Lex: Chinese airlines

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In nominally communist China, not all airlines are created equal.

Air China was once the industry runt; it was the last to go public and even then needed an asset injection in order to meet profitability requirements.

But after last week’s shake-up, which gives Air China a cross-shareholding in Hong Kong carrier Cathay Pacific, the Beijing-based airline is the clear national champion.

That leaves China Eastern Airlines and China Southern trailing in its wake. Both have performed abysmally since listing in the late 1990s; indeed, China Southern stock is roughly one-third of the offer price of nearly a decade ago and the company has not paid a dividend since 2002. Both carry heavy debt burdens, a legacy of Beijing’s penchant for scoring points on the international stage by buying aircraft. China Southern’s total adjusted net debt to operating earnings before interest, tax, depreciation, amortisation and aircraft rent rose to 11 times last year. It has agreed to buy 73 new aircraft by 2010, adding to the debt burden. High oil prices further undermine profitability. China’s 12 airlines lost $270m in the first quarter of this year, even as core revenues jumped 18 per cent to $4.2bn.

Yet investors still on board need not fear the worst from Air China’s elevation. Beijing recognises the importance of competition – indeed, that is why the industry has been overhauled so many times – and is unlikely to allow other big carriers to be grounded. It has several tools at its disposal to avoid this, including resetting landing fees or even waiving debts. There is scope for more mergers, say between CEA and Shanghai Airlines. With the Beijing Olympics coming up in 2008, China will want to show it is more than a one-carrier country.

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