China Southern Chief Calls for Reforms to Aid Survival of China's Carriers in New World Order

World Airline News, May 19, 2000

China's aviation philosophy must be reformed if the country is to survive the competition generated by its entry into the World Trade Organization (WTO), warned China Southern Airlines President Yan Zhiqing last month in Beijing.

Despite accentuating core issues - ranging from a desperate need to upgrade and expand fleets and the immediate introduction of modern business practices to a revision of established socio-economic factors including the reduction of state control - China Southern's president sees reform not only as a survival technique, but as a key element in establishing China at the forefront of aviation development.

"Great business potential (will) arise from the anticipated development of the Chinese aviation industry," said Yan during an address to the World Economic Forum April 16-18. "China must not follow but set the international standard in marketing expertise and international public relations and communications."

China's Industry Hindered

Several aspects have been targeted by Yan to aid the development of Chinese aviation. He warns that the Chinese government (under the auspices of the Civil Aviation Authority of China (CAAC) - the majority owner and policy enforcer of the country's aviation industry) must realize that current capacity control is insufficient for the expected boom. "The present government control over increasing aircraft capacity is to mold the national carriers to current market situations. However, with increases in market demands and production expansions, it is necessary for Chinese carriers to renew and expand their fleets," explained Yan.

But this argument, however valid, will be difficult to implement. Commentators point to the heavy-handed control of the government authority, and the lengthy bureaucratic process that has evolved under Chinese communism. Limitations, some self-imposed, have limited fleet growth and are expected to hinder all three major international carriers - Air China, China Eastern Airlines and China Southern - in sustaining a coherent defense against Western competition.

There is one avenue, little explored by the Chinese government, that could assist national carriers' defense, according to Yan - a revision of foreign ownership rules. "At present the state-owned economic sector contains a very large proportion of the Chinese aviation industry. This, to some degree, leads to the inability of other economic sectors to play a positive role in the aviation development of the country."

He added: "Since 1985, China's airlines have been developing themselves with loans instead of with government investment. The asset-liability ratios of most carriers are more than 80 percent. This heavy debt burden hinders the advancement of aviation companies. Civil aviation is a capital-intensive industry. Its progress demands large capital investments that cannot be adequately provided by itself or the government."

Yan has experienced the benefit of foreign investment and secondary markets. His airline is the only Chinese carrier listed on the New York Stock Exchange, where 34.8 percent of the company (1.2 percent below the 35 percent foreign ownership ceiling) is traded - a significant factor in the airline's ability to dominate the domestic market (at 24.8 percent almost twice the closest competitor, China Eastern, which commands 14.1 percent) and develop one of the world's youngest fleets (on average 5.3 years, according to airline statistics). The airline's total share capital, including the state-owned 65.2 percent, is RMB 3,374 million (US$414 million).

But this freedom from state control is insufficient and must be relaxed further, said Yan, although he would not go as far as to advise the state to relinquish control. "China Southern may further lower its (undisclosed) assetliability ratio and improve its competitiveness, if foreign investment limits were raised - provided that the state owns the majority of shares," he said.

"It is necessary for the industry to establish a multiple capital structure and absorb foreign capital. This will help to solve the problem of inadequate investment facing the industry. More importantly, it will push forward the reform in managerial mechanisms, which will improve the management and profitability of the enterprises."

Foreign Expertise Required

But Yan did not stop at advising the degeneration, however gradual, of state control- next was the opening of company management dogma to foreigner influence. "In order to prepare for the keen global competition after China joins the WTO, it is a pressing task for Chinese airlines to upgrade its management and have well-qualified and internationally seasoned managerial personnel," he exhorted.

Again, Yan based his opinions on hard earned experience as head of China's leading airline. He explained that after the 1987 disintegration of China's monopolistic aviation industry, China Southern's management lacked the knowledge necessary to compete in a market-driven environment. "During the transformation of China from a planned economic system to a market economic system, with socialist characteristics, the Chinese airlines, not experienced in running as an independent organization, lagged quite far behind their counterparts in Europe and the United States in management expertise," Yan said.