since foreigners can now head management at a domestic airline. "To take a fairly large stake would have a more profound effect in penetrating the Chinese market compared with other types of cooperation, like code sharing," said analyst Deng Hongmei of China Everbright Securities. Cathay Pacific Airways Ltd, Singapore Airlines Ltd, Air France SA and AMR Corp's American Airlines have appeared keen to buy stakes in Chinese airlines and to help them promote their brands abroad, analysts said.China's air passenger market is expected to grow by an annual eight per cent and cargo by more than 10 per cent, a bright spot when global airlines are still struggling to recover from the fallout of the September 11 attacks. - Reuters © 2002: Indian Express Newspapers (Bombay) Ltd. All rights reserved throughout the world.
