"Big Three" Target US$1.3b for Expansion
By Alman Loong, The Standard | Jan. 23, 2007
China's airlines are seeking loans totaling up to US$1.3 billion (HK$10.14 billion) to finance the acquisition of more than 20 aircraft, according to debt market newsletter basis point.
Air China, the mainland's flag carrier and the dominant provider of international flights, has issued a request for proposals for at least US$700 million in financing to buy more than 10 aircraft including several narrow-bodied Boeing and both narrow- and wide-bodied Airbus jets, the report said.
However, Li Youqiang, finance department managing director, would only tell The Standard: "We plan to expand our aircraft fleet but we are not in financial need at this moment."
He provided no details about the expansion plans.
The 10 aircraft will cost US$800 million. Aircraft loans generally cover 80 percent to 85 percent of the purchase price. However, cash-rich banks will probably offer 100 percent.
Bankers are awaiting a mandate from China Eastern Airlines and China Southern Airlines to provide at least US$620 million in finance for more than 13 aircraft. The term of the loan will be 10 years.
Spokesmen for both companies were unavailable to comment.
Boeing of the United States estimates that mainland airlines will buy an average of 115 new big aircraft per year until 2025, while Airbus, a European consortium, projects 90 planes per year over the same period.
Mainland airlines face strict government controls on fuel imports and their ability to pass those costs on to customers. Dow Jones news cited a source familiar with the situation who said the central government is considering injecting 16 billion yuan (HK$16 billion) into its three major airline groups to cut both their debt burden and rising fuel costs.
Under the plan, China would inject 3 billion yuan into China National Aviation Holding, the parent of Air China; 6.4 billion yuan into China Eastern Air Holding Company, the parent of China Eastern; and 6.6 billion yuan into China Southern Air Holding, parent of China Southern.
The airline industry's combined profits rose by 50 percent between January and November this year to more than 9 billion yuan due to the fuel surcharge on airline tickets, compared with a loss of 640 million yuan in the first six months due to high jet-fuel prices, Xinhua said in December, citing Yang Yuanyuan, director of the General Administration of Civil Aviation of China.
On January 22, Citigroup upgraded the target share price for the "Big Three" - China Southern, China Eastern and Air China - by 34 to 48 percent to reflect the bullish attitude of the market towards their earnings forecasts this year.