China Eastern Airlines, Shanghai’s biggest carrier, put a spurt on in the stock market amid speculation — the stock market being the biggest purveyor and believer in gossip of any institution — it may combine with smaller rival Shanghai Airlines (some of the crew seen in this illustration).

China’s third-largest carrier jumped 6.26% to close at RMB10.69, after climbing by as much as the 10% daily limit. Shanghai Airlines gained 0.5% to close at RMB8.02.

It is unusual for rumors to have a sound basis for thinking it. But this one has its reasons.

A tie-up with Shanghai Airlines would raise China Eastern’s market share in China’s commercial capital to 55%, helping it compete with larger rivals Air China and China Southern. The carrier is also seeking funds to cut debt and improve its operations.

Shanghai Airlines is controlled by the city’s government, while China Eastern is majority-owned by the state government.

Chairman Li Fenghua earlier this month said China Eastern wants to raise RMB15 billion ($2.1 billion) for new planes and training. He said the company plans to reach the target by reviving the sale of a stake to Singapore Airlines, by tapping capital markets and through government subsidies.

The airline’s minority shareholders vetoed the sale of a stake to the Singaporean carrier and its parent Temasek in January in anticipation of a higher offer from Air China.

What will happen now? Your guess is as good as anyone’s. Probably better.

What can be safely said is that China Eastern needs to get its debt sorted out and it desperately needs to improve its customer service at every level. Whether it buys Shanghai Airlines or not is a comparatively trivial business decision compared to those two major tasks.
Source: Bloomberg

Chairman Li Fenghua said China Eastern Airlines is still in talks to sell a stake to Singapore Airlines and it is very likely the two carriers will complete a deal.

No date was given for the end of this continuing soap opera by Chairman Li Fenghua said it would have to take a back seat to the more pressing priorities of relief efforts after this week’s devastating earthquake in southwest China and preparations for the Beijing Olympic Games in August. So do not expect it to happen Real Soon Now. (This last phrase is very common in the IT industry where a new product may happen but do not hold your breath.)

In January, China Eastern’s minority shareholders rejected its proposal to sell a 24% stake to Singapore Air and Singapore state investment agency Temasek for $920 million.

The thumbs-down came after the parent of Air China expressed interest in a tie-up with China Eastern, which the Shanghai-based airline rejected.

Chairman Li Fenghua also said China Eastern is making preparations to open an office in Taiwan in anticipation of the opening of direct flights across the Taiwan strait. (Note the illustrations are of hostesses from each of the airlines. Relevant and a lot more pleasant to look at than most aircraft.)
Source: Reuters

It is a big ask. China Eastern Airlines, the most indebted of China’s big three airlines, aims to raise at least RMB15 billion ($2.1 billion) for new planes and training to help it compete with Air China and Cathay Pacific.

China Eastern Chairman Li Fenghua said in an interview, ‘If we can get more, it’ll be even better.’

Li plans to reach his target by reviving the sale of a stake to Singapore Airlines, by tapping capital markets and through subsidies from the government, which owns part of the carrier. It all seems a trifle difficult to envisage.

China Eastern’s minority shareholders vetoed a tie-up with Singapore Air in January after the parent of Air China pledged to make a higher offer.

But Jack Xu, an analyst at Sinopac Securities, said, ‘The government won’t sit and watch its own company go bankrupt. China Eastern will have an opportunity to resubmit the Singapore deal this year.’

He rates the carrier ‘outperform’ which seems a tad optimistic given the recorded losses
Shanghai-based China Eastern still aims to raise $1.5 billion selling shares to Singapore Air, Temasek Holdings, the city-state’s sovereign wealth fund, and to its own state-controlled parent, China Eastern Air Holding.

China Eastern Chairman Li Fenghua, seen in this illustration said, ‘There’s no change in our plan to tie up with Singapore Airlines.’

Chew Choon Seng, chief executive officer of Singapore Airlines, said the two carriers are currently discussing commercial cooperation such as cross-selling tickets rather than an equity link. He wisely declined to say whether a tie-up is still being actively pursued.

China Eastern will spend 80% of the RMB15 billion on aircraft, with most of the rest going toward staff training.

The airline plans to add 17 Airbus SAS and two Boeing aircraft this year. It added 20 aircraft in 2007, expanding its fleet to 223. China Southern added 23 aircraft last year and Air China got 29.

The carrier filled 73.6% of its available seats in 2007. Passenger numbers rose 11% to 39.2 million, while cargo volume climbed 6.7% to 939,700 metric tons. This year, freight may jump 14% to 1.07 million tons.
Source: Bloomberg

According to the Wall Street Journal China Eastern Airlines, the least solvent of China’s three major state-owned carriers, plans to take out US$337 million in new loans to pay for additional aircraft for its fleet. Which seems likely as it is massively extending its fleet.

It then goes on that China Eastern’s financial difficulties have continued as strategic investment bids from both Singapore Airlines and Air China parent China National Aviation Holding Co have stalled.

In February the Shanghai-based carrier reportedly missed debt payments totaling US$535 million, according to a person familiar with the situation.

It depends how familiar that person is.

China Eastern Airline officially reports it netted a $83.71 million (RMB586 million) profit in 2007. So missing debt payments, on the face of it, seems unlikely.

True, this is after posting a $0.43 million (RMB2.992 billion) loss in 2006,

The Shanghai Securities Journal reported the airline’s passenger revenue from domestic (excluding Hong Kong) grew 19% year-on-year to $3.42 billion (RMB23.908 billion), while international passenger revenues grew 20% to $1.76 billion (RMB12.308 billion).

Revenues from its routes to and from Hong Kong fell 13% to $0.34 billion (RMB2.355 billion), due largely to increasing competition for the lucrative market.

Cargo accounted for the remainder of revenues.

Fuel costs surged 11.69% year-on-year to $2.16 billion (RMB15.117 billion), accounting for 40.9% of operating costs. The company has forecast that it will carry 42.95 million passengers and 1.07 million tons of cargo this year. It will also buy eight A320 aircraft, five A321s, one A330-200, three A330-300s, one B737-700 and one B737-800.
The China Economic Review covers this story for subscribers, Click here.
Source: China Perpective

New readers start here. Air China wants to buy China Eastern. China Eastern considers this a fate worse than death and if it is going to be sorted — and by damn it needs it — than Singapore Airlines would be the airline of choice. (The fact that Air China and China Eastern are both effectively government owned shows that the China government uses an unique for of democracy in running its holdings.)

Air China Acting Chairman Kong Dong said Friday that China Air now plans to introduce Cathay Pacific Airways as its partner in its bid for China Eastern Airlines to help improve CEA’s management.

Kong Dong admitted that Singapore Airlines, CEA’s preferred cooperative partner, is among the world’s best carriers but said, ‘Cathay Pacific also possesses many advantages.’ Yes it does. As in already possessing some of the action by having shares in China Airlines.

CX Chairman Christopher Pratt commented last week that the Hong Kong-based carrier will support CA’s bid for CEA but warned that ‘the result won’t come out soon.’

Kong Dong said CA will not propose a new bid despite CEA’s rejection but will elaborate on its current offer if CEA is willing to accept it. He also said that the State-owned Assets Supervision and Administration Commission of the State Council, the controlling stakeholder of China’s state-owned airlines, will not interfere with CA’s bid.

SASAC Vice Minister Wang Ruixiang said last week that the Chinese government will facilitate dialog between state-owned airlines but ‘it won’t force them to merge if they hold different views on it.’

This story has legs and will run. However, the harsh truth is that China Eastern is not remotely up to international standards in inflight service and that is where the battle will be fought. China Air is better, but not by a large margin.

Could SIA turn China Eastern around and get the people in cabin service to understand that passengers are not just unwonted interruptions? One doubts it. But, plainly, with open skies the new formula Air China and China Eastern have got to lift their game or they will be swamped.
Source: ATW Online