The sky's the limit for aviation in China
By Mure Dickie
Published: February 2 2005 02:00 | Last updated: February 2 2005 02:00
When the southern Chinese island province of Hainan decided to set up an airline in 1993, it could muster only Rmb10m (US$1.2m) in initial investment - not enough, as one history of the company relates, "to buy even half an aircraft wing".
Hainan Airlines has come a long way since then. Last week, the carrier, now the core of China's fourth largest airline group, placed an order for eight new Boeing 7E7s with a list price of US$960m.
That deal - part of a package of orders for 60 7E7s from Chinese airlines - offers only a hint of the ambitions harboured by Shanghai-listed Hainan Airlines and its parent HNA.
Chen Feng, HNA's ebullient chairman, says that in the next five to seven years the group wants to expand its fleet from 104 aircraft to about 200 - acquiring up to 20 new aircraft a year.
"We have two goals," Mr Chen says. "The first is to establish a high-quality aviation brand for the Chinese people and the second is to create a world-class company for China."
Such ambitions rest in part on the belief that China's newly consolidated aviation market is poised for a sustained period of expansion of more than 20 per cent a year, as the country's economic development sends annual income per head above US$1,000.
Hainan Airlines has become the only regional airline that can significantly challenge the dominance of the country's three big airline groups, Air China, China Southern and China Eastern.
It has done so in part by being early to tap domestic stock markets to increase its capital base and by attracting investment from the likes of George Soros, the billionaire financier, who holds a 14.8 per cent stake in the listed company.
HNA is now preparing a big restructuring that will merge Hainan Airlines with other carriers acquired during a wave of government- sponsored consolidation in the sector. And Mr Chen is hoping to attract new investors through a private placement, while also considering a possible overseas listing for HNA's airline operations.
He is also optimistic that HNA can avoid the kind of loss-making pricing that has undermined Chinese airlines in the past.
HNA still faces considerable challenges, however. The group is still much smaller than the three big airlines. Even by Mr Chen's count, HNA has only 12 per cent of the market compared with Air China's 23 per cent, China Southern's 21 and China Eastern's 19 - an imbalance that could make it relatively vulnerable if price pacts break down.
Some observers are critical of a lack of clarity about the operations of the group, which also operates hotels and airports. Hainan Airlines was recently rapped by regulators for failing to disclose a transfer of Rmb440m to a trading company in Shaanxi Province.
Such complaints suggest that HNA might be wise to make disclosure a more prominent part of its much vaunted corporate culture.
After all, Mr Chen puts great store by the cultivation of moral values among HNA staff.
All group employees are required to read a 253-page tome on "Chinese traditional culture", edited by Mr Chen.
And Mr Chen, a high-profile member of China's ruling and atheist Communist party, is eclectic in his approach to corporate governance. Along with the words of the sages, HNA also looks to US corporate trend-setter General Electric for inspiration.
"HNA's corporate culture is a harmonious combination of east and west," he says. "It has the essence of traditional Chinese culture and also has the western 'Six Sigma' management method."
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