Chinese state-owned carriers could become more competitive on the international stage, following the change in their parents' ownership structures.

Earlier this month, Air China and China Eastern Airlines both disclosed that their parent companies – China National Aviation Holding and China Eastern Air Holding, have converted from state-owned enterprises into limited liability companies. China Southern Airlines is expected to make a similar announcement at some point.

This follows the Chinese government's announcement last year that all major SOEs will be converted into joint-stock or limited liability companies by the end of 2017. This is a push to introduce mixed ownership between the government and private sector, aimed at driving efficiency in often-bloated SOEs, separate government work from the day-to-day management of businesses, and bring these firms more into line with corporate practices.

Corrine Png, chief executive of transport equity research firm Crucial Perspective, says the reform will help to improve the level of information disclosure, transparency, performance and governance of the airline holding companies. This is important because Chinese carriers are increasingly pursuing growth on international routes, exposing themselves to stiff competition.

"Improving the quality of corporate disclosure and governance at the parent level is a significant step that will help drive the Chinese airlines' commercial strategies and performance monitoring, improving their competitiveness further as they continue to expand on international routes and gain market share," she adds.


The move could also pave the way for more private investment in state-owned airlines. Last week, China also made it easier for state and private Chinese companies to invest in the country's civil aviation industry, in a bid to boost its development.

Under the revision, state-owned and private investment entities may individually or jointly invest in the civil aviation industry. It has made clear that key players Air China, China Eastern and China Southern must, however, remain majority controlled by state-owned shareholders.

The three carriers are already listed on the Shanghai and Hong Kong stock exchanges, where investors can take a stake, and a number of transactions have taken place in the past years.

In 2015, Delta Air Lines acquired 10% of China Eastern's Hong Kong-listed shares for $450 million. This translates to a 3.55% stake in the Chinese airline. The airline's president has also said that it will work to attract other investments, and reduce the stakes held by state-owned enterprises.

Last year, China Southern also sold a 2.68% stake to American Airlines for HK$1.55 billion ($198 million). American also has an observer on the Chinese carrier's board, without any voting rights. This makes Air China the only state-owned operator without a foreign investor.

As Beijing attempts to loosen its grip and liberalise the industry, and as Chinese carriers continue to aggressively pursue international growth, more foreign partnerships and investments can be expected. Any relaxation in ownership and investment rules, either at the parent or airline level, would thus be beneficial.

More quickly, changing the parent companies’ ownership could see more private investment in the parents' various subsidiaries, such as ground handling, catering or airfreight logistics.


Joanna Lu, Flight Ascend Consultancy's head of advisory Asia, says that besides the potential "slight dilution" of state-owned capital in the airlines, the new ownership structure could also lead to the separation of ancillary business from the core airline operations. Joint ventures, partly funded by non-state-owned capital, could also be incorporated to enter new markets outside China.

Analysts add that SOEs have the disadvantage of having to answer to political and social objectives that may not be in line with their business strategy or financial goals. Politics could also interfere with business decisions, especially in international market assessments and fleet acquisitions for airlines, says Lu.

She adds, however: "The three state-owned airlines already have the majority of the market share, so it does make sense to introduce more dynamics into the market."

The easing of control over the Chinese aviation industry is definitely a step in the right direction. Market forces are essential for greater efficiency and competition.

Source: Cirium Dashboard