Private Airline Tiptoes Around State Goliaths

Reuters interviews Wang Zhenghua, the owner of China’s biggest private budget carriers, and reports on his philosophy for surviving in a state-dominated sector:

“You have to take it a bit slowly, rather than being too aggressive and making enemies everywhere,” says Wang, founder and chairman of Shanghai-based Spring Airlines, of the approach that has enabled him to successfully carve out a piece of the $56 billion-a-year Chinese airline industry.

For Wang, one of the biggest obstacles to expanding has been resistance to his opening new routes from state-owned airlines.

Having learned from difficult experiences in the past – he was famously threatened with a 150,000 yuan fine in 2006 by a regulator in Shandong province for supposedly disrupting market order with promotional tickets selling for 1 yuan each – Wang now takes a more conciliatory approach.

“State-owned airlines have a longer history and are bigger in terms of capital size compared with privately owned airlines,” said Wang Jian, board secretary of Shanghai-based China Eastern. “In terms of routes, we don’t have direct competition (with Spring Airlines).”

While Chinese airlines are mostly state-owned, the aviation industry is one of China’s fastest growing sectors. According to Bloomberg, multiple airlines are gaining in the stock market:

PetroChina rebounded 1.1 percent to 8.96 yuan after falling to a record low yesterday on concern cuts in energy prices will hurt earnings. China, the world’s second-biggest oil consumer, will reduce gasoline and diesel prices for the third time since May after global crude costs tumbled.

“Investors are taking this opportunity to buy up the stock, hence the rebound,” said Li Xin, an analyst at Masterlink in Shanghai. The stock trades at 11.5 times estimated price earnings, compared with the five-year average of 17.1 and the record low of 10.89, according to data compiled by Bloomberg.

China Eastern Airlines Co. led gains for airlines on the prospect lower fuel prices will boost earnings. Shares of the second-biggest domestic carrier climbed 2.6 percent to 4.35 yuan. Air China Ltd. (601111), the largest international airline, rose 2.4 percent to 6.35 yuan.

Although China Eastern Airlines and Air China have gained earnings, another Bloomberg article reports that China Southern Airlines may fall more than 50%:

China Southern Airlines Co. (1055), the nation’s biggest carrier by passengers, said first-half profit may fall more than 50 percent because of slowing economic growth and higher jetfuel prices.

Profit will drop from 2.76 billion yuan ($433 million) a year earlier, the Guangzhou-based company said in a statement today. The weakening of the Chinese currency against the U.S. dollar also caused foreign exchange losses, it said.

Credit Suisse said in a separate note to clients that it expects China Southern’s first-half profit to slump 98 percent to 46 million yuan as earnings are affected by a 13.4 percent jump in domestic fuel costs. The carrier’s profit in the first- quarter fell 74 percent.

China has allowed its currency to weaken this year amid slowing growth and Europe’s turmoil. The yuan fell 0.88 percent from April through June, the biggest quarterly decline since a dollar peg ended in 2005. Chinese Airlines typically hold dollar-denominated debts.

Read more about China’s airline industry, via CDT.

July 10, 2012 10:53 AM
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Categories: Economy, Society