SIA alliance promises to carry China Eastern to profitable heights

PUBLISHED : Monday, 02 July, 2007, 12:00am
UPDATED : Monday, 02 July, 2007, 12:00am

Unprofitable China Eastern Airlines is flying on a wing and a prayer. High-flying Singapore Airlines is always trying to spread its investment wings.

Now the two carriers are flying into each other's arms, borne on the winds of change, competition and consolidation. Will the deal fly?

It looks like a win-win alliance at first glance. China Eastern is the only loss-making airline among the mainland's big three carriers and continues to bleed, losing 550 million yuan in the first quarter. It needs to be bailed out and, like wind beneath its wings, a formidable strategic investor in SIA will give China Eastern a lift.

Obviously, the Chinese airline hopes to harness the industry-standard management efficiency and operational expertise that SIA offers. This could prove invaluable towards cutting costs and engineering a turnaround.

'Even modest operational improvements arising from SIA's strategic stake would substantially boost China Eastern's profitability and book value,' Goldman Sachs said in a report.

But some analysts are sceptical as to what SIA can do as there will be challenges in terms of working arrangements, knowledge transfer and policy implementation, not to say the regulatory and nationalistic issues involved (hence the protracted negotiations).

Beyond a turnaround, China Eastern could do with a firmer footing and wider presence outside its home market and SIA could bring its international cachet and reach to bear here.

For the Singaporean flag carrier, this strategic alliance holds the potential of opening doors in the mainland including the domestic and the cargo sectors.

But for all its successes, there are fears that SIA may be stretched having to carry the excess baggage of China Eastern's debts and losses on the route to expansion. SIA and Temasek are paying a heavy price for its expected 24 per cent stake; for ballast, SIA needs to have some management control and board representation in this alliance.

Detractors may well ask, why take another risky gamble and on a loss-making airline to boot? Add the fact that SIA has a poor record in investments, to say the least, and shareholders will be asking, what price expansion?

SIA had to write off its investment in Air New Zealand after ANZ's Australian unit Ansett went bust. It acquired a 49 per cent stake in Virgin Atlantic Airways with not much to show for it while Richard Branson pocketed GBP600 million (HK$9.42 billion).

Then there were bids that did not get beyond the political and nationalistic headwinds. SIA failed to make any headway in the potentially huge Indian market despite securing a deal with the Tata Group. It was beaten to the punch by British Airways to a stake in Qantas.

With such experiences, SIA has been treading warily on investments and acquisitions have been few and far between. The China Eastern stake is its first under chief executive Chew Choon Seng, who says he sees potential in the airline.

As the mainland further liberalises its aviation market, Hongqiao and Pudong airports in Shanghai, which is China Eastern's base, are expected to set the pace as a growing regional hub in northern Asia and 'it is here that the real treasure lies for SIA', said Peter Harbison, chairman of the Center for Asia-Pacific Aviation.

But the question is, would China Eastern have the clout to swing things for SIA as reforms proceed, as traffic rights and routes are the prerogatives of the General Administration of Civil Aviation of China?

The aviation industry will be looking at the two carriers' tie-up as a trigger to more mergers and acquisitions. The consolidation wave in fact started last year with Beijing-based Air China and Cathay Pacific Airways taking 17.5 per cent stakes in each other with Hong Kong Dragon Airlines becoming a subsidiary of Cathay. These airlines are apparently reaping the benefits of their partnership.

China Southern Airlines alone among the big three is left without an international ally. But there is no lack of foreign players setting their sights on the growing mainland market and Air France and Emirates are seen as potential partners for the Guangzhou-based carrier.

Like a second wind, SIA should help China Eastern compete better at home and abroad. SIA, for its part, is taking a necessary, calculated gamble in a market that cannot be ignored.

The two airlines have their work cut out to make the deal work; if they succeed, the alliance will be a great way to fly.