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China's big 3 airlines rake in $5bn net cash despite record loss

Major state-owned carriers enjoy ample funding while smaller rivals scramble

China's big sate-owned airlines are sitting on more cash than they were three months ago despite the coronavirus outbreak decimating air travel demand.    © Getty Images

TOKYO -- China's three state-owned airlines reported a combined 14 billion yuan ($1.98 billion) in net losses for the first three months of the year, their worst ever quarterly performances since the trio became publicly listed companies in 2006.

Yet despite these losses, China Southern Airlines, China Eastern Airlines, and Air China all ended the quarter with far more cash on hand than when it began, as the key state-owned companies were able to secure bond issuances and bank loans despite the crisis facing the industry.

Total revenue for the three carriers dropped 46% to 53.85 billion yuan, back to where it was about a decade ago, before Chinese tourists had become a regular sight in cities like Bangkok, Paris and New York. Such poor results were not unexpected, as all three carriers warned of "substantial" or "significant" losses earlier this month.

More noteworthy is their ability to raise cash in such dire times, particularly compared to their smaller rivals. The three state-owned companies raised a total of 93.606 billion yuan in the quarter, more than double what they brought in a year ago. Subtracting repayments and redemptions of loans and debts, the trio raked in a total net cash of 35.181 billion yuan, or about $5 billion.

As a whole, the three airlines have made some cuts to their investment spending, with first-quarter fixed-asset investments -- mostly for buying aircraft -- declining 58%, or 5.5 billion yuan. But so far, only China Eastern has announced it will trim its investment for the year. On Wednesday, its management said "the company has slashed or delayed investment plan due to the novel pneumonia epidemic" for the first quarter.

Air China, by contrast, stuck close to its plan to increase annual investment by 92%, spending 80% more during the quarter than it did last year.

For all this, the three airlines were sitting on more than 20 billion yuan of cash at the end of the quarter -- 54% more than at the end of last year -- despite a negative opertaing cashflow of more than 23 billion yuan. The first negative cashflow since 2007 came as the carriers were forced to keep the vast majority of their planes grounded and refund tickets with little or no charges.

China Southern could be an exception, as its cash position was about 8% lower at the end of March. But the Guangzhou-based carrier revealed on Monday that it has received approval from the securities regulator to issue new shares to supplement its depleted capital base -- something that would not be easy for a non-state owned company to do in the country.

Regulators gave Air China and China Eastern the green light to issue bonds up to 16 billion yuan and 15.4 million yuan, respectively, in April.

 

The three airlines are core listed subsidiaries of so-called central companies -- elite state-owned enterprises directly controlled by the central government. And while they have little need to worry about cash, their smaller peers have been left scrambling.

The net losses of the five other listed carriers -- Spring Airlines, Juneyao Airlines, Hainan Airlines Holding, Shandong Airlines, and China Express Airlines -- came to 7.7 billion yuan in the first quarter. They raised a total of 13.93 billion yuan during the period, up just 1% on the year. Since total repayments and redemptions were 30% less on the year, these midsize airlines were left with 5 billion yuan in hand, but that was not enough to make up for their losses.

As a result, their investment cuts were more drastic. Spring Airlines revealed Wednesday night that the private carrier will slash its annual spending on aircraft by 40% to $400 million in 2020. The Shanghai-based airline is purchasing 12 planes, the same number it announced a year ago, but instead of upgrading to the newer A321 NEO, it will stick to the older A320 model.

Juneyao, another private Shanghai-listed carrier, announced earlier that it will set aside just $200 million for capital expenditure this year, 91% less than what it announced a year ago. The cut will affect Juneyao's fleet size, as it is buying only nine planes instead of 20 this year, including halving its order of Boeing B787 Dreamliners to just two.

China Express Airlines, a Chongqing-based private regional carrier, benefited from government subsidies. The Shenzhen-listed company was the only listed Chinese airline to maintain a positive operating cashflow this quarter after it received 254.51 million yuan from the authorities, which is 18 times more than a year ago. The company has provided little information on the subsidies, but at least part of the money will be used to "support energy saving and pollution cutting" and "subsidize employment stabilization."

The overall cash holdings of the five smaller players as of March was 30.73 billion yuan, down 2% from end of last year. Even though their individual situations vary, their position is generally tougher compared to that of the big three, which benefit from various forms of central government support, including both open and tacit public guarantees.

This dichotomy between state and private companies is not limited to aviation.

Privately owned enterprises, or POEs, in China are "particularly vulnerable to economic shocks and policy changes," according to Lillian Li, a Shanghai-based senior credit officer at Moody's Investors Service. "The coronavirus has intensified investors' risk aversion toward POEs, particularly weaker POEs, which creates additional funding difficulties and means most POEs will encounter liquidity constraints under unfavorable circumstances or a difficult credit environment," she added.

Monetary easing measures in response to the pandemic have contributed to a 47% surge in onshore bond issuances in mainland China in March. Li points out, however, that private companies as a whole "only accounted for 10% of total issuance, while the weakest POEs accounted for 1% of total issuance in March."

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