Air­lines revving up

China Daily (Canada) - - FRONT PAGE -

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 hongliang@chi­nadai­lyhk.com

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