Lois Jones

The Great Wall of China runs slap bang through Air China's offices. Or so it seems to the uninformed outsider.

Over the years, the state-controlled Civil Aviation Administration of China has constructed a wall of resistance designed to keep outside influences and potential friends and foes away from Air China.

However, Air China's wall needs to come tumbling down quickly if this jealously guarded state treasure is to succeed in looking to the market for funds and overseas for alliances and a stronger route network.

Whether the bricks can be pulled down in time for Air China to keep astride of burgeoning domestic and international competition as its stock hits the markets remains questionable, however. Air China's announcement in October that it is restructuring into a joint-stock company and planning to list on domestic and international markets will fling this cosseted child out into the tough adult airline world.

Preparatory steps are already underway with a view to a listing next year or by 1999 at the latest, says an Air China official in charge of the flotation. Air China has already set up a special working team and is preparing accounts for auditing by accountants Deloitte & Touche.

Air China expects to follow the example set by China's two other major carriers - China Eastern Airlines which floated in February 1997 and China Southern Airlines, which followed in July - and list in both Hong Kong and New York, though a Tokyo and domestic listing are also under review.

The news of Air China's partial privatisation comes as no surprise. The successful listings of China Eastern and China Southern, combined with the increasing competitive threats jostling Air China, must have left the CAAC with little option but to unleash the flagship carrier on to the market.

The flotation is a logical step given China's sweeping industrial reform which aims to lift the country out of a centrally planned system into a market economy and open up state-owned enterprise to outside funding.

Like China Eastern and China Southern, a maximum of 35 per cent of Air China's stock will be floated, leaving the majority of its shares and control in government hands. More than with its counterparts, however, any relaxation of state influence over Air China is heavy with political overtones. Air China - the only carrier permitted to carry the Chinese national flag on its aircraft - has strong political relations with the central authorities and is proudly seen as a national emblem of the PRC.

The CAAC has already declared that it 'will not treat partially privatised and fully state-owned airlines any differently', says an industry source. While more money will doubtless mean more autonomy for Air China, significant decisions will still require a government stamp and the CAAC will maintain its overriding influence until China ends its love affair with central planning, predicts one manufacturer.

While monies from the flotation will help bolster Air China's bottom-line and wipe out debts, its finances remain in fairly good shape (see charts). Long-term liabilities were RMB18.3 billion (US$2.2 billion) in December 1996.

Instead funds from the listing will mainly be channelled into aircraft financing, says Yang Bing, Air China's manager lease financing. Not only will financing become easier after the listing, but Air China 'may well purchase aircraft with its own capital', Yang predicts.

The airline is most likely to spend its newly acquired cash on much-needed short-range aircraft. These are set to be Airbus A320s, an airline source reveals. The airline began to pepper its Boeing fleet with its first Airbus in October 1997, with the delivery of an A340. Two more A340s were due for delivery in November. Air China will also take delivery of one Boeing 747-400 and three B777-200s in mid-1998. The airline is currently negotiating for more B747s and B737s, eyeing Boeing aircraft again as the US and China endeavour to strengthen their political ties, says the airline source.

Alongside Air China's expanding fleet will come network expansion. The airline currently serves 42 international and regional points and total passenger numbers reached 6.68 million in 1996, with total traffic of 2 billion RTKs.

Depending on the outcome of government negotiations the airline will start services to Kuala Lumpur and other additional points in Asia either this season or next, says the airline source. Air China is also eager to snatch up nonstop services to Taiwan once turbulent China-Taiwan political relationships are smoothed out. A Johannesburg service is also planned to boost an African network consisting of Cairo and Addis Ababa. The airline's new A340s will be used on its Beijing-Seoul service, as well as to existing capital cities in Europe. Air China will focus on increasing capacity on existing routes rather than on adding new services in Europe, says the source.

In the US, the airline operates to San Francisco, New York and Anchorage and would like to resume Los Angeles services in 1998.

Air China is gradually recognising the industry's 'unless you're global you're dead' premise, and is hurriedly adding codeshares to its portfolio. The airline hopes to gain approval in time for its planned codeshare with Northwest Airlines to get underway in mid-1998. Air China is also eyeing a codeshare with Varig to Sao Paulo, though it may yet opt to use its own capacity on the route.

More involved partnerships have yet to be formed but Wei Meng, corporate development executive at British Airways, expects Air China to be wooed fervently. 'Being a Chinese airline is like being the father of beautiful daughters with all the world's airlines courting them. The King's daughters need never worry about marriage'.

Conscious of the powerful alliance cards in its hands, Air China is aiming for the top of the alliances pole and wants membership of the Star Alliance.'Air China has viewed its exclusion from the Star Alliance as a slap in the face, demanding what qualities are needed to join up,' says one Chinese source.

Air China's existing cooperation with alliance member Lufthansa makes sense of Air China's aspirations to become the seventh point of the six-member Star Alliance. However Air China's evolving relationship with Northwest, which competes with Star member United Airlines over the Pacific, could clash with a Star Alliance tieup.

Undoubtedly Air China needs partnerships to survive but, as an inexperienced player, it needs time to brush up on marriage tactics before it can evolve into a suitable partner, warns an industry source. 'Although Air China will look for foreign partnerships to improve its reputation, I don't see them easily integrating into an alliance network. For that you have to focus on a common understanding. There's a lot of national pride tied up there with Air China still.'

Air China's Yang predicts that the carrier will not rush into alliances. 'The Air China approach is to take things step by step and not rush.' Air China is further likely to avoid a global link-up until consolidation in the Chinese market is complete, predicts the industry source.

Once the listing is done and dusted and Air China is armed with the necessary short-haul aircraft, the airline's next point of attack will be the domestic market.

Domestic sales currently represent a mere 15-20 per cent of Air China's revenues. Domestic aspirations include acquiring domestic carriers and hoovering up the routes freed up by consolidation. The airline plans to 'cooperate with some Chinese carriers in the southern part of China' and has 'a strong desire to operate to Shinjang from Beijing', says an Air China official.

While increased capacity can only mean good news for Air China's traffic, the opening of the market will also bring with it more intense competition.

Not only will Air China need to beat off the more commercially minded China Eastern and China Southern to maintain its spot as China's number one carrier, but the airline also faces the onslaught of foreign carriers that are already tearing at the fabric of the Chinese market.

In contrast to most travellers' preference for their national airline, the Chinese opt for foreign airlines rather than their home carriers. In part, the trend comes from the Chinese perception that foreign equals better, says Jonathan Dong of Airbus. Air China's image is also lagging behind foreign carriers due to its severe lack of marketing prowess. 'Marketing is the biggest weakness in the Chinese aviation sector,' says Lufthansa's chief representative in the People's Republic, Helge Stavonhagen.

'Air China has top western aircraft, the second longest safety record among the world's airlines and its service standards have improved phenomenally - this combination would be unbeatable if complemented by marketing,' continues Stavonhagen.

As China moves upmarket, Air China is learning to play western airlines at their own game. British Airways' development manager in China, Paul Fisher, acknowledges a pronounced move towards western service standards. 'Up to now Chinese airlines have been buses that fly. Service has been a forgotten word in China for 35 years, but now people are beginning to speak up for improved services.'

By the end of 1998, all Air China and CAAC airlines' cabin crew on international routes will need to be proficient in English. Air China is also turning to carriers like BA to sell it software, such as yield management systems, and for advice on infrastructure development.

There are still massive gaping holes in the fabric that make up a viable international competitor, however. Like its Chinese counterparts, Air China desperately needs to improve aircraft utilisation and operating efficiency, points out Fisher.

Perhaps the greatest challenge facing Air China, however, is the necessary shift in its management mindset from a protected state organisation into a sharp international concern.

The reluctant loosening of the CAAC's vice-like grip will remain critical to Air China's future. 'The state needs to cut the strings and take on a supervisory role - as long as it is trying to make political statements with Air China, the flag can't be financially viable,' warns a senior airline source. Air China's defensive Great Wall may take a long time to pull down.

Source: Airline Business