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I’ve always been fascinated by the world of business. And living in China right now, there are no lack of interesting business stories to sift through. But this most recent story from the airline industry in this country strikes me as particularly interesting, given the nature of the situation.
Air China’s parent company, China National Aviation Corporation – a state-run enterprise – put the state in a tough spot on the PR front. Allow me to explain:
Last September, Singapore Airlines announced that it was going to try to snap up a 24-percent stake in China Eastern Airlines. Nothing to surprising about this move, given that many analysts predict China’s airline industry is ripe for investment and growth. And the State Council approved the move. All seemed to be running along smoothly until this week when CNAC announced that it wants China Eastern shareholders to reject the Singaporean bid and accept an offer of 5 HK dollars a share, instead of the 3.80 HKD Singapore Air is offering. So if, and when, the shareholders accept the Air China offer, CNAC will have put the government in a very difficult situation, and one that may prove to be none-too-appealing on the business PR front.
This government desperately wants to encourage foreign investment in key areas where China has been traditionally weak. One of these areas is the airline industry. The main reason is because they want to bring in foreign talent in the managerial sector given the strong growth potential in the sector. As such, it seemed a no-brainer for the government to green-light the Singapore Air investment in China Eastern. But now that Air China is making a move, the government’s image in this situation has been irreparably tarnished. When it comes to business, particularly with the state-run organizations, the government wants to appear hands off because it sends a bad message to the market when the government has its stink on any transactions. But Air China wouldn’t have made the offer to the China Eastern shareholders unless it had a pretty good indication that the government was going to green-light the deal. And what makes matters worse is that a number of analysts believe that the Singapore Air offer of 3.80 HKD per share is about right for the current financial situation. As such, it appears the government is undercutting foreign investment in favor of a financially inefficient ‘local’ offer.
So the question I have is how much consensus is there within government circles about what is actually going to happen in this situation? Is the leadership within the China National Aviation Corporation going against the government? Has the CNAC stepped where it shouldn’t have? And what will the government ultimately do? Will it approve the deal or not? If I was a betting man, this would be my prediction: The government will allow the Air China offer to stand, saying that it wants the markets to dictate the outcome. However, don’t be surprised in a few months if we suddenly see the head of CNAC suddenly ‘retire.’
We’ll keep you posted on the results.

 
 

2 Comments

  1. B says:

    “Is the leadership within the China National Aviation Corporation going against the government?”
    You indicate that Air China’s Chairman Li Jiaxiang has just been named to replace Yang Yuanyuan as director of the China Administration of Civil Aviation.
    I believe that Mr Li supported Air China’s offer not only for the sake of this corporation, but also for the sake of the whole Chinese aviation industry (in his belief, at least), therefore it is likely that he will continue to back the offer while he becomes the governmental official.
    Furthermore, Air China and the Hong Kong-based foreign airliner Cathay Pacific have cross shareholdings, therefore although Air China is still largely a state-run company, it does have a foreign side and thus can provide “foreign talent in the managerial sector” too. And this side comes from cross shareholdings, rather than being one-way accquired by the foreign parterner (like the Singapore Airlines’ offer for China Eastern).
    Anyway, Singapore Airlines may be an excellent airliner itself, but most of its foreign investments have been regarded as unsuccessful.

  2. Paul says:

    B:
    You raise some very good points. And I’m sure you are correct in presuming that Mr. Li did support the move to help the entire industry. Consolidation in the Chinese airline industry is needed if it’s going to start to become more competitive on the international stage. And I take nothing away from Air China as a significant player in the industry as well. The point I’m trying to make here is that it’s a matter of perception. The government has the final say as to whether this deal goes through or not. And if it does, you can bet that Singapore Airlines is likely to cry foul. Not good if you want to attract international business opportunites to sectors that need it.
    The other point is that China Eastern wants the Singapore Airlines deal to go through. Not that this should matter in a business transaction, because China Eastern has its own reasons and best interests in mind for not wanting to give further control of itself to its competition. I just wanted to point that out.
    All this reminds me, by the way, of the same situation Canada had a few years back when Canadian Airlines was struggling and Air Canada eventually took over controling interest in the company and rolled it together. Business-wise, it was a good move. But for consumers, it left a lot to be desired, because Air Canada became a virtual monopoly. And while that isn’t likely to happen here in China anytime soon, I don’t think it’s a good path to be on.
    Thanks a lot for the comments B.