China's aviation industry is on a roller coaster ride due to the snowballing economic crisis, but the path has turned steeper for its private airline companies.
United Eagle Airlines (UEA), a debt-ridden private carrier based in Sichuan province, received a 200-million-yuan capital injection from State-owned Sichuan Airlines on Tuesday. The cash infusion has allowed Sichuan Airlines to become United Eagle's controlling shareholder, with a 76 percent stake.
United Eagle has become the first private carrier to be taken over by its State-owned counterpart since the global economic downturn deepened.
Only three days ago, the authorities had ordered East Star Airlines, another private carrier based in Wuhan, to suspend operations due to safety concerns.
The cash-strapped airline's debt burden has reportedly been "mounting" and it has failed to pay aircraft leasing fees to GE Commercial Aviation Services.
China National Aviation Holding Co, the parent company of Air China, had said earlier that it would acquire East Star and complete the same before the end of the month.
East Star has become the second private airline to halt services after Okay Airways. Tianjin-based Okay suspended service in December due to an internal dispute between its controlling shareholder and management team.
"This is just the beginning. Private airlines are much more vulnerable than their State-owned counterparts as the global air travel environment continues to deteriorate," said Li Lei, an aviation analyst with CITIC China Securities.
The government has approved about 10 private airlines since 2004. But they are "congenitally deficient" due to their weak capital strength, limited route network resources and lack of airline management experience, Li said.
"We have been plagued by cash flow problems for a long time," said Chen Jiale, former deputy general manager of East Star and a founding member.
"The airline business requires huge cash flow to maintain healthy growth. You can hardly make profits in the short term by just selling tickets," Chen said.
Private carriers have also been hit by volatile oil prices and the economic slowdown.
As their international businesses shrink, large State-owned airlines are focusing on the domestic market and have deployed many planes flying international routes on the domestic network.
(China Daily March 19, 2009)