Vol. 8 No. 13                                            WE COVER THE WORLD                                                         Monday February 2, 2009

Money Squeezes China Carriers

(Exclusive China)—As Year of Ox begins, the global financial crisis has dragged Chinese airlines into hard times, huge losses on aviation oil hedging, sharp drop in mail and cargo movement, weak growth in passenger transportation and aggressive capacity expansion plan.
     While an overall industry loss in 2008 is clear, let’s look at major Chinese airlines one by one, offering some hint for this New Year.
     China Eastern: Government to pullback the carrier from bankruptcy
     RMB7 billion capital injection from the government seems far less than enough to lift the airline cleanly away from further financial difficulties.
     As losses on aviation oil hedging edged up to RMB6.2 billion by December 31 2008, China Eastern Airlines, which also suffered RMB2.3 billion losses for its flights in the first three months of 2008, has to worry about finding more capital sources.
     The carrier was nearly on the edge of bankruptcy before this capital injection, when it reported its 98.49 percent debt-to-asset ratio for the third quarter in 2008.
     Newly appointed president of China Eastern, Liu Shaoyong, former President of China Southern Airlines, has initiated a range of steps to strengthen the airlines’ finances, with strong support from the government and state-owned banks.
     On December 24, Communication Bank of China offered China Eastern credit line of up to RMB10 billion.
     On January 15, 2009, China Eastern obtained RMB5.55 billion in loans from the finance affiliate of its state-owned parent group, with an interest rate below the central bank's benchmark lending rate for commercial banks.
     Four days later, Shanghai Pudong Development Bank signed another RMB10 billion in credit lines with China Eastern.
     Together with these vigorous financial arrangements, efforts to reduce capital outflow were also launched.
     In total 29 investment projects at the airline have been suspended, including preparations for establishing branches in several cities and works for setting up Tibet Airlines.
     China Eastern now is also trying to sell a stake in its regional unit Joy Air Co.
     Efforts to cancel or delay new aircraft delivery in 2009 are also under way.
Air China:
Greatest losses on aviation oil hedging and largest capital injection expected.
     As the flag carrier of China, Air China outperformed its peer group for years, but during 2008, it recorded higher losses on aviation oil hedging than any other Chinese airlines.
     By December 31 2008, the amount of losses reached RMB6.8 billion.
     One month more after the announcement of capital injection into China Eastern and China Southern, there is still no news revealed for Air China.
     “If anyone says, of the three giant airlines that only China Eastern and China Southern would receive capital injection from the government, and Air      China would be left aside, no one would believe this.” an insider at Air China told Air Cargo News FlyingTypers.
     “Capital injection, not only to rescue the troubled airlines, but also compensate the lagged reduction on aviation fuel price. For whichever motive, Air China would be in the list.”
China Southern:
     Thanks to the decision made by former president Liu Shaoyong, China Southern ceased oil hedging last September, distinguishing itself from other major Chinese airlines with USD6.3 million profits on oil hedging.
     With business focus on domestic routes, China Southern now stays in a relative favorable position compared with other airlines; and the RMB3 billion capital injection from the central government also helps to strength its finance.
     Other state owned airlines, like Hainan Airlines, also have received financial support from local government.
     As to Shanghai Airlines, reports about its merger plan with one of the three giant airlines have never ceased, although the airlines have changed that is, first it was China Eastern, and now also Air China.
     Elsewhere the landscape in China commercial aviation gets murkier in 2009.
Private Airlines:
     Private airlines are struggling and without hope in the toughest year modern China aviation has ever seen.
     While major state owned airlines are always backed by the government, enjoying favorable policies, flight routes resources and scale economy of fleet, private airlines can only rely on themselves.
     So the freeze is on and has halted for now, the once prospective development of private airlines in China.
     Until capital, what these carriers lack most, and have no way of getting, opens up again the airline start up landscape is a desert.
     As example, United Eagle Airlines in Sichuan Province has had to ground two aircraft in its small fleet due to lack of working capital.
     OK Air has suspended flight of all its aircraft because of shareholder conflict, ending its most profitable cargo contract with FedEx.
     East Star Airlines, that once impressed the world for its aggressive expansion plan, now is under negotiation with Air China, seeking a stake sale to the latter party.
     Spring Airlines, which has the best profit records among Chinese private airlines in past years, so far seems ok but still faces much capital pressure.
     Civil Aviation Administration of China (CAAC) has issued measures to rescue domestic airlines, but it is unlikely the government will find the money to help private airlines.
David

Foreign Direct Investment Challenged

Dateline Brazil— Despite the severe problems facing other emerging markets, Brazil registered its second-biggest monthly flow of foreign direct investment in December, pushing the annual total in 2008 to a record, the central bank said.
     Foreign Direct Investment (FDI) surged to $8.12 billion in December from a revised $2.18 billion in November, helping Brazil post an annual record for FDI of $45.1 billion, the bank said in Brasilia.
     Investment from abroad more than compensated for the $2.92 billion current account deficit posted in December.
     Brazil’s $1.3 trillion economy is relying on foreign direct investment to finance its balance of payments as investors pull money out from the country’s capital markets and exports drop because of the global credit crunch.
     “Foreign investors have a long-term perspective,” Altamir Lopes, (left) head of central bank’s economic research department, told reporters in Brasilia.
     “They are looking at the fundamentals of Brazil’s economy and are seeing positive perspectives.”
     Total FDI for 2008 was the highest since Brazil began keeping records in 1947, the bank said.
     The country’s $2.92 billion current account deficit in December was larger than November’s revised $976 million deficit, the bank said.
     A Bloomberg survey of 17 economists forecast a deficit of $2.63 billion.
     Brazil’s current account deficit, the broadest measure of trade in goods and services, will probably widen in January to $3.2 billion, Lopes said.
     He expects foreign direct investment of $2.5 billion this month.
     How is the situation facing the other developing economies?
     According to the World Bank, FDI in developing nations will drop by USD 180 billion or 31% in 2009 as a global recession prompts multinationals to cut spending on factories and mines.
     Mr. Mansoor Dailami, (right) manager of international finance in the global development prospects group said that the decline will put renewed pressure on emerging market currencies, even as asset sales by fund managers slow.
     He added:
     "This is the most serious reaction so far to the global recession at the factory level.
     “Most emerging-market currencies are already under pressure and this tendency will continue.
     “In 2008, it was a stocks and portfolio story.
     “This year, it will be an FDI story."
     Morgan Stanley estimates that FDI fell an estimated 10% in the developing world in 2008 and will cool further this year.
     FDI, which typically involves spending on plant and machinery or the purchase of a controlling interest, accounted for 38% of inflows into emerging markets in recent years as compared with 10% for investment by funds and 54% for loans.
     Mr. Michijiro Kikawa, (left) CEO of Hitachi Construction Machinery Co. said:
     "I've never before experienced seeing sudden, simultaneous drops in worldwide demand.
     “New investment won't be implemented until we can foresee how the market will recover."
     As recently as October 28th 2008, Hitachi was predicting 26% growth in China sales for the current financial year. The nation’s excavator market shrank 50% from year earlier levels in November and 37% in December.
Gordon Feller