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Mark O'Neill

Government allows private investments in sector but retains price-setting power

Under mounting pressure from airlines driven into the red by soaring fuel prices, China's aviation regulator yesterday declared the end of a 56-year state monopoly on jet fuel.

In the process, it meted out severe punishment to the monopoly firm that lost more than US$500 million in futures trading last year.

On its website, the Civil Aviation Administration of China (CAAC) published a directive effective August 15 allowing private capital to enter the civil aviation sector, including the sale and storage of jet fuel.

Since 1949, aviation fuel has been a state monopoly, held since 1990 by China Aviation Oil Holding (CAO), whose Singapore subsidiary closed  in November last year after gambling away US$550 million on bad derivatives trades.

'To attract competition into the market, the regulation encourages state and non-state companies to invest in the aviation fuel sector,' the directive said.

'Aviation is a capital-intensive sector. To accelerate the growth of this sector requires not only major investment by the state but also investments from all parts of society.'

In airports with only enough traffic to warrant a single operator of aviation fuel sales, storage and supply, private firms will be limited to a 25 per cent stake in the venture.

In airports with more than one supplier, private firms can now take majority stakes in new ventures competing with them.

First into the market are likely to be the two oil giants Sinopec and China National Petroleum.

The directive makes no mention of allowing foreign companies into the aviation fuel business. A CAAC official told the South China Morning Post that the liberalisation does not extend to foreign companies.

Soaring fuel prices have wiped out the profits of all but a handful of Chinese airlines this year. In the first five months, the sector posted combined losses of 340 million yuan on revenue of 50.31 billion yuan, according to CAAC figures.

On July 26, CAAC announced a 6 per cent rise in the price Chinese airlines must pay CAO for their  local fuel supplies - its third increase since February. Benchmark FOB Singapore jet kerosene prices have risen 39 per cent this year to US$71 per barrel yesterday, up from a low of US$51.10 on January 8.

Because of government restrictions on domestic transactions in foreign currency, Chinese airlines can hedge the fuel they consume only on overseas routes, making them more vulnerable than foreign carriers to increases in fuel prices. Air China and China Southern Airlines say they have hedged a negligible fraction of their fuel requirements.

China Eastern Airlines says it has hedged about 10 per cent of its needs.

Pressure from airlines and the dire financial status of CAO persuaded CAAC to end its monopoly.

'We want more suppliers of aviation fuel,' said Yuan Yaohui, head of the policy and legal department of CAAC. 'But this does not mean that the aviation fuel market is completely liberalised. This directive allows more suppliers but the power to set prices rests with the National Development and Reform Commission.'

On June 13, the Singapore High Court approved a debt restructuring plan for CAO, under which it must pay 54 per cent of debts totalling US$510 million to more than 120 creditors over five years.

Industry analysts say that China's two largest oil companies, Sinopec and China National Petroleum,  are likely to take stakes in a restructured CAO.

The directive also allows private capital into cargo services, construction of airports, aircraft maintenance, aviation catering and computer ticketing systems.

But private investment is still banned from the country's air traffic control system.

The directive said the state must retain majority control of Air China, China Eastern and China Southern and the main airports in Beijing, Tianjin, Shanghai, Chongqing, the capitals of the provinces and regions and Shenzhen, Xiamen, Dalian, Guilin, Shantou, Qingdao, Zhuhai, Wenzhou and Ningbo.



China ends 56-year monopoly on jet fuel