By staff reporters Li Weiao and Zhang Na, and intern reporter Zhang Lihua

From Caijing Magazine

China’s fledgling private air carriers are struggling to survive. Airports have issued ultimatums to United Eagle Airlines, Juneyao Airlines and East Star Airlines for overdue bills. And cash-strapped Okay Airlines, the country’s first private carrier, recently suspended all flights.

These were among the first private airlines to take off after China opened the aviation market to competition in 2004. Now, besieged by slumping demand, shareholder squabbles, credit constraints and management problems, they may become the first Chinese carriers to go out of business.

Private airlines are not the only carriers indebted to airports and fuel suppliers. Almost all the country’s major airlines -- including Hainan, Air China and Southern -- have appeared since last March on a Civil Aviation Association of China (CAAC) black list of indebtedness. At the top was Hainan, which owed 100 million yuan to airports.

CAAC said 70 percent of the nation’s domestic carriers operated in the red during the first 10 months of 2008. Losses totaled 4.3 billion yuan.

A bright prospect among private carriers is Spring Airlines, which recently decided to save money by cutting management salaries by one-third. But its plan to launch an initial public offering in October had to be postponed indefinitely.

When private airlines first took off, some speculated they would not be able to raise funds as easily as state-owned carriers. Recent events have fanned that theory.

“Banks are not lending to private airlines,” said Liu Jieyin, Okay’s former general manager. “Instead they’re practicing a rather stringent policy.”

A senior CAAC official told Caijing some government policies favorable to the aviation industry have also applied to the private sector. However, he added, the government is unlikely to invest in carriers in which it is not a shareholder.

And unlike the travails of state-run airlines, the current crisis in the private aviation sector often has been in the public eye. Shareholder disputes are not uncommon among China’s private carriers. Some fights have been nasty.

Observers say many private Chinese airlines suffer from management chaos because they lacked adequate financial support at inception. Financial pressures have forced them to regularly introduce new investors, they say, which in turn can hurt company management and render board decisions ineffective.

Clipped Eagle

United Eagle, which ranked seventh on CAAC’s black list with 39.5 million yuan in debt, recently became the first domestic carrier publicly penalized for failing to pay airport bills.

The airline received a letter from Sichuan Airports Corp., which oversees all Sichuan Province airports, in late November demanding immediate payments and threatening a five-step sanction process. The airline was ordered to pay 30.45 million yuan in overdue takeoff and landing fees, plus surcharges, accumulated between March 2007 and October 2008. The threatened penalties would start with service phase-outs and end in legal proceedings.

The first step was taken December 1 when the airport authorities closed United Eagle’s VIP lounge at a Sichuan airport. Sun Zhijun, the airline’s financial director, told Caijing his company sought a settlement and rushed 1 million yuan to airport officials. But the airport did not buckle.

The airline then promised to pay monthly installments of 1.5 million yuan starting in January. It also pledged to incur no new debt and clean up all overdue bills ahead of schedule if it managed to complete an expansion and restructuring plan.

Based on these promises and partial payments, the airport agreed to resume some services. But by then United Eagle’s debt, including money owed the airport and banks, had grown to 90 percent of assets. Sun said the carrier, while seeking new investors and additional investments from existing shareholders, is now on the verge of bankruptcy.

United Eagle was established by Li Jining and two partners in Chengdu in June 2004 with 80 million yuan in registered capital. The airline bid for more investors in December 2006, prompting Sichuan Airlines Group to buy a 20 percent stake for 20 million yuan. Subsequently, Sichuan Airlines CEO Li Haiying became the new legal representative and general manager. Six months later, a shareholder based in Guangdong Province transferred some of his shares -- a 21.4 percent stake -- to Shanghai-based Juneyao Group, which also controls Juneyao and Okay airlines.

By June 2007, Chengdu-based Huaying Investment Consultancy Co. Ltd. had become the largest of five shareholders, with a 29 percent stake in United Eagle. A month later, the shareholders increased their total investment to 150 million yuan from 100 million yuan.

But the airline continued to lose money. On July 17, 2007, three United Eagle flights were grounded at the Shijiazhuang airport after fuel suppliers, citing overdue bills, refused to refuel planes. To cope, shareholders coughed up 50 million yuan the next day.

Caijing learned that United Eagle’s board of directors is currently considering several strategies to save the airline. Proposals include increasing the capital base, boosting investment, borrowing from banks and cutting costs.

Lan Xinguo, president of Sichuan Airlines, said shareholders are enthusiastic about adding capital, which is expected to grow to 400 million yuan. But he denied that the Sichuan group, which has 200 million yuan in debts of its own, will buy out United Eagle.

Not Okay

Trouble also vexed Beijing-based Okay Airlines which, citing safety concerns, suspended all flights December 6. That came two weeks after Okay’s controlling shareholder, Juneyao Group, asked CAAC for permission to suspend flights.

Since then, Caijing learned, CAAC has tried to mediate a dispute between Juneyao and Okay’s smaller shareholders, so far without success.

Juneyao took control of Okay a year after the airline was launched in 2005 with 300 million yuan in registered capital. Initially, Okay sought to partner with Korean Airlines. But it went with a Chinese investor to avoid foreign control of company shares.

Juneyao now holds 63 percent of Okay’s stake through its subsidiary Beijing Okay Traffic and Energy Investment Co. Minor stakeholders are Dadiqiao Investment Co. Ltd. (Beijing), with 26 percent, and three individuals.

Within 24 hours of the airline’s grounding, dozens of fuel suppliers started withdrawing lines of credit and demanded settlements in cash. Aviation companies typically settle fuel bills on more flexible terms.

Tensions ran high as Juneyao accused Okay’s management of collaborating with fuel suppliers. But management and the four smaller shareholders pointed a finger at Juneyao for allegedly telling airports about flight terminations in advance, causing fuel suppliers to overreact. Minor shareholders also said Juneyao failed to consult with them before deciding to halt flights, even though company rules say important operation decisions must be approved by two-thirds of stakeholders.

The carrier had been operating in the red. Okay’s operational losses and shareholder-management conflicts had long been reported by the media.

But in recent months, the airline’s relationships with airports, fuel suppliers and others fell off a cliff. Now, suppliers “do not believe in contracts,” Liu said. “They only accept pre-payments in cash.”

Juneyao and Liu also clashed over his position with the airline. The parent published a notice saying Liu had been removed. His job was taken over by Wang Junjin, the president of Juneyao Group, Juneyao Airlines and Okay.

Okay employees, who said they have remained on the job as well, told Caijing staff that the group, not the airline, had announced the suspension of all flights.

Discord among Okay’s board members and executives continued after the flight suspension. Minor shareholders December 11 issued a joint statement attacking the “crimes” of Juneyao. The parent fought back with a counter statement.

Liu blamed unscrupulous shareholders for the disputes. “When Juneyao came in, we had a good relationship with it,” he said.

But later the minor stakeholders sued the group for allegedly fabricating board decisions, illegally firing Okay managers, and other charges. They also accused Beijing Okay Traffic of injecting less than half of the capital promised as controlling shareholder.

Juneyao officials denied the charges, and said the capital for Okay was provided by May 2006.

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