China Eastern Airlines

Airlines take off on reports of state aid

PUBLISHED : Tuesday, 18 November, 2008, 12:00am
UPDATED : Tuesday, 18 November, 2008, 12:00am

China Eastern and China Southern to receive 3b yuan each, say Shanghai papers

Shares of China Eastern Airlines Corp and China Southern Airlines jumped yesterday on speculation that the government would inject capital into the two airlines as part of efforts to aid state-owned enterprises struggling to cope with the global economic crisis.

China Southern shares rose as much as 21.1 per cent before closing 11.93 per cent higher at HK$1.22 in Hong Kong yesterday. China Eastern climbed 17.39 per cent before closing up 7.61 per cent at 99 HK cents.

Two Shanghai newspapers said the airlines would each receive 3 billion yuan (HK$3.4 billion) from the government by the end of the year. The news helped push both airlines' shares up the 10 per cent limit on the Shanghai Stock Exchange yesterday.

However, both companies said they had not yet been informed by the government about a potential cash injection.

'Our parent company has been seeking a capital injection from the government, but the State Council has not given us an official reply,' said Xie Bin, company secretary of China Southern.

China Eastern also said it had not yet received notification.

'The news will drive the stocks up in the very short term, but they will dive back sharply after the sentiment withers,' said Kelvin Lau, an analyst at Daiwa Institute of Research.

Moreover, the amount of capital was not significant when compared with the financial obligation of the airlines next year, he said.

China Southern has 28 billion yuan in bank loans and aircraft leasing obligations that it needs to repay next year, while China Eastern has 21 billion yuan of financial commitments.

Natural disasters, tightened security measures during the Beijing Olympic Games and the global financial downturn led to mainland airlines incurring 4.2 billion yuan in losses during the first 10 months.

In the third quarter, China Eastern posted 2.3 billion yuan in losses, while China Southern recorded an almost 900 million yuan deficit.

To add to their woes, mainland airlines are entering a price war during the off-peak season, offering tickets priced as low as train fares on domestic routes.

China Southern, which aggressively increased its international network during the year, yesterday offered round-trip tickets between Guangzhou and Manila for as little as 600 yuan.

An additional challenge is that more seats must be filled, because the Big Three airlines will each take delivery of 20 to 40 new aircraft next year, a 10 per cent increase to their existing fleets.

China Eastern has already made ad hoc cancellations of flights equal to about 10 per cent of its daily capacity, owing to oversupply.

But the capital injection gives rise to the moral hazard that is shared by most state-owned enterprises.

Management does not need to work too hard to achieve profitability, because the government will eventually act as a white knight to save them. Moreover, government aid puts state-owned airlines and private airlines on an uneven playing field, market watchers said.