Christmas was kind to China Eastern Airlines. Barely two weeks after receiving a US$439 million capital injection from the government, the carrier’s parent company was given a second present at the end of December: another cash handout, this time of US$585 billion.
While China Eastern celebrated its fortune, another industry player looked on forlornly, hungering for just a small slice of the windfall.
"We need about [US$14.6 million] to overcome our current difficulties," said Sun Zhijun, financial director of United Eagle Airlines (UEA), a leading private Chinese carrier.
The global financial crisis has hit the Chinese airline industry hard, and none are faring worse than private airlines. According to the CAAC, China’s civil aviation authority, 70% of domestic airlines lost money in 2008, with losses in the first 10 months estimated at US$628 million. Profits at Spring Airlines, a private Shanghai-based carrier, fell 70% in 2008.
State-owned carriers can rely on government support, but private airlines are largely on their own. Plagued by capital shortages and facing strong competition, years of development have seen them capture only 15% of the market. Their troubles are bad news for both investors and travelers who rely on them for cheap flights.
Chen Yizhi, a sales manager at Dell, booked a flight out of Tianjin for December 6 on private carrier Okay Airways. After waiting for three hours at Tianjin airport, he was told that the flight had been cancelled. Hundreds of Okay Airways ticket-holders across China were similarly stranded as the airline grounded all five of its planes.
The incident was sparked by Wang Junjin, Okay’s largest shareholder and head of the Junyao Group, one of China’s largest private enterprises.
"The company’s losses kept on widening and the disagreements between us and the management kept on increasing," Wang said, adding that Okay had suffered annual losses of about US$5.85 million since starting in 2007.
Wang repeatedly pushed for the sacking of Okay Chairman Liu Jieyin, but, backed by four smaller shareholders, Liu refused to step down. Reports of management conflicts led China Aviation Oil to halt fuel supplies and demand cash for future deliveries. Unable to afford fuel, Okay suspended flights.
As the conflict lingers, hopes of resuming flights in near future are dimming. Okay has no cash flow from ticket sales to pay for jet fuel or airport fees, and the company is facing calls from creditors to immediately repay about US$29.2 million in debts.
Other airliners have taken over routes previously operated by Okay and the CAAC has intervened to help solve the problems. But Chen the sales manager is not convinced. "Who would dare to fly with such a company again?"
The news is not much better at UEA. Airports in Sichuan province stopped providing services to the airline in November as unpaid landing and service fees reached US$4.45 million. UEA has grounded two of its five airplanes, which has hurt the company’s cash flow and access to credit.
According to an agreement reached in late December, the airports will renew services in return for monthly debt repayments, but UEA is still in trouble.
"We are talking to shareholders for further capital injections … to overcome the current the difficulties, and for our future development," said UEA’s Sun.
Many airlines will find such challenges insurmountable, said Deng Hongmei, an aviation analyst with Anxi Securities. "Only a few will survive. Most will be merged into larger players, or will just go bankrupt," she said
Failures won’t just hurt the airlines’ investors. Wang Jicheng, a researcher at the State Council’s Development Research Center, says cheap private carriers push state-owned airlines to lower prices. Without private competition, travelers may find ticket prices rising.
Airlines are also finding new ways to stretch their money. Rather than expand its own crews, Wuhan-based East Star Airlines chose in December to temporarily hire pilots from Spring Airlines.
Others have been luckier. Hainan-based HNA Group became one of the few private airline companies to get government help when it received US$73 million from the Tianjin municipal government on December 23. That may give HNA’s airlines a boost for now, but the future of China’s private carriers is still up in the air.