Great Wall woes highlight risks of investing in China

The political debacle that resulted in the grounding this week of mainland all-cargo carrier Great Wall Airlines should serve as yet another cautionary tale of the myriad perils of investing in China's aviation industry.

It is widely held as the world's most promising aviation market - 50 million mainland travellers a year are expected to take international flights by 2010 and air cargo volume is expected to expand 10 per cent a year in the interim.

But that promise has not stopped the sector from being a graveyard for investors, public and institutional.

Just ask Singapore Airlines (SIA), the latest flier caught in the honey trap and its parent, Temasek Holdings, which together own 49 per cent of Great Wall.

United States authorities this week placed Great Wall's parent China Great Wall Industry and three other mainland firms on a commercial blacklist for allegedly supplying missile parts to Iran, calling for a freeze of assets under US jurisdiction. China of course has denied the allegation.

Great Wall Airlines nevertheless grounded its fleet - two Boeing B747-400 freighter aircraft on lease from SIA - in a move which was seen throughout the industry as somewhat drastic.

Granted, the blacklisting barred Boeing from offering technical support for the joint venture's aircraft.

'Boeing cannot provide any assistance, including parts or services, directly or indirectly to Great Wall Airlines,' the manufacturer said in a statement this week.

The aircraft are relatively new by freighter standards and have been well maintained by SIA, so the move was not made to safeguard against any interim mechanical faults.

Six years ago, Boeing paid US$1.5 billion in cash for a company called Jepperson Sanderson, which supplies almost all the world's pilots - commercial and recreational - with the aeronautical charts they must instantly refer to in case of a navigational systems failure in the cockpit.

Pilots flying without those charts would breach insurance regulations, among other things.

Boeing says it has approached the US Treasury to obtain a licence allowing it to continue business with Great Wall and the carrier is trying to appeal the decision, since the sanctions 'have nothing to do' with its operations, according to SIA.

But no one is holding their breath. Security experts tell Below Deck that commercial blacklists imposed by the US Treasury have a tendency to take a long time to unwind.

The future of this particular sanction is destined to be played out in a political arena far removed from aviation.

SIA Cargo, which paid US$30 million for its 25 per cent in the venture, is reluctant to abandon it, given the huge potential of China's air freight sector over the next decade and beyond.

'We believe a resolution is possible,' an SIA source told Below Deck.

But he acknowledged the ability to influence the pace of any resolution was way beyond the means of even state-owned Temasek.

As a start-up contributing on an associate level, Great Wall's grounding will have minimal if any impact on SIA's bottom line.

Even so, bankers say their clients are again querying SIA's due diligence after a string of failures, including its proposed investment in Air Zealand and less than stellar returns from its #600 million (HK$8.83 billion) purchase of 49 per cent in Virgin Atlantic Airways.

In the eyes of Singapore Inc, it appears the promise of China Great Wall Industry's political influence in China may have outweighed the potential downside of its well-known military dealings.

If it is true that every cloud has a silver lining, the one created by the blacklist must be hanging over Shenzhen, home of Shenzhen Airline's new cargo joint venture Jade Cargo.

Great Wall offered more than 200 tonnes of cargo uplift six days a week between Shanghai and Amsterdam with a return leg via Seoul.

Jade, which has Lufthansa Cargo and a German investment bank as minority shareholders, started its Amsterdam service this month and no doubt will see a fortune in Great Wall's misfortune.

Moreover, Jade management has already stated its intent to point its next plane - scheduled to be delivered in November - towards the burgeoning Indian cargo market where Great Wall's other discontinued service was flying between Shanghai and Mumbai via Chennai.

They must be smiling in Frankfurt.