Chinese Airlines Launch Fundraising Amid Calls For Rapid Expansion
06/13/2012| 05:44am US/Eastern
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-- China Eastern and China Southern become latest airlines to launch fundraising plans
-- Airlines face increasingly tight margins but encouraged to expand
-- Capacity growth expected to outpace traffic demand growth
(Recasts 1st paragraph, adds comments from airline executive in 6th-7th paragraphs, analyst comments in 9th, 10th, 12th, 13th paragraphs, detail and background throughout)
By Andrew Galbraith and Joanne Chiu
SHANGHAI--China's major airlines are moving to raise capital amid weak market conditions as they seek to raise cash to invest in new aircraft, even as rivals in Europe and the U.S. cut back on spending. Two of China's three largest state-owned airlines this week announced plans to raise over US$1.5 billion, combined, a few months after similar plans were unveiled by the country's flag carrier.
China Eastern Airlines Corp. (0670.HK), the country's second-largest airline by capacity, on Wednesday said it plans to sell up to 8.8 billion yuan ($1.39 billion) of bonds with maturities of up to ten years on the domestic market, and use the proceeds to buy aircraft and repay bank loans. The sale requires shareholder and regulator approval.
China Southern Airlines (1055.HK), the country's largest carrier by fleet size, said late Monday it aims to raise up to CNY2 billion ($314 million) through a private placing of Shanghai-listed A shares to its controlling shareholder, China Southern Air Holding Co. It is raising the funds to reduce debt and boost its capital.
In April, Air China Ltd. (0753.HK) announced plans to issue CNY1.05 billion ($166.56 million) worth of A shares to its controlling shareholder, China National Aviation Holding Co., for working capital and to reduce its bank borrowings.
All three companies have launched their fundraising campaigns as the airline industry contends with rising fuel costs and slowing economic growth. Air China said Tuesday that its passenger traffic fell 0.7% from a year earlier in May, while average jet fuel prices climbed 4%.
"The first thing you have to contemplate is pressure on margins, and yet being compelled by the CAAC to expand," said an executive at a Chinese airline, speaking on condition of anonymity and referring to China's civil aviation administration. The CAAC said Monday that the country's commercial aircraft fleet would more than double from 2011 levels to more than 4,000 planes by the end of 2015 as the government pushes the development of commercial aviation nationwide.
Higher oil prices and lower foreign exchange gains wiped out the three leading Chinese carriers' first-quarter net profit. Air China Ltd., China Eastern Airlines Corp. and China Southern Airlines Co. posting combined first-quarter earnings of around CNY825 million (US$128 million), down nearly 80% from a year earlier.
China's state-owned carriers have, nevertheless, fared better than their international peers in recent years, thanks to government financial support and a growing domestic air travel market. But their fortunes could take a turn for the worse, as capacity growth will likely exceed growth in passenger demand this year, hurting airlines' profitability, said Patrick Xu, transport analyst at Barclays Bank.
"Growth of domestic air passenger traffic demand has been decelerating to around 12% in the first quarter from around 15% to 20% in 2011," Mr. Xu said.
The International Air Transport Association, a trade group representing the world's airlines, on Monday cut its 2012 profit estimate for carriers in Asia, citing weakness in cargo operations and slowing growth in China and India. It forecast Asian airlines would make a total net profit of $2.0 billion this year, down from $4.9 billion last year.
Analysts say the recent fundraising by the carriers is unlikely to have a significant impact on their ability to expand, noting that in China Southern's case, the amount of money represents only 5% of the carrier's total debt. Mr. Xu said a CNY2 billion injection by China Southern Air Holding was simply "a precaution by the government to strengthen (China Southern's) balance sheet."
Chinese airlines have relatively higher gearing compared with their regional peers, with China Southern's net debt to equity ratio of 170% and China Eastern' s above 200%, said Mr. Xu.
-Write to Andrew Galbraith at andrew.galbraith@dowjones.com and Joanne Chiu at joanne.chiu@dowjones.com
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