China's smaller carriers are in a life or death struggle to gain Beijing's approval for what they expect will be a limited number of aircraft orders this year. The outcome of the battle looks likely to settle which airlines survive and which are swallowed by others.

And the signs are ominous for the minnows, with legislation coming in to force this month which strengthens the Civil Aviation Administration of China's regulatory control. From his increasingly powerful position, the CAAC's deputy director Shen Yuankang predicts this year will see a growing number of mergers among China's smaller carriers.

The difficulty that Sichuan Airlines had in obtaining approval to lease three A320s highlights the worries of the smaller airlines. For nine months, arguments raged back and forth within CAAC over whether a second tier provincial carrier such as Sichuan should be allowed to acquire such aircraft. The debate was not only over its ability to operate and maintain A320s, but also addressed the implications for other provincial carriers.

Pent-up demand for aircraft is mounting, yet no one knows how many new orders Beijing will allow. Smaller carriers fear the big airlines such as Air China, China Southern, and China Eastern will grab most of the orders. There is no sign that Beijing is easing the clamps placed on international borrowing for all sectors last year, so the number of new orders may reflect whatever deal the CAAC can strike with exchange control authorities and others who regulate China's economy.

At the present rate China clearly will not meet its five-year goal of adding 320 aircraft by 2000. That would require 64 new aircraft annually and no retirals, but as a result of the CAAC's freeze on orders, only 27 aircraft deliveries are due this year. Last year saw the import of only 21 aircraft into China, against 11 retirals, for a net gain of only 10 aircraft.

CAAC officials refuse to explain how they will meet their target, but Li Yongqi in CAAC's planning department insists: 'Reports of 40 new aircraft per year are groundless.' Air China has been waiting since last August for approval to place a $1.9 billion order. China Southern hopes to buy 20-25 large jets in the next five years. Zhu Deci, former chief accountant and now the airline's senior advisor, says some of the $2 billion needed to finance the order will come from the carriers planned public offering, which Zhu says is basically completed but is still awaiting final approval.

In the meantime, China has also adopted a new law governing the issuance of bank guarantees. The securities law ends a running debate by declaring that guarantees issued by branch banks are unenforceable unless the branch has written authority from its head office.

D Knibb/T Ballantyne

Source: Airline Business