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China Eastern Airlines, one of the country's three largest airline companies, recently announced plans to sell shares to foreign-capital companies in order to extricate itself from debt and restructuring woes. Cathay Pacific Airways, operated by Britain Swire Group, will likely take over the shares.
China Eastern is having difficulties restructuring after aquiring Yunnan Airlines and Xibei Airlines. The funds for the restructuring projects would probably total 10 billion yuan (US$1.2 billion) and it could not happen without bank financing, Ye Yigan, board chairman of China Eastern Airlines, told the press.
China Eastern itself is also suffering from financial losses. Its deficit for the first six months 2003 was 1.4 billion yuan, more than the losses incurred by the other two airlines combined. To make matters worse, its debt-asset rate rose from 76 percent to 85 percent. According to recent financial statements, China Eastern's cash reserve for the first half-year was less than 1.2 billion yuan.
Consolidation of airplanes also brings capital pressure on Eastern Airlines, say analysts.
Last year Eastern Airlines signed loan agreements with several banks including Bank of China, China Commercial and Industrial Bank and Shanghai Pudong Development Bank and got more than 50 billion yuan in credit. This year, Bank of Communications provided 4 billion yuan in total loan allowances.
However, Eastern Airlines will have a heavy interest burden if it takes bank loans and invests them in corporate restructuring. By the same token, a financing method such as a bond issue will also put China Eastern deeper in debt.
Various indicators show that the most probable and rational way to help solve the problem would be with the share offering. The share price for Eastern Airlines has risen after the SARS scare, a fact helpful for equity financing.
Cathay Pacific Airways is the other factor.
Analysts believe that Cathay Pacific is attracted by the growing market on the mainland. Using Hong Kong as an international hub, Cathay Pacific has a wide variety of international flights and this would give it an opportunity to expand within China.
In particular, an air route between Hong Kong and Shanghai will be likely to give Cathay Pacific a head start if it acquires a stake in China Eastern.
(Shenzhen Daily November 25, 2003)
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