David Knibb
Zhu Rongji may be starting cautiously as China's new premier, but his pro-market plans are clearly visible in recent aviation initiatives.
Beijing is cutting its own spending as the Civil Aviation Administration of China considers whether to allow more foreign capital in airlines and how to attract more investors to its airports. Working against Zhu, however, are slowdowns from earlier reforms and ripple effects from the currency crisis in other parts of Asia.
Xia Xinghua, CAAC director general for restructuring, says his agency is considering whether to raise the foreign investment limit in airlines to 40 per cent. The current cap is 35 per cent equity and 25 per cent voting rights. The voting rights limit was raised to 35 per cent for China Eastern at the time of its initial public offering in February 1997, but remains 25 per cent for other carriers. Both China Eastern and China Southern have lobbied for a higher ownership limit because both are at the 35 per cent foreign maximum and, based on favourable response to their overseas IPOs, would like to raise more.
The CAAC has already submitted a proposal to the State Council to ease airport investment. This follows a 2 per cent cut in public spending on airports, despite a growing gap between demand and capacity. According to Xia, Beijing wants to shift more emphasis to air traffic control and rely on a 14 per cent increase in private investment to make up the difference. Chen Guangyi, CAAC director, admits even this 'still does not seem enough, considering we have so many projects to launch this year'.
Proposed rules seek to attract airport investors in two ways, despite no change in the current 49 per cent foreign ownership limit. First, the CAAC would allow foreigners to invest in more core operations. Now they are restricted to specific sectors such as terminals, maintenance, and airport hotels. Second, the changes would give investors more say in airport management. Lack of such control is one reason foreigners have preferred power stations and water treatment plants over Chinese airports. Xia predicts a final decision on both the airline and airport rules 'in the second half of this year.'
Three major airports, namely Xiamen, Shanghai, and Shenzhen, are already tapping private capital. Xiamen was first with a US$28 million issue. Shanghai raised $225 million earlier this year. Shenzhen expects to raise $75 million the same way. All three are domestic offerings. By contrast Beijing's Capital airport has applied to the securities regulatory commission for an overseas listing, and the CAAC has given Guangzhou's Baiyun airport the green light for a similar request.
These reforms come at a time when Chinese airlines are feeling the pinch from two directions. Last July's air fare reform caused more havoc than expected. Unifying fares for local and foreign passengers effectively raised fares 13 per cent. That was supposed to improve airline yields, but traffic slumped so severely that the CAAC allowed airlines to offer discounts to lure back passengers. The result, even at such carriers as Hainan Airlines, has been a drop in profits.
Airlines with regional routes are also suffering from the Asian currency crisis which is currently tormenting China's neighbours. Lower loads to and from southeast Asia cost China Southern $9 million in last year's second half, and the carrier is concentrating on domestic growth this year.
Source: Airline Business
