Hainan Airlines to form aviation conglomerate

By staff reporter Ji Minhua and special correspondent Liu Gong

Hainan Airlines has raised a whopping US＄ 700 million from a recent share sale, realizing a crucial step in its plan to take on much bigger domestic airline carriers.

The fourth largest domestic airline in terms of fleet size, Hainan Airlines publicized its share sale on June 30. The Hainan provincial government and American financier George Soros invested 1.5 billion yuan (US＄ 187.6 million) and US＄ 25 million respectively in Grand China Airlines Holdings, which is now Hainan Airlines’ largest shareholder. After the sale, Soros’ own stake in the airline dropped from 14.8 percent to 3.06 percent.

Insiders say the Hainan government does not seek to control the new group. It may entrust its voting rights to the group’s management team or buy back its interests later. Soros similarly has no intention of controlling Hainan Airlines through the deal, saying that “it is but a long-term financial investment.”

The newly-formed Grand China Airlines will incorporate China Xinhua Airlines, Chang’an Airlines and Shanxi Airlines to become an aviation giant with nearly 100 planes and assets worth 30 billion yuan (US＄ 3.75 billion).

The Hainan government made the decision to invest last September. Soros did so in December. It was not his first time investing in Hainan Airlines. In 1995, he deposited ＄25 million into the company.

It is rumored that US-based Pan American Holdings may invest US＄ 60 million to US＄ 200 million in Grand China, but the agreement has yet to be inked. “Negotiations on the investment are under way,” said a senior Hainan Airlines manager who refused to be named. “It would be a bonus if we secured the deal.” Together with its related enterprises, the Hainan Airlines Group controlled by Chen Feng, chairman of Hainan Airlines, holds 32.75 percent of all Grand China shares. The Hainan government holds 48.61 percent, while Soros becomes the third largest shareholder with 18.64 percent.

After the restructuring, Hainan Airlines expanded its capital and obtained much-needed cash to support further expansion. “We need money all the time,” said Chen Feng. “That is because we need to develop; otherwise, we will only die.”

Chen launched Hainan Airlines from the ruins of Hainan Provincial Airlines in 1993. The initial 250 million yuan (US＄ 31.25 million) investment came from the Hainan government, the corporate staff, and 24 institutional shareholders.

The Hainan government held 5.33 percent of the airline shareholders’ equity, and the staff held 20 percent, giving the institutional shareholders a majority stake.

Although the local branches of China’s major commercial banks provided it with much credit, and although it was listed in the domestic A- and B-share markets, Hainan Airlines has been frequently bogged down in problems with its capital stock due to fast expansion. In 2000, the state government formed three major domestic aviation conglomerates: Air China Ltd., China Eastern Airlines Corp., and China Southern Airlines Co., pressuring Chen to accelerate his merging plans to cope with intensified competition.

In August 2000, Hainan Airlines merged with Haikou-based Meilan International Airport in Hainan province and Xi’an-based Chang’an Airlines. In 2001, it also took control of China Xinhua Airlines and Shanxi Airlines. Despite these initiatives, Hainan Airlines was still sidelined in the domestic market, since the three airline groups had already taken 80 percent of the market and most of the major routes. Flying the feeder lines, Hainan Airlines had to suffer higher costs while serving fewer passengers.

Since 1999, when it issued A-shares, the airline has had no other chance to refinance. The 2003 SARS crisis sent it into the red, racking up 1 billion yuan (US＄ 125 million) in losses. Last year, it registered a loss of 216 million yuan (US＄ 27 million), raising its debt-asset ratio to a dangerous level above 90 percent. “We are most concerned about its capital risks,” said a Hainan government official. Such concern has prompted the government to pour an additional 1.5 billion yuan (US＄ 187.6 million), or one-tenth of the annual provincial fiscal revenue, into the company.

The Hainan government had owned only a small proportion of the Hainan Airlines shares. But in the wake of the collapse of several financial and real estate companies as a result of the 1997 financial crisis and the bursting of the property bubble, the government realized that it could not afford to lose Hainan Airlines as well. It is a major source of local tax income. “We hope the capital input this time can significantly lower its debt-asset ratio,” said another provincial government official. The government talked the Hainan branch of the China Development Bank into granting credit to a company under its control before investing the money into Hainan Airlines. It has said that it would not intervene in the airline’s management. “It may entrust its rights to the Hainan Airlines Group,” an insider told . “Even if it wanted to have a hand in [the management], the Hainan Airlines Group would not let them.” Analysts say that since the government shares account for less than 50 percent of the company, it would be difficult to wrest control of the airline anyway.

Ever since Chen launched the company 13 years ago, despite various corporate reorganizations, he has never given the helm to someone else. Insiders say Chen will go on to buy out remaining shareholders in China Xinhua Airlines, Chang’an Airlines and Shanxi Airlines. It is expected to cost him 1 billion yuan (US＄ 125 million). “The incorporation will improve the overall efficiency of our operations,” said Li Xianhua, executive president of the Hainan Airlines Group.

The next step would be to take Hainan Airlines Co. Ltd. private and withdraw it from the domestic stock market. After the recent share placement, the proportion of public shares dropped from 50 percent to only 15 percent, making it much easier to privatize the company. After that, Grand China will seek to float its shares in the Hong Kong market. “We will try to list Grand China in Hong Kong in the second half of next year,” said Li. “The foreign investors would find a way to quit after the Hong Kong listing,” said a senior Hainan Airlines manager who requested anonymity.

Analysts say that before these plans can be implemented, Hainan Airlines and Grand China Airlines would have to satisfy a few requirements of the mainland and Hong Kong stock markets. If the new company cannot get listed in Hong Kong, insiders say, the investors would give up the privatisation plan and seek to float shares in the domestic A-share market.

Staff reporter Wang Xiaobing contributed to this story
English version by Xin Zhiming and Therese Lim