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Private airlines face nationalization

PRIVATELY-OWNED Chinese airlines that sprouted up during an industry deregulation are now facing nationalization as they suffer a cash crunch and their state-owned counterparts got cash injections to weather the global economic downturn.

State-run Sichuan Airlines Co last month took over United Eagle Airlines Co, the first private airline on the Chinese mainland, by injecting 200 million yuan (US$29.24 million) to expand its stake to 76 percent from 20 percent.

"The nationalization of private carriers will be an increasing trend during the economic downturn," said Yao Jun, an analyst at Merchants Securities Co. "The move will lead to a pricing monopoly and hurt consumer interests."

The Civil Aviation Administration of China approved the startup of the nation's first private carrier in 2004 as part of its market-oriented development strategy to promote competition.

The outbreak of the financial crisis has amplified their primary weakness - a shortage of capital.

Wuhan-based East Star Airlines Co, another privately-owned airline, was on the brink of bankruptcy after rejecting a takeover by Air China's parent. The Wuhan Intermediate People's Court in Hubei Province on Monday received applications from six creditors seeking the wind-up of the carrier..

East Star, which suspended operations on March 15, lost about 500 million yuan, owes 60 million yuan to Wuhan's airport and has defaulted on staff salaries, according to auditor Ernst & Young.

Another private carrier, OK Airways Co, was ordered earlier this year by China's aviation authority to suspend flights for two months because of prolonged financial and management problems.

"The aviation industry involves huge investments, high risks, low profits and slow returns, which means that private capital faces tough challenges when entering the industry," said Li Yanhua, vice director of economic and management department at Civil Aviation University of China.

"Taking the United States as an example, hundreds of smaller startup carriers emerged when the country deregulated its skies, but few of them have survived. The knockout punch for China's private carriers has just begun," Li said.

China has about 20 private carriers. Most have stumbled as a cooling economy slows demand. The country's aviation market reported single digit growth in air traffic last year for the first time in five years.Passenger volume rose 3.3 percent to 192 million last year, compared with a rise of 16 percent in 2007, and cargo volume edged up 0.3 percent to 4 million tons after a 13-percent jump in 2007.

Lack of support

The problem for private carriers is the lack of any government financial support while their state-owned rivals are receiving billions of yuan in cash injections.

The parent of China Eastern Airlines Corp got 7 billion yuan from the central government and Vice General Manager Li Jun said another 2 billion yuan is in the pipeline.

The state-owned parent of China Southern Airlines Co received a 3-billion-yuan cash injection, and Shanghai Airlines Co got 1 billion yuan.

Wang Zhenghua, chairman of China's first budget carrier, Spring Airlines, said bailing out the industry will disrupt the market. The government, he said, should seek more market-oriented measures to help cash-strapped carriers.

For example, the government could grant subsidies only to carriers that fly international routes because they are suffering the most from the slump in global demand, Wang said. Or the government could waive business taxes for airlines, he said.

"Such moves would enable carriers to compete in a fair market," he said. He insisted that Spring Airlines won't be turned into a state-run carrier.

Spring Airlines, one of only two private carriers to earn a profit last year on the mainland, is targeting to double its net income this year from 20 million yuan in 2008, despite the economic downturn.

Wang said private carriers still have advantages over their larger state-owned peers, such as more innovative operational flexibility to cope with changing markets and rising costs.

"Private carriers should seek diversified markets and develop their own clients," said Zeng Xu, an analyst with Guojin Securities Co.

Spring Air has kept its load factor at 95 percent on average, higher than the 75 percent in the industry, by lowering ticket prices and affiliating with a tourism company that provides a reliable stream of customers.

JuneYao Airlines, another profitable private carrier, has loyal clients in Wenzhou businessmen by offering them chartered flights.


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