Chinese aviation appears to be experiencing a thaw as two recent events show that both outsiders and the CAAC have growing confidence in China's airlines.
China's transition from bank-guaranteed to asset-based financing received a boost with the recent decision of an operating lessor to commit aircraft to a Chinese airline without a guarantee. In a separate but equally significant move, the CAAC has relaxed its aircraft purchase moratorium by allowing several provincial carriers to acquire new aircraft.
International Lease Finance Corporation's president, Steven Udvar-Hazy, has been predicting for two months that Chinese airlines would choose more operating leases because of limits on their ability to finance new fleet and the growing resistance of Chinese banks to write guarantees. Without saying that operating lessors would deal without such guarantees, he certainly implied it.
The lessor which has taken that step is still anxious about being too far out in front of other lessors and has insisted on anonymity. Otherwise, as a spokesman explains, disclosure would compromise the lessor's ability to demand a guarantee next time. He regards this as a 'test case', but predicts it will set the trend. 'If airlines can't get guarantees, it makes no sense for us to ask for them.'
The lessor is no stranger to China and that weighs heavily in its decision. 'We've been very comfortable with China. None of our Chinese lessors have ever been late paying us,' he says. That is a view shared among lessors. Anne Chidgey, aircraft finance manager for Ansett Worldwide reports: 'Our Chinese lessees have been exemplary.'
Creditworthiness of Chinese airlines is actually not the main concern. 'We just want to be able to get our aircraft back if an airline defaults,' says one operating lessor, who seems comfortable with China's repossession laws.
Lessors who still must insist on guarantees will find that Bank of China has stopped writing them, at least temporarily. However the Industrial and Commercial Bank of China is now an active participant and the newest entrant into airline guarantees is the China Merchant Bank.
The CAAC's decision to relax its freeze on new aircraft was expected for larger airlines, but is somewhat surprising for provincial carriers. Generally, Beijing has favoured its bigger airlines, as exemplified in its recent announcement limiting competition by smaller carriers on trunk routes flown by Air China, China Southern, and China Eastern Airlines.
But improved safety standards and strong demand in regions underserved by bigger carriers have persuaded CAAC to grant exemptions to Hainan Airlines, Shandong Airlines, and probably Sichuan Airlines for 10 new aircraft with deliveries starting in July. At presstime, the Sichuan Airlines A320 deal was still subject to final approval, but informed sources predicted assent would be given.
These approvals do not spell an end to the moratorium. The CAAC will still consider requests for exemptions, although it appears likely to grant more. It approved no new aircraft last year.
What criteria the CAAC will use are unclear. Observers predict decisions will be influenced by a mixture of merits and politics. The list of airlines receiving exemptions should indicate Beijing's views about which of China's 38-odd airlines will develop into the second tier carriers.
Source: Airline Business
