China Eastern Airlines - A Chinese Company in Transition

During our field visit to Shanghai, we were invited to the training center of China Eastern Airlines. The Airline has been in the news lately due to its talks with Singapore Airlines (SA) who offered to buy over 20% of the company in return for SA getting an entry point into the lucrative and fast growing Chinese air travel business. SA offered close to $1 billion to China Eastern. China Eastern desperately needed the cash infusion since its debt to asset ratio is about 94 % (during their presentation to us they claimed they do not have to worry about profit, which makes them a stronger competitor)! Since the Chinese government owns over 60% of the company, the government immediately got involved in the M&A talks by encouraging China Air (its offical airline) to offer even more than $1 billion to China Eastern to difuse the SA offer. SA announced that it will not enter into a bidding war with the Chinese Central government and withdrew its offer.

Our presenter, the deputy director China Eastern's training center and the former director of the airline's maintenance department, told me privately that he was hoping SA will come back to the table and the merger will go through. China Eastern is not known for its service and the offer from SA is an incredible opportunity for them to learn from the best in the world. In addition, their offer would have immediately put cash into the company, which China Eastern really needs right now.

To date we have been watching the news to see what will be the end result of this negotiation. However, all the indicators are pointing to the Chinese government getting its way and forming a larger airline that will be locally owned and controlled right before the Olympics and the World Expo, not allowing a foreign entity enter their market.

Our presenter spent a good portion of his lecture talking about a marketing campaign the company launched last year to honor China's diverse culture by holding events in flights (a different one every week) to demonstrate the various cultural aspects of their country. Yet when asked whether the campaign was extended to foreign markets, he quietly responded that it did not. We wondered, therefore, why would the company spent a whole year almost to tell their own people about their own culture without taking the time to use this extensive effort to draw in new foreign customers...

Lastly, we visited an area dedicated to flight attendant training (see above pictures), where our students had fun getting into the airplanes' parts and pretending to close and open emergency exits. We did not get any official explanation while there and it seemed clearly that it was not something they were prepared to do for us. Once we finished wondering the srea, we were sent on our way...

China Eastern, by the way, is the 3rd largest airline in China and it does offer flights to several overseas destinations. Currently you cannot use the web to purchase tickets online from them. The presenter admitted that they are still far from knowing how to invest in web technology.

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From The New York Times; January 9, 2008
“A decision by minority shareholders of China Eastern to reject a tie-up with Singapore Airlines and a Singapore government investor has set the stage for an unusual corporate battle in China.
It has paved the way for a possible counterbid for China Eastern by China National Aviation Holding, the parent of Air China, the country’s biggest carrier. China Eastern, which is based in Shanghai, has vowed to fight any counteroffer to retain its independence.
Both China Eastern and Air China are majority state-owned companies.
At stake, analysts say, are plans to force the consolidation of China’s aviation industry and turn Air China into the single dominant carrier in China, which has the world’s largest aviation market outside the United States.
The outcome could give Air China a powerful grip over China’s two main aviation hubs, Beijing and Shanghai, and the lion’s share of the Chinese market for domestic and international air travel…”
“China Eastern’s chairman, Li Fenghua, said after the shareholder vote that he would oppose any bid by China National to replace the Singaporean investors and would attempt to keep the deal with Singapore Airlines and Temasek alive.
But China Eastern might not have much choice, analysts said. Singapore Airlines and Temasek are expected to walk away from the deal rather than offer a higher price.
China Eastern, which is carrying a huge debt burden and has suffered a succession of losses, still needs a strategic partner. Technically they would be bankrupt in any other country, but they still have government ownership plus government subsidies.”

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The presenter during our visit to China Eastern talked about China Easter’s goal to become a “one stop solution” for the Chinese travel industry but acknowledges that the airlines net asset is “pretty low” and is therefore a “problem.” He stated that the airlines goal is by 2010 to become “the leader in all aspects of safety and security management and maintain the reliable operation record in East Asia. No air accidents!” They expect at least a 10% growth rate annually and aim to become “a leader in all aspects of aviation management in Asia and place Shanghai as the hub of their net operation system by 2010.” Furthermore, they want to “achieve a four star level of SKYTRAX in service quality, be the best carrier for domestic flights and competitive in international flights.” One curious note, they want to become “the most tasteful company in the world” with the best food aboard planes!