Japan minister says JAL won’t be liquidated

Airline lost $1 billion in 2nd quarter, government turnaround panel named

TOKYO - Japan's transport minister said Sunday he will not force the struggling Japan Airlines, Asia's biggest airline, into bankruptcy.  "We will not crush and liquidate (the airline)," Land, Infrastructure and Transport Minister Seiji Maehara said on a TV Asahi talk show. "It's just impossible."  A team of government-appointed corporate turnaround experts was set up Friday to create a restructuring plan for the airline, whose own draft reconstruction plan Maehara called "insufficient."

The team will make a recommendation to the transport minister by late October or early November.  Officials from the airline and the transport ministry were not available for comment Sunday.  The airline incurred its biggest-ever quarterly net loss of 99 billion yen ($1 billion) in the three months to June, and has forecast a net loss of 63 billion yen ($701 million) for the current fiscal year to March 2010. JAL was privatized in 1987.  JAL has sought public funds for survival. Its request for taxpayer money came months after it received 60 billion yen ($668 million) in loans from the government-owned Development Bank of Japan in June.

In his meeting Thursday with the transport minister, JAL President Haruka Nishimatsu revealed that the airline is short 450 billion yen ($5 billion) through March 2011, money that is needed for debt repayment, according to media reports. Nishimatsu reportedly told Maehara that JAL was planning to cover part of the payment by selling off its in-flight meal catering unit and reviewing company pension plans.  JAL's original restructuring scheme also included 6,800 job cuts, or around 14 percent of its workers.  The airline has reportedly been in talks on financial tie-ups with several top airlines including Delta Air Lines Inc., the world's biggest airline operator, its rival American Airlines Inc. and Air France-KLM, Europe's biggest airline group.

 

Chinese airline industry undergoes transformation

China has done much to improve its safety record and the performance of its airlines. Dennis William reports on how this was achieved and what’s next.

China’s air safety record has improved significantly in the last 10 years alongside major reforms and expansion of its civil aviation industry.

From the 1980s through the 1990s China’s air safety reputation was poor, with most of the country’s airlines operating old Russian-made and locally-made aircraft. Persistent pilot errors were common, exacerbated by poor standards of English language which resulted in problems communicating with air traffic controllers outside China which gave rise to misinterpretation of information conveyed. Unreliable maintenance of aircraft and poor government oversight of safety issues all contributed to the situation.

Much has been done over the last 10 years by the authorities and airlines, with the result that air safety has risen to a level that today sees China’s fatal air accident rates comparable to those of North America and Europe.

Former Minister for the Civil Aviation Administration of China (CACC) Yang Yangyuan played a major role in this transformation. A former management pilot with China Southern Airlines, Yang was ready to admit to mistakes and learn form accidents and incidents involving Chinese airlines.

This hard-pushing official made it a point to adopt a more open attitude towards correcting and changing the work attitude of the local officials which he said was of paramount importance for the situation to improve. Some officials did not like the sudden changes that Yang was trying to make, but he managed to convince them it was for the good of the industry and the image of China.

Among the steps taken by the authorities to reduce accidents and incidents were:

• establish programmes for Chinese State and provincial regulators, and airline executives to learn from their US counterparts;

• seek assistance from foreign governments and aircraft manufacturers to draft new safety regulations and procedures, and help implement and enforce them;

• allow international aviation and safety organisations to carry out audits, draft and suggest recommendations;

• enhance training of engineers, mechanics, pilots, government inspectors and airline officials across the board in the day-to-day operations of the airlines;

• recognise English as an important tool for communication and improvement for all people working in the civil aviation industry;

• ensure cadet pilots who were not fluent in English went through a mandatory six-month course before entering the flying school, and

• agree to closely cooperate with foreign accident investigators.

A case in point involving the latter was in November 2004 when a Bombardier CRJ-200 plunged into an ice-covered Mongolian lake, hardly two minutes after taking off in good weather. US and foreign investigators were allowed to visit the crash site within hours of the crash which killed 54 passengers. Investigations revealed that the cause of the crash was wing ice due to failure of the crew to take necessary precautions. The crash prompted Chinese authorities and the International Air Transport Association to sign a cooperation pact which allowed IATA experts to carry out audits on all Chinese airlines and release its findings.

The openness of the authorities was a clear indication that China meant business in improving its air safety.

The measures have resulted in the accident rate for Chinese carriers dropping significantly – about tenfold since the mid-1990s. There has been no fatal accident involving a Chinese airline since 2004.

China’s new openness in revealing and admitting its shortcomings to outsiders was a revelation to foreign safety experts who had previously worked with the Chinese on enhancing aviation safety.

CAAC officials took the task seriously and viewed it as its responsibility to take immediate steps to correct the situation. Officials in authority did something akin to heresy for a burgeoning economic power – they threatened to defer deliveries of new aircraft to Chinese airlines until a multi-layer safety roadmap was comprehensive, fine-tuned, implemented and that they were convinced that airline officials were taking it seriously.

This was a major change in operations for the CAAC. The authority was set up in June 1949 as the country’s regulatory body for civil aviation. It was changed to the General Administration of Civil Aviation of China in early 2004, then back to its former name.

Some 25 companies from the US, ranging from engine makers to avionics suppliers, got together to provide technical training and assistance. Federal Aviation Authority experts were on hand to improve air traffic control designs and inspection procedures. Chinese airline officials had the opportunity to gain work experience with major US airlines and aircraft manufacturers, while French aviation colleges and Airbus had separate agreements to train CAAC and Chinese airline officials.

This has gone a long way in enhancing China’s air safety, culminating in Guangzhou-based China Southern Airlines, the largest carrier in China, being awarded the Five-Star Flight Safety Award by CAAC for the best safety record among Chinese airlines.

Up to June, the carrier had recorded 14 years and one month of continuous safe flight operations, flying five million hours and carrying 250 million passengers.

Li Jiaxiang, CAAC Minister and Deputy Minister for Transport says this is an achievement for the airline and China in international aviation safety. For every one million hours of safe operation, CAAC awards an airline one star.

In addition, in March, China Southern passed the rigid IATA Operational Safety Audit.

China, through the CAAC, has also in the last 10 years been aggressively putting reforms in place for the airline industry to improve the airlines’ management and operations in an effort to turn loss-making carriers into profitable ones. Reforms started in 1978 and have been slow to be implemented by the authorities, but the programme has now moved into top gear.

In June 2001 the airline industry was consolidated with the nine state-owned carriers grouped into three groups with each headed by one of the big three – Air China, China Southern Airlines or China Eastern Airlines.

With the consolidation the three carriers were also allowed to evaluate and make their own decisions on the aircraft type that they wanted to acquire. Prior to this, CAAC was in full control of the type of aircraft airlines could operate or acquire. CAAC would order the aircraft and deliver the equipment to the airlines that needed the aircraft.

Under the reform exercise, smaller loss-making airlines owned by provincial governments were acquired by the bigger carriers to avoid being pushed out of the market. The aim was to reduce the number of airlines competing and turn the red ink into black.

Since consolidation the big three have gone a long way in terms of network and fleet expansion. Losses have also turned into profits, with better management of the airlines.

While many major airlines around the world have reported losses due to high oil prices, the big three Chinese carriers have posted profits in the first six months of this year, although the second half of the year is proving less satisfactory. Air China had the highest with 1.28 billion yuan (US$175.34 million), China Southern reported 848 million yuan and China Eastern achieved 41.62 million yuan.

China Southern, which joined the SkyTeam global airline alliance last November, is the biggest carrier operating 342 aircraft and over 100 aircraft on order, including five Airbus A380s and 10 787-8 Dreamliners.

The carrier started operations in 1989 and was listed on the New York and Hong Kong Stock Exchanges in June 1997. As part of the consolidation of the airline industry, China Southern acquired China Northern Airlines and its subsidiaries Beiya Airlines and China Northwest Airlines and China Xinjiang Airlines.

China Southern was ranked fourth by IATA last year in terms of the number of passengers carried - 56.52 million.

Already operating a wide international network, the carrier was due to launch Guangzhou-Moscow flights in October, to be followed by Beijing-Detroit and Beijing-London in March, and Guangzhou-Vancouver in July 2009.

The carrier is owned 50.3 per cent by China Southern Air Holding, Hong Kong and non-China investors. It has a workforce over 35,100.

With a fleet of 232 aircraft, China Eastern is owned 61.64 per cent by the Chinese government, publicly held H shares 32.19 per cent and publicly held A shares 6.17 per cent. After failing to offload 24 per cent stake to Singapore Airlines (SIA) and the Singapore Government’s investment arm Temasek Holdings following objections from shareholders, the Shanghai-based airline’s plan to seek a strategic partner remains unchanged.

According to China Eastern’s vice president Li Jun, the airline needs to enhance the management of its operations to be prominent in the highly competitive airline business especially in international markets. The carrier still sees SIA as an ideal strategic investor, but this is as far as it goes. “The only way to move forward is to have a strategic investor,” Li says.

China Eastern is currently looking at ways in which it could co-operate with Shanghai Airlines and Taipei-based Eva Airways. Shanghai Airlines is one of the fastest growing and most profitable Chinese carriers. China Eastern has acknowledged that the government was discussing the possibility of merging it with Shanghai Airlines. China Eastern president Cao Jianxiong says, however, that the talks are at government level and not between the two carriers. “We have no plans to merge with Shanghai Airlines,” Cao points out.

China Eastern is making a profit on domestic operations but is losing money on most international routes due to low yields. It plans to order 40 A320s this year to meet expansion needs but has ruled out the possibility of acquiring the A380.

Air China started operations in July 1988. The formation of the carrier was the result of the government’s decision to split the operating divisions of the then CAAC airline into six carriers. The other five are China Eastern, China Southern, China Northern Airlines, China Southwest Airlines and China Northwest Airlines.

On 15 December 2004, Air China was listed on the Hong Kong and London bourses. It operates a fleet of over 240 aircraft and has a further 146 aircraft on order including 15 777-300ERs and 15787-8 Dreamliners.

Air China became a member of the Star Alliance in December 2007. Star Alliance started courting Air China in 2001 but CAAC was the stumbling block then. At the time CAAC said it did not see how the carrier could benefit from joining the alliance.

The flag carrier is expected to continue to play an important part in China’s ongoing plans for further consolidation. A proposed merger between Air China and China Southern was blocked by CAAC in September 2000, with the regulatory body citing competitive reasons.

Grand China Air - a merger of Hainan Airlines, Shanxi Airlines, Chang’an Airlines and China Xinhua Airlines - is the fourth largest Chinese carrier. It was formed in November 2007 with a registered capital of 3.09 billion yuan (US$423.28 million) using Beijing as its hub to penetrate the international market and Haikou Meilan International Airport (HMIA) to expand its domestic operations.

The carrier launched thrice weekly services to Seattle on 0 June using A340-600s, three of which the airline has leased from ILFC. It will introduce flights to Chicago and Newark next year after it starts taking delivery of its 787-8s, of which it has eight on order.

The carrier’s other international destinations are Brussels, Toronto, Berlin and Budapest, while its domestic network covers over 500 routes.

The rights for international flights secured by Hainan Airlines have been transferred to Grand Air China. The airline operates a fleet of 133 aircraft and has 166 on order.

The Hainan provincial government holds 48.6 per cent in Grand Air China, Hainan Airlines Group (HAG) 32.8 per cent and Soros Fund Management LLC 18.6 per cent. The latter is owned by US financier George Soros.

Shanxi, Chang’an and China Xihua, which were loss-making airlines, were acquired by Hainan Airlines in stages in 2002 and 2003. Using HMIA as its base, Hainan Airlines started operations in October 1989 as Hainan Province Airlines and was renamed Hainan Airlines in January 1993.

In 1998 Hainan Airlines became the first Chinese carrier to own shares in an airport when it acquired 25 per cent stake in HMIA.

HAG has recently signed an agreement with local firm Qian Tang Aviation Group to set up a new joint venture domestic airline. It will start operations next year.

To be named Qian Tang Air, the airline will be based in Zhejiang initially operating with three A320s. The carrier hopes to capitalise on Zhejiang’s economic growth to expand its operations.

Shanghai Airlines plans to concentrate operating as an independent airline using Pudong International Airport and Hongqio Airport, both in Shanghai, as its hubs. The fifth biggest carrier in China, the airline has been accident-free since it started operations in 1985. With a fleet of 53 aircraft, the airline has firmed up plans to expand to 100 by 2010.

Shanghai Airlines hopes to secure the rights to launch flights to Seattle, Washington DC and Los Angeles next year using 787-8 aircraft, of which it has nine on order. The carrier abandoned plans to fly to Hamburg, Vienna and Zurich this year, but will revisit the plan when market conditions improve and it is more feasible, says an official. “With the high fuel price and weak market, it does not make business sense to operate these routes as yet,” the official adds.

Shanghai Airlines was admitted as the 19th member of Star Alliance on December 12 2007. It set up Shanghai Airlines Cargo with Taipei-based Eva Air in 2006 operating a fleet of three MD 11Fs and two 757Fs.

Meanwhile, US-based Mesa Air Group is looking into the possibility of selling its stake in Kunpeng Airlines, a regional Chinese carrier, to its partner in the joint venture airline, Shezhen Airlines. Kunpeng, which has been operating at a loss, has indicated that it will move its base from the Xi’an International Airport to Xinzheng International Airport in Zhengzhou, north China, although no date has been fixed. Kunpeng operates five Bombardier CRJ200s leased from Mesa. The lease will only continue should Mesa succeed in the sale of its stake. Kunpeng has ordered 100 ARJ21-700s and four Embraer ERJ 190s.

While low-cost airlines have been accepted and are thriving around the world, it is considered a risky business in China, which is still very conservative.

China is a robust market and aviation has expanded rapidly, linking the country to more destinations. Since 2005 alone, 29 new airlines have surfaced.

One of these is Spring Airlines, whose motto “Making flying affordable to everyone in China” gives the impression that it is a LCC. It is not a LCC, although it operates like one, restricting passengers to 15kg for checked baggage.

LCCs face a major obstacle in China that is not found in many other parts of the world - to book a flight a passenger needs a credit card and although people have credit cards in China, they cannot be used online in the country. Another problem is that LCCs do not have access to big international airports in China like their counterparts in Malaysia, Thailand and South Korea.

Currently there are no LCCs in China. Several companies had plans to set up LCCs as early as 2005, but their plans were thwarted by the conditions laid down by the authorities. The authorities wanted to dictate the routes that LCCs could operate and the fare structure. This would have gone against the principles of reforming the airline industry.

An official at the MOT, Zheng Bao says that a lot of progress has been made reviewing the reforms for LCCs including “harmonising the transport system”, although he declines to provide details.

Okay Airways, which was launched as a LCC in 2005, failed miserably due to the stringent conditions imposed by the authorities. Full service airlines had also complained that they were facing unfair competition due to Okay Airlines’ low pricing. Okay Airlines was re-launched as full-service carrier a year later.

A bigger threat to local airlines will surface when the high-speed train service is offered in 2012. China is investing 77.4 billion yuan (US$10.6 billion) in the construction of 16 high-speed rail tracks. Construction, which started in November 2007, will be completed in stages over the next 11 years. The tracks will connect provincial capitals with the major cities and towns as well as the manufacturing hubs in the Yangtze and Pearl River regions and the Bohai Sea.

When construction is completed in 2019, China will have a total of 12,000km high-speed rail tracks. The 1318km long Beijing-Shanghai high-speed rail track is being constructed under separate funding. The track will allow speeds of up to 300km per hour.

When the Beijing-Shanghai service is commissioned in mid 2010 it will reduce travelling time between the two cities from the current 13 hours and 10 minutes to four hours and 45 minutes. Flight time between the two points is three hours and 15 minutes.

The high-speed train service will change the landscape of air travel in China. In South Korea and Taiwan it is already evident that high-speed train services have changed the landscape of air travel, resulting in surplus aircraft for the airlines operating domestic flights.

By 2010 China will have 190 airports in operation. According to CAAC statistics, China’s air traffic had an average 18 per cent growth since 1980, almost triple the country’s GDP growth rate and also triple the world’s average growth rate.

Boeing, meanwhile, has forecast that China will need 3,400 new aircraft by 2026. Currently there are 1,104 aircraft operating with about 36 airlines in the country.

But despite strong growth in recent years, clouds are on the horizon for the Chinese airline industry. The second half of the year has seen a sharp decline in traffic and profitability for many of the country’s carriers, with the much-anticipated boom in traffic following the Beijing Olympics failing to materialise.

Air China, for example, has warned it is on course for a big third-quarter loss which will most likely result in a loss for the full year.

Last month China Eastern Airlines also reported a loss for the third quarter – a net loss of 2.33 billion yuan for the three months compared with a net profit of 976.4 million yuan for the same period a year ago. The result comes on the back of falling traffic attributed to the financial downturn and not helped by strict visa restrictions required for foreign nationals.

The Chinese Government has yet to respond to the changing airline marketplace and airline requests for assistance.

Contacts:
Emirates Airline
Olga Petrycki
(416) 360-6522 ext. 226 or Cell: 416-427-0697
Email: olga@punchcanada.comolga@punchcanada.com