Airlines revving up
Airline stocks were high flyers in the earlier stock market rally. Despite the latest market downturn, airline shares have risen by an average of more than five times in the past 12 months.
Most of the airline companies, including the large Statecontrolled carriers and privately owned budget carriers, took the opportunity of the bull run to raise capital by issuing new shares through private placements or subscription by shareholders. The proceeds accrued were largely used to repay outstanding loans and finance the purchase of new aircraft. As a result, most of these carriers have greatly lowered their gearing ratios, which had previously been a major concern to potential investors.
Meanwhile, all airline operators are benefitting from lower oil prices, which make up a major part of their expenses. Of particular interest to investors is Shanghai-based China Eastern Airlines, which stands to gain from a projected increase in visitors to the financial metropolis with the opening of Shanghai Disneyland expected in mid-2016, and the continued development of the Shanghai Free Trade Zone (FTZ).
In line with the trend, China Eastern’s Shanghai-listed A shares have gone up to nearly 12 yuan ($1.93) apiece, from 2.50 yuan about a year ago. During that time, the company had raised a total of 50 billion yuan through a private placement of A shares to help fund the purchase of 28 aircraft from Boeing and Airbus. The new aircraft acquisitions were seen to be essential to compete more effectively with the increasing presence of budget carriers, especially Spring Airlines and Juneyao Airlines, which are also Shanghai-based.
Both Spring Airlines and Juneyao Airlines had, in the past few months, raised capital in the Shanghai market to finance their fleet expansion programs. The battle for market share in one of the Chinese mainland’s major air hubs is heating up.
At stake are the hundreds of thousands of visitors expected to be attracted to Shanghai by the new Disneyland theme park, which will be the largest outside the US. Airline officials are also expecting a substantial increase in traffic created by growing activities in the FTZ, which would get a boost from the faster pace of economic reform and opening up of the capital account.
China Eastern, as the longestestablished carrier in the region, is seeking to build on the advantage of its more extensive traffic network and wider client base to secure its dominant position in the Shanghai market. To do so, it is seeking to establish alliances with selected overseas carriers to capture a bigger share of the expected increase in foreign visitors to Shanghai.
The Shanghai airline proposed an alliance with Australian flag carrier Qantas easrlier this year, while Delta Air Lines of the US has offered to buy a 3.55-percent stake in China Eastern for $450 million.
A China Eastern official was quoted as saying that the airline plans to work with Delta to expand its global footprint beyond ChinaUS routes. The company’s international business accounts for about 35 percent of its revenue. Contact the writer at email@example.com