This article appears in the April 29 edition of Aviation Week & Space Technology.
Change is in the air at. Though the only move that can be definitely expected is a move into low-cost operations, China’s third-largest carrier says it is in a transformational stage. Most notably, six years after the collapse of a deal with , it is talking again about securing a strategic investor, partly to help improve its management.
The state company is looking for more independence, pushing the idea that, in accordance with a new theme in Chinese economic policy, the government does not need to hold most of its shares and—reading between the lines—that managers should have a freer hand in running the carrier.
They have not reached that stage yet, however, and for the moment they seem to be concentrating on the best opportunity that is immediately available to them: budget operations. China Eastern Chairman Liu Shaoyong and other senior executives have lately checked outand , as well as full-service carrier Scandinavian Airlines (SAS), the Chinese airline says. In an internal report to employees this month, China Eastern’s managers emphasize EasyJet’s great success in online ticket sales, Ryanair’s record of continuous profits and the high loyalty of SAS customers. Like other Chinese state airlines, China Eastern does not have a notably strong record in any of those areas.
The investigation of the operating methods of Ryanair and EasyJet underlines China Eastern’s interest in low-cost air services. Even before the Civil Aviation Administration of China () began encouraging budget airlines last year, China Eastern moved to gain experience in the field by agreeing with Australia’s to set up a franchisee in the low-cost Jetstar chain in Hong Kong. Jetstar Hong Kong still lacks approval from the local authorities, but in the meantime China Eastern has moved to convert a Beijing-based subsidiary, China , to the budget model. All the signs suggest that China Eastern is trying harder than rivals and to move into low-cost aviation.
A serious push into budget aviation by one of the major carriers would be a revolution in Chinese commercial aviation—though probably a slow-motion revolution, since the CAAC tends not to allow sudden changes in any part of the industry. Another revolution, just as far reaching, is implied in China Eastern’s public discussion of the desirability of reduced state influence in its share register and management.
The basis of this is a policy called “mixed ownership” that the central government promulgated last year. The exact implications of the policy are debated in China, but it at least means increased private participation in state companies. While many of them, including the big airlines, already have private stakes through share market listings, the state holds most of the equity and has an overwhelming voice in management. The three biggest carriers are, in effect, state agencies, though they are forced to compete in a managed market.
The state does not need controlling stakes in all its enterprises, says China Eastern General Manager Ma Xulun, obviously thinking of his own company. It should be enough for the government to have merely a major shareholding, he tells the China Times, a Beijing newspaper. “We are suggesting that the government change the relevant policies as quickly as possible,” he says.
Closely related to this is China Eastern’s consideration of bringing in a strategic shareholder, a foreign airline that would put capital into China Eastern, presumably reducing the government’s stake. Ma is more interested in management advice and operational cooperation: “Money is an issue, but it is not a core issue,” he says. “Our first consideration is the cooperation we can get from a partner and how the partner can boost our business. That is the pre-condition.”
Ma adds that he and Liu moved to China Eastern after the failure of the deal with Singapore Airlines and a Singaporean state investment fund. So they have no regrets, he says, implying that they are willing to try again with a foreign partner. In the China Times interview, he repeatedly raised the issues of mixed ownership and a possible strategic shareholding, though the identity of a possible foreign airline investor is not mentioned.
Just as foreign investment in airlines is limited in most countries, the Chinese government has kept its carriers largely owned by Chinese shareholders, if not by itself. And, as elsewhere, the industry’s ownership limits contrast sharply with the relative liberalism of other sectors such as automotives.
Chinese airlines are weak in international markets, preferring to compete with each other at home. They are trying to change that. For China Eastern, opportunities will open when it begins receiving 20-300ERs it has on order. They will be employed mainly on routes to North America, beginning with service between Shanghai and Los Angeles in November, says Ma.