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Sunday 12 October 2008
China Eastern Close to Gaining Control of Shanghai Airlines
It’s been rumored that the Shanghai city government has approved China Eastern Airline’s acquisition of Shanghai Airlines, expanding China Eastern’s already largest market share in the region. PDF
China Eastern Close to Gaining Control of Shanghai Airlines
11 October 2008
It’s been rumored that the Shanghai city government has approved China Eastern Airline’s acquisition of Shanghai Airlines, expanding China Eastern’s already largest market share in the region. However, as the global aviation industry is facing colder weather as a whole, it is not plain whether the acquisition is good one, or at a good time, for China Eastern.
Sources close to the local government say Shanghai mayor Han Zheng has endorsed the deal. The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council could help China Eastern finance the 3 billion yuan deal. Since China Eastern operates directly under central government administration, Shanghai Airlines will be the first large local enterprise in Shanghai to be transferred to the central government. And for the Shanghai government, it could be the first major move of its state-owned assets consolidation.
Shanghai declared in May 2007 that it would make breakthroughs in its development as a global economic, financial, trade, and freight center in the next five years. The construction of a freighting center depends on the development of Shanghai as an international aviation hub, to rival Hong Kong and Beijing. To equal or surpass them, Shanghai needs not only airports, but also a powerful aviation company.
Air China, with a 44% market share, is the biggest in Beijing’s aviation market. But its market share in Shanghai, with the richest aviation resources in China, is only 12%, much lower than China Eastern’s, which stands at 35%, and Shanghhai Airlines at 18%.
While China Eastern has worked on cooperation with Singapore Airlines, China Airlines sought to establish cooperation with Shanghai Airlines to expand its market share. But as China Airlines is central government-administrated, while Shanghai Airlines belongs to the Shanghai city government, they can cooperate on routes but not on building equity.
But the Shanghai local government always seemed more willing to give Shanghai Airlines to China Eastern, and the merger of Shanghai Airlines and China Eastern has been promoted by the Shanghai government. A source from China Eastern said that although the airline had no expectation of synergies after the merger, acquiring Shanghai Airlines was a strategic move.
The merger may not turn out to be good news for China Eastern in the short-term. China Eastern chairman Luo Zhuping said the company’s biggest concern now was how to withstand the “winter.” The market expects the global aviation industry to contract this year by $5.2 billion.
In 2007 China Eastern’s and Shanghai Airlines’ debt to asset ratio stood at 95% and 87%, respectively, both higher than the industry’s average of 82%. According to China Eastern’s half-year financial report, released on August 27, the company’s debt to asset ratio has now reached 95.23%. Acquiring a company with high leverage puts even heavier pressure on China Eastern. The airline has already suffered from its acquisition of Northwestern Airlines in 2002, whose debt to asset ratio was over 100%.
According to Wang Zhigang, a SASAC research center expert, an enterprise may face serious fund shortage when the external environment is bad. To maintain its operation, it may look for strategic investors or to reduce redundant costs through M&A. So for China Eastern, acquiring Shanghai Airlines seems the best choice.
But China Eastern is still interested in introducing strategic investors. The company attempted to introduce Singapore Airlines and Temasek Holdings as strategic investors in September 2007, but was hindered by China’s Civil Aviation Administration and the proposal was blocked by small shareholders at a meeting early in the year.
Market analysts believe the government’s attitude has been a factor in this deal. Singapore Airlines is not likely to involve itself in negotiations full of political uncertainties that may not yield any outcome, and it hopes the Chinese government will declare clearly that it will allow the selling of China Eastern’s shares to an overseas investor.
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China Eastern Close to Gaining Control of Shanghai Airlines
11 October 2008
It’s been rumored that the Shanghai city government has approved China Eastern Airline’s acquisition of Shanghai Airlines, expanding China Eastern’s already largest market share in the region. However, as the global aviation industry is facing colder weather as a whole, it is not plain whether the acquisition is good one, or at a good time, for China Eastern.
Sources close to the local government say Shanghai mayor Han Zheng has endorsed the deal. The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council could help China Eastern finance the 3 billion yuan deal. Since China Eastern operates directly under central government administration, Shanghai Airlines will be the first large local enterprise in Shanghai to be transferred to the central government. And for the Shanghai government, it could be the first major move of its state-owned assets consolidation.
Shanghai declared in May 2007 that it would make breakthroughs in its development as a global economic, financial, trade, and freight center in the next five years. The construction of a freighting center depends on the development of Shanghai as an international aviation hub, to rival Hong Kong and Beijing. To equal or surpass them, Shanghai needs not only airports, but also a powerful aviation company.
Air China, with a 44% market share, is the biggest in Beijing’s aviation market. But its market share in Shanghai, with the richest aviation resources in China, is only 12%, much lower than China Eastern’s, which stands at 35%, and Shanghhai Airlines at 18%.
While China Eastern has worked on cooperation with Singapore Airlines, China Airlines sought to establish cooperation with Shanghai Airlines to expand its market share. But as China Airlines is central government-administrated, while Shanghai Airlines belongs to the Shanghai city government, they can cooperate on routes but not on building equity.
But the Shanghai local government always seemed more willing to give Shanghai Airlines to China Eastern, and the merger of Shanghai Airlines and China Eastern has been promoted by the Shanghai government. A source from China Eastern said that although the airline had no expectation of synergies after the merger, acquiring Shanghai Airlines was a strategic move.
The merger may not turn out to be good news for China Eastern in the short-term. China Eastern chairman Luo Zhuping said the company’s biggest concern now was how to withstand the “winter.” The market expects the global aviation industry to contract this year by $5.2 billion.
In 2007 China Eastern’s and Shanghai Airlines’ debt to asset ratio stood at 95% and 87%, respectively, both higher than the industry’s average of 82%. According to China Eastern’s half-year financial report, released on August 27, the company’s debt to asset ratio has now reached 95.23%. Acquiring a company with high leverage puts even heavier pressure on China Eastern. The airline has already suffered from its acquisition of Northwestern Airlines in 2002, whose debt to asset ratio was over 100%.
According to Wang Zhigang, a SASAC research center expert, an enterprise may face serious fund shortage when the external environment is bad. To maintain its operation, it may look for strategic investors or to reduce redundant costs through M&A. So for China Eastern, acquiring Shanghai Airlines seems the best choice.
But China Eastern is still interested in introducing strategic investors. The company attempted to introduce Singapore Airlines and Temasek Holdings as strategic investors in September 2007, but was hindered by China’s Civil Aviation Administration and the proposal was blocked by small shareholders at a meeting early in the year.
Market analysts believe the government’s attitude has been a factor in this deal. Singapore Airlines is not likely to involve itself in negotiations full of political uncertainties that may not yield any outcome, and it hopes the Chinese government will declare clearly that it will allow the selling of China Eastern’s shares to an overseas investor.
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