Chinese Airlines

[HenryTo]

You know that the Chinese stock market is in a bubble when airline shares are bid up to a P/E of 60:

http://www.bloomberg.com/apps/news?pid=20601087&sid=akUghdFJ32D4&refer=home

[rffrydr]

The inevitable consolidation:

http://www.google.com/hostednews/afp/article/ALeqM5g6_iCO-ZwmbrAYFEabkGHKQnl4tQ

China Eastern, Shanghai Airlines told to merge
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Cathay gets reamed, like the ethanol producers, on its hedges. Posting margin becomes an unexpected, and immediate, expense for these companies.

[rffrydr]

GE makes the first purchase (question is do they really want them?):

http://www.forbes.com/markets/2008/11/04/chinese-made-jet-markets-equity-cx_vk_1104markets04.html
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

That 60 PE's effect:

http://www.ft.com/cms/s/1/36a98ace-be9d-11dc-8c61-0000779fd2ac.html
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Today is the Tomorrow you worried about Yesterday!

[texfly101]

Article regarding the announcement of future Chinese business strategies in aerospace. This has always been the fear of the industry. A Detroit/Japanese shakeout ala the auto industry, is the worst case projection. The duopoly that Airbus and Boeing enjoy is definitely threatened. It is felt that Airbus might be the more vulnerable given its cumbersome political management structure and future product line problems. Also, Boeing might be less affected given its current outsourcing strategies that enables it to move production to any area that provides an increase efficiency in production and lessens risk. Boeing's products being a major source of export trade balance make this a political problem too. So it is a major announcement, both in financial matters and political context. It will be interesting to see how readers who are China focused and more expert in Chinese affairs than me, regard this as a future strategic move.

China's aviation makers likely consolidate for large jets
Xinhua 01/02/2008
Authors: Cheng Yunjie and Chen Xi

Beijing, Jan.2 (Xinhua) -- China Aviation Industry Corporation I (Avic I), which last year elevated China into the world's fourth country to develop its own advanced fighter aircraft - the "Jian 10" - is considering consolidation with another domestic large jet maker.

The discussion between Beijing-based Avic I and China Aviation Industry Corporation II (Avic II) might lead to the re-merging of the two state-owned enterprises spun off in 1999 from the former Aviation Industries of China.

But discussion on merger was only "exploratory". A detailed consolidation plan was expected to be unveiled later this year, the Shanghai Securities News reported on Wednesday, quoting "unidentified well-informed sources" with Avic I.

"To enhance the manufacturing capability of the aviation industry, Avic I and Avic II will probably undertake consolidation and cooperation," a vice president of Avic I was quoted as saying, being the first head-on response to the rumors of merger concerning the two aviation producers.

The industrial maneuver was intended to concentrate preponderant resources of both companies and prepare the industry for the production of large jets, said the newspaper run by the Xinhua News Agency.

China's State Council, the Cabinet, approved in principle last February the start of research and development of large aircraft, an air-freighter with a take-off weight of more than 100 tonnes or an airliner with more than 150 seats, as well as the establishment of a jumbo passenger aircraft shareholding company.

Just before the New Year holiday, Chinese Premier Wen Jiabao paid a special visit to the Avic I Xi'an Aircraft Industry (Group)Company to give a pep-talk on the manufacturing of large aircraft.

During his talks with technicians, Wen emphasized a China-made large aircraft was a "significant strategy" for the country, which would lift China's competence in the global market as a slew of technical breakthroughs especially in engine, materials and electronic equipment to be made.

Currently, only the United States, Russia, France, Germany, Britain and Spain have the ability to build large aircraft, with Boeing and Airbus taking the lion's share of the international market.

There is no official timetable for the set-up of the new large passenger aircraft company, but Shanghai-based China Business News revealed on Tuesday that March would be the earliest possible date.

Both Avic I and Avic II, together with domestic airlines and government-controlled investment companies, would likely be the shareholders of the large passenger aircraft company, it said.

The new start-up would only be responsible for the design and assembly of large aircraft while production of components and parts would still be left to other aviation enterprises, the Shanghai Security News reported, quoting a former expert with the Ministry of Science and Technology.

Being the leading aviation makers, both Avic I and Avic II have expressly shown their interests in large jets.

"There are no rivals but only partners when it comes to jumbo jet manufacturing," general manager of Avic I Lin Zongming has said.

Given that the Avic I has taken over the larger and better slice of assets from the former Aviation industries of China, industry analysts say Avic II might give up its civil aviation outfits such as airborne equipment production to Avic I so as to beef up the manufacturing capacity of the latter.

Another market guess is to take out the civil aviation business from both companies which also engage in military product manufacturing to establish a third company solely dealing with aircraft for civilian use.

With 240,000 employees and aggregate assets of more than 100 billion yuan, Avic I is the parent of 47 industrial enterprises, 31 research and development institutes, provides 90 percent of the aviation weaponry systems of the People's Liberation Army and has produced over 15,000 aircraft in 20 projects, 50,000 aero-engines and more than 10,000 missiles, according to company statistics.

The maiden flight of ARJII1, China's first 90-seat regional jet with Avic I holding the intellectual property right, widely viewed as a step closer to large aircraft, is scheduled for this year.

The smaller Avic II boasts a total asset of 31.5 billion yuan, with its aero production covering a wide rang of military and civilian vehicles including helicopters, trainers, general aircraft, unmanned aerial vehicles, engines and airborne equipment.
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dj

[texfly101]

Its the Chinese government's use of the aviation business to build their future as a major producer of technological goods. In the aviation industry, this is being closely watched for several reasons. The first is that it reflects the struggle between Boeing and Airbus as they compete for market share. Boeing is trying to protect their lead and Airbus is trying to grab a larger share of the Asian markets which have traditionally been Boeing's. The second reason is what are the Chinese governments plans? By the fact that it is well known that any Chinese aviation business deal is endorsed by and an extension of the Chinese government. In the past, both companies have had to outsource to get a buy. Boeing has gone the parts supplier route with several billions dollars of parts for various airplanes including the 787. Airbus is one upping that by using them as a parts supplier and also by putting A320 assembly plants in place inside the country. Airbus states this is for risk sharing and production efficiencies. Consequently, this has been seen to be the preferred strategy given the recent Airbus deals. Recent buys, until this last one, have been basically 50/50. This major sole supplier deal is seen to an award that is linked to the factories. So whether its strategic for market share, or trying to reduce costs by using China's cheap labor and regulatory friendly business environment, or both, is not the major concern. Its the fact that giving the Chinese the ability to produce an airplane will eventually turn into a major threat to Boeing which is major threat to our one of our major exports, airplanes. Hit Boeing and you hit the American economy from aspects such as less exports, a reduced Boeing share price, and an extremely aggressive competitor in the Chinese. The industry's analysts have questioned the wisdom of the deal and are saying that Airbus is in dire straits to offer this much. They say that if A and B thought it was tough competing between themselves, just put China in the mix and it might be disastrous for the industry. Its an interesting circumstance in that the A320 is basically German and that they are giving away German jobs with the current plan to locate A380 and A350 production in France and A320 in Germany with the Power 8 plan. Germany, and rightfully so, is seen as the loser in this deal as they are getting only a airplane that is both long in the tooth and up for replacement and having to share with the Chinese. That alone could make this deal very problematic. Its seen as a power grab by France which I agree with. China is definitely a winner, getting these airplanes at a such a discount that it rumored that Airbus is losing money on the deal, and they get a major manufacturing facility also. Boeing is the biggest loser, for now that is, as it is a TBD to see how it works out for Airbus.
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dj

[rffrydr]

But still they want to build them. Hubris?...or greed?
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Today is the Tomorrow you worried about Yesterday!

[texfly101]

China signs up to buy $14.8 billion of new jets...and gets a new A320 production line.
http://online.wsj.com/article/SB119605392116403744.html?mod=hps_us_whats_news
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dj

[texfly101]

I have to add that they have become very aware of these concerns and are working to correct them. And I'm sure that there can be a lot of people who will disagree with my views, but it is an industry fact that it is and increased danger to fly in the interior. They just haven't had the time or money to upgrade their fleets, hire and train their mechanics, hire and train their pilots, upgrade their infrastructure. When you have those deficiencies in place, not only does each compound each other but Murphy's Law rules.
I'm sure that with the Olympics and the Chinese Pride, that there will be a very successful effort to provide adequate air transport. And I'll place bets that if anything happens that heads will roll...and that's not a figurative saying, they are deadly serious about what the world sees and have spent billions on aircraft. Unfortunately its the people who have to operate them and they are struggling to catch up with the rest of the western world in this area....dj
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dj

[texfly101]

Henry,
To answer that is pretty simple, if the airplanes are usually Boeing, McD or Airbus, then they stand a chance of holding together. You can still get some of those Russian Tupolevs, Yaks, Antonovs and Chinese Xian turbprops that are really a problem. Aging junk that is hard to fly with maintenance done as a maybe. They don't have the best safety record, even for the accidents we know about. Usually, if a Boeing or Airbus falls out of the sky, its something that a human did to it. The others can literally fall apart in the air as they don't have to meet FAA standards for construction or maintenance. They are rugged but their design standards and flightdecks are behind the times so I wouldn't get on them, particularly since they are flown by who knows who with English (the international language of Air Control) as a second language. I have heard that they have trained their pilots by making them OJT in the second seat, so there can be only one qualified pilot on board. Who knows? Its truly a crapshoot over there in the interior especially.
Probably the worst thing is that their maintenance standards are lax at best and downright illegal and underhanded at times. I have a picture of a 747 engine's rotor blades strapped together with seatbelts. And it was being used in service since a 747 can operate just fine on 3 engines (true story) and was impounded in Germany only because the airport authorities were notified by the gas crew. Things like that are common. The 737 that burned on the ramp a month or so ago was the result of China Air's maintenance crew missing putting in a bolt properly which then punctured the gas tank. So if you fly the interior, you truly are taking your life in your hands, imo.
The good thing is that their fleets are truly outdated and in need of upgrading so there is a huge market there. They have recently bought billions of dollars of aircraft from both A and B, a very politically driven almost 50/50 split of the orders. They want to partner with A and B to fill it with home built derivatives but the last time that McD tried that, the airplanes were not allowed to leave the country. Something to do with QA, wings and tails not fitting, small items like that. But there will be a ton of money made there. Airbus has the inside line with signing a deal to put two A320 plants there. While the A320 is long in the tooth and soon to be replaced, China will gladly take it and run, learn how to build properly and come back as a deadly competitor in the 2020's.
Have a great turkey day, I'm going salmon fishing...Dallas
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dj

[HenryTo]

Unfortunately, I can't disagree with that.

DJ, what's your perspective on some of the fleets that the Chinese domestic airlines utilize?

Have a great Thanksgiving.

Henry

[texfly101]

There are two things that I won't do with Chinese airlines, fly on them or buy them. Both are a definite crash waiting to happen imo
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dj