BEIJING - China Eastern Airlines Corporation Limited (China Eastern) is currently in the midst of an embarrassing situation. The public is now questioning the airline's business integrity.

On March 31st, eighteen flights from China Eastern's Yunnan Branch in Kunming to Diqing, Dali, Lijiang, Xishuangbanna, Wenshan, Simao and Mangshi unexpectedly returned to base, leaving thousands of passengers stranded. In the days that followed, China Eastern insisted the event was caused by bad weather; but later, after an investigation, the Civil Aviation Administration of China (CAAC) confirmed the weather conditions at Yunnan's major airports were suitable for flying. Pressurized by mounting negative media coverage and angry consumers, on April 8th China Eastern had to admit the event was partially caused by human error, and that compensation would be offered to the passengers concerned.

Investors already suspected that the airline was experiencing management problems. This year, several pilots handed in their resignations and started negotiating with China Eastern in hope of avoiding paying compensation. China Eastern, however, didn't pay close attention to their actions. The airline's Yunnan branch later proposed to deduct unpaid income tax from pilots' salaries, and also decided not to pay them flight hour subsidies for three months. This eventually triggered a collective protest from pilots due to long-term discontent about salary, benefits and management problems.

Chaotic management was the major reason for the discontent. Many staff commented that overstaffing at China Eastern headquarters and an ineffective management team were to blame. Employees have no passion about their work. Corporate culture was a political culture; to be precise, the company was more like a government. They hoped changes would put the struggling airline on a path similar to Singapore Airlines or other joint ventures. This yet seemed impossible.

Frequent changes in the boardroom and problems pushing strategic restructuring also added to the loss of confidence. For the past ten years, China Eastern has had six management teams, four chairmen and six general managers. The average working period for each general manager was only a year. Though it acquired China Northwest Airlines and Wuhan Airlines, China Eastern still encountered resistance when consolidating flight paths and coordinating the transportation resources.

For example, China Eastern's Yuannan Branch was formerly Yunnan Airlines. "After we were acquired by China Eastern, the only change was the company name. There was no input of corporate culture, and pilots have lost the feeling of belonging," a long-term employee of the former Yunnan Airlines said. Their salaries had decreased greatly by subterfuge, and the company also failed to fulfil its promises to pay energy-efficiency awards, flight safety awards and overtime payments. There are the reasons for the serious brain drain from China Eastern. 

State-owned airlines often attribute brain drain to poaching from the fast-rising private airlines, whose flexible operations and motivational mechanisms appeal strongly to pilots. More importantly, in management terms, there is easier access for staff in private airlines to channels for reporting problems and resolving them.

China Eastern has strict rules that bar Chinese pilots from working for other companies; but its foreign pilots-who are better paid than their Chinese counterparts-can move freely after serving the company for seven years. Unequal treatment further exacerbated the conflict. Unfortunately, China Eastern largely neglected to engage in effective communication with Chinese pilots.

China Eastern's sluggish, rigid response caused negativity to spread-until today, the company is still overshadowed by it. On April 7th, a China Eastern flight from Haikou to Nanjing was delayed indefinitely. Passengers refused to accept usual explanations like "weather conditions" or "mechanical problems", and simply perceived it as another strike by the flight crew. China Eastern ran out of alternatives and had to arrange other flights for the passengers and compensate them accordingly. Sometimes, attitude defines the result, not money.
 
The outlook on China Eastern's performance is not optimistic. It has been losing money since 2002, when the aviation industry started consolidating, and its annual report last year revealed a loss of more than RMB2.7 billion (US$392 million). China Eastern recently announced that it would become profitable in 2007 because its main business had broken even and it had large foreign-exchange gains.

But some analysts are doubtful. "Although China Eastern has had a turnaround in its business based on Chinese accounting standards, it may still be suffering losses according to international accounting standards," says Wang Nai, an analyst from Hong Kong-based Guotai Junan Securities. The share price from China Eastern in Hong Kong once dropped below HKD3.80 (US$0.48), the same amount Singapore Airlines' stocks were selling for. 

Senior management at China Eastern claimed they were only experiencing temporary difficulties. It seems, however, that a new round of crisis-ridden corporate restructuring is unfolding. Li Fenghua, Chairman of China Eastern, thought introducing strategic investors and speeding up the corporate restructuring would save the company. But its middle and small shareholders were not interested in the amalgamation of China Eastern with Singapore Airlines and Temasek Holdings. In addition, the fund company was also unhappy with Singapore Airlines' offer, which was lower than Air China's HKD5 (US$0.64) per share. The shareholders meeting thus rejected the proposal without hesitation.

Dogged by the management and trust crisis, China Eastern first needs to clarify its business concept to reignite confidence and reunite its employees, rather than hope for government support like fuel subsidies, or external environmental assistance like RMB appreciation. Although the latter could increase short-term income for the company, it would have little resounding impact neither on China Eastern's performance nor on its competitiveness.

This article is from China Business Feature.  You can view more of their coverage at CBFeature.com.