China's airlines ready to expand fleets

By Jane Searle
CNN Sydney

SYDNEY, Australia (CNN) -- China's main airlines look to be preparing for major fleet upgrades and expansion, according to the Sydney-based Centre for Asia Pacific Aviation.

But the Centre warns that China's commercial situation is fragile, with the Chinese aviation market still facing problems of excess capacity.

A special industry report released by the aviation analyst says: "Any significant increase in capacity without a corresponding growth in traffic would erode profitability".

It says plans for expansion seem to be settled, with 65 billion yuan (about $8 billion) in credit extended to airlines by Chinese banks since November 2001.

From that period, the report notes that "China began to actively encourage airlines to use long and medium-term foreign currency loans granted by domestic commercial banks for the purchase of foreign-made aircraft".

According to the report, another 2.5 billion yuan could be raised from equity markets, if expansion plans proceed.

It said many carriers intend to list shares later this year, with some aiming for international capital markets.

Funds from debt and equity plans could buy around 200 new A320 or B737 aircraft -- the equivalent to one third of China's present fleet.

Stiff competition

China Eastern's order for twenty A320s in April and for five A340-600s earlier is seen as a move to preserve market power, the report says.

The airline faces stiff competition from China Southern and Air China.

Air China is expanding after a merger with CNAC Zhejiang Airlines, and looking to a Star Alliance membership through connections with Lufthansa.

But the report says a merger between China Eastern and Shanghai Airlines has been abandoned.

Following decentralisation of the Civil Aviation Administration of China (CAAC) in the 1980s, the number of airlines in China increased rapidly.

In 1997, demand started to fall behind capacity growth. Large discounts to stimulate traffic led to record industry losses the following year.

That prompted the CAAC to freeze new aircraft orders and announce the industry would be consolidated under three major airlines -- Air China, China Eastern and China Southern.

The report rates long term growth prospects for China's airline market as "very favorable", but emphasises that "deep discounting could return the market to capacity saturation".