Air China

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Air China

Beijing Capital International Airport
Beijing
China
Telephone: 86-10-6456-3201
Fax: 86-10-6456-3831
Web site: http://www.airchina.com.cn

State-Owned Company
Incorporated:
1988
Employees: 15,000
Operating Revenues: $1.38 billion (1997)
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 48819 Other Support Activities for Air Transportation

Air China is Chinas principal international airline, and is the designated flag carrier of the Peoples Republic. Based in the capital of the worlds most populous country, the airline has occupied a special place in the hearts of aircraft manufacturers and foreign airlines eager for access to the untapped potential of the Asian market. Air Chinas logo, made up of the letters VIP styled into the form of a phoenix, reflects the carriers aspirations regarding customer service. The airline flies a young fleet of about 70 planes, carrying about 16 million passengers a year.

Origins

Air China was one of several airlines created out of the Civil Aviation Administration of China (CAAC) in the mid-1980s. This body, and its predecessors the China Civil Aviation Administration (CCAC) and the Chinese Civil Aviation Bureau (CAB), had directed Chinas civil air service since 1949. At first dependent on Soviet aviation technology, by the 1980s the Chinese were fielding fleets of modern Western jets as they began to compete with Western airlines on international routes.

Difficulty adapting to new marketplace competition and a series of accidents between 1979 and 1983 created pressure for the organization to change. The CAAC was reorganized in late 1984, producing the following four regional divisions: Eastern, Southern, Southwestern, and Northwestern. Air China, based in Beijing, was given chief responsibility for intercontinental flights, and took over the CAACs long haul aircraft (Boeing 747s, 767s, and 707s, as well as medium-haul 737s) and routes when it was granted its autonomy on July 1, 1988. Because of the commercial importance of Guangzhou (formerly Canton), China Southern was also cleared for international flights, along with Shanghai-based China Eastern.

The CAAC remained in existence as a kind of governmental overseer. It still controlled aircraft purchasing and worked very closely with its newly independent branches. The government also made its voice known to domestic passengersan official letter of recommendation was a prerequisite for booking a flight until 1993.

At its launch in 1988, Air China operated 32 international routes to 31 destinations, and also connected 30 cities within China. It was Chinas largest carrier, and the only one allowed to carry Chinas national flag. In 1989, Air China posted a net profit of $106 million on revenues of $383 million. (The carrier had 6,000 employees at the time.) In that same year, Air China entered a joint venture with Lufthansa German Airlines, which provided 40 percent of the capital, or $220 million, to create the Beijing Aircraft Maintenance Center (Ameco Beijing). It specialized in the upkeep of the Boeing aircraft that comprised Air Chinas fleet. The venture was expanded with another $218 million (¥1.2 billion) in 1992. Ameco Beijing employed nearly 4,000 people, a little fewer than 50 of them from Lufthansa. Air Transport World reported the company preferred to source its needs through joint ventures due to the countrys lack of hard currency. Its Beijing Air Catering was 40 percent owned by a large Hong Kong caterer.

Expanding in the 1990s

Air Chinas president, Xu Bai Ling, had years of experience piloting Chinas most distinguished visitors. An early priority for the airline was repairing a reputation damaged by delays, cancellations, or poor in-flight service. In the early 1990s, CAAC launched an incentive program to foster improvements. Air China hired consultants from Singapore Airlines, which was known for its stellar cabin crews. It also hired a few Russian planes and crews to fly certain routes.

Operating revenues for Air China were $1.05 billion in 1994, producing a net income of $36 million. In 1997, the airline reported sales of $1.38 billion (¥11.5 billion). The fleet had grown to 65 aircraft and the carrier was flying 144 routes overall. By October 1997, Air China was planning a public stock offering. China Eastern Airlines and China Southern Airlines had listed on the Hong Kong and New York exchanges earlier in the year. Air China delayed plans based due to poor financial performance and a downturn in business caused by the Asian financial crisis.

Rumors of a state-prompted merger between Air China and China Southern Airlines abounded in 1999. By this time, China Southern, based in the commercial center of Guangzhou, had become the countrys largest carrier. At the time, China had 30 airlines, and Beijing wanted to group them into several, more globally competitive units. Altogether, mainland airlines lost more than ¥6 billion in 1998. Flight International observed that a merger with China Southern could give Air China access to the Hong Kong and New York stock markets.

About 16 million passengers flew Air China in 1998. The October 1999 opening of a new terminal at Beijing Capital International Airport, where Air China operated the vast majority of flights, promised not only to relieve travelers of cramped conditions but also to allow Air China to devote more resources to its lucrative ground handling business for international carriers. One-fifth of Air Chinas 15,000 employees worked in ground handling.

Although the Chinese aviation industry as a whole was expected to earn ¥1 billion ($120 million) in profits in 1999, Air China and other individual airlines were struggling to break even and mitigate their collective losses of 1998, which totaled $300 million. Air China was not publicly traded and was not quite as open with its own sales figures as China Eastern and China Southern.

New Frontiers in the New Millennium

To demonstrate the airlines faith in its Y2K preparations, Air China chief Wang Lian and several other top officers personally piloted several flights at the turn of the millennium. As reported in the China Daily, this decision generated a considerable amount of positive publicity in China. Wang had worked for the CAAC for more than 40 years before being appointed Air Chinas director-general in early 1999.

Early in 2000, Air China teamed with China National Aviation Co. Group (CNAC), the CAACs Hong Kong-listed commercial arm, to establish a Hong Kong branch (95% owned by Air China). Direct flights to London from Hong Kong soon began. Air China faced competition at its home base from Air France, which increased its four flights a week to Beijing, begun in 1997, to daily service. British Airways also wanted to increase its frequencies (it was operating 18 flights a week to China).

In mid-2000, the CAAC repeated earlier calls for a consolidation of the ten airlines it controlled into three. (Air China, China Southern, and China Eastern were to each acquire the smaller airlines.) Apart from the ten CAAC airlines, there were another 24 smaller carriers that had been formed by provincial or private interests.) Price wars had proved so destructive that the government banned discounting. However, no deadlines or plans for financial support for ailing carriers were made. To aggravate the airlines financial troubles, the CAAC blocked a proposed merger in September 2000 between Air China and China Southern on anti-competitive grounds.

In January 2001, the CAACs ten airlines announced they had agreed on a merger plan. Air China was to acquire China Southwest Airlines and China International Airlines, the countrys fourth strongest domestic airline. This was to create a group with assets of ¥56 billion (HK$ 52.5 billion), including 118 aircraft.

Company Perspectives:

Air China is the largest commercial airline in China. We continue to attract increasing international renown and a growing reputation for high levels of product service combined with a traditional Chinese welcome. Our logo, the phoenix, is a symbol of good fortune and based on an artistic perception of the letters VIP. Air Chinas non-stop flights between Londons Heathrow Airport and Beijing operate with the worlds most advanced 747-400 series aircraft offering superior levels of comfort in First, Business and Economy class cabins. With a flying time of 10 hours and onward connections to over 60 domestic destinations, Air China provides an unrivaled network between global destinations and China. Air China is committed to flight safety and customer service with particular emphasis on modern training methods and fleet maintenance. A continued investment in staff and service development will ensure that Air China maintains its position as an enviable force in the airline world.

Key Dates:

1984:
Civil Aviation Administration of China (CAAC) is reorganized, creating four divisions, one based in Beijing.
1988:
Air China becomes autonomous from CAAC.
1989:
Lufthansa enters maintenance joint venture with Air China.
1991:
CAAC launches incentive program to improve in-flight service and on-time performance.
1994:
Operating revenues exceed $1 billion.
1997:
CAAC delays Air China IPO due to Asian financial crisis.
1998:
Excess capacity leads Chinas airlines to billions in losses.
2000:
Air China chief Wang Lians trans-Millennium flight garners attention for the airlines as an effective public relations stunt.
2001:
CAACs ten airlines agree on merger plans.

Air China had completely dropped plans to merge with China Southern and was soon reported to be planning its own $500 million floatation on the New York and Hong Kong stock markets. The funding was to help Air China, which had been eclipsed in recent years by China Eastern and China Southern, to grow sufficiently enough to justify its status as a national flag carrier.

Later in the year, the influential Star Alliance, founded by United Air Lines and Lufthansa, was reported to be considering inviting Air China to join in the alliance. This would raise Air Chinas profile considerably, as well as connecting to the worlds largest network of air routes, reported the South China Morning Post. However, Chinas airlines were negatively impacted by the September 11, 2001 terrorist attack on New York and Washington. According to China Eastern chairman Ye Yigan, the incident was expected to cost the top three airlines ¥3.35 billion ($405 million) due to a drop in passenger demand and higher operating costs.

Principal Competitors

Cathay Pacific Airways Limited; China Eastern Airlines Corporation Limited; China Southern Airlines Company Limited.

Further Reading

Air China Launches New Service, Works on Image, USA Today, October 9, 1991, p. 8B.

Air China to Stand Alone, Airfinance Journal, March 1995, p. 8.

Bangsberg, P.T., Lufthansa, China Plan More Funds for Aircraft Maintenance Venture, Journal of Commerce, June 24, 1992, p. 2B.

Bradbury, Nicholas, Troubled But Hopeful, Asset Finance & Leasing Digest, June 1994, p. 23.

CAAC Blocks China Southern Merger with Air China, AFX-Asia, September 28, 2000.

Chan, Christine, Link-Up Possible Between Mainland Flagship and Southern Airline; Rumours Fly of Giant Merger, South China Morning Post, Bus. Sec., July 9, 1999, p. 4.

Chang, Leslie, China Intends to Merge 10 Airlines Into Three, Wall Street Journal, July 24, 2000, p. A21.

China: Person of the Week; Making the Trans-Millennium Flight, Wang Creates a Marketable Image, China Daily, December 12, 1999, p. 8.

Davies, R.E.G., Airlines of the New China, Airlines of Asia Since 1920, London: Putnam Aeronautical Books; McLean, Va.: Paladwr Press, 1997, pp. 40324.

Flynn, Ann Amelia, Chinas Airlines Take Wing, China Business Review (Washington), May/June 1993, p. 14.

Harding, James, Air China Plans Overseas Float, Financial Times (London), October 15, 1997.

Holland, Tom, China Break-In, Far Eastern Economic Review, October 25, 2001, p. 41.

Its a Jungle Up There: China Tries to Tame Its Unruly Aviation Sector, ChinaOnline, October 25, 2000.

Lo, Joseph, Star Alliance Beckons Air China, South China Morning Post, Bus. Sec, May 24, 2001, p. 2.

McGregor, Richard, Call for Mergers Leaves Chinese Carriers Up in the Air, Financial Times (London), August 1, 2000.

Ng, Eric, Air China Set to Announce Lead Bank for Listing, South China Morning Post, Bus. Sec, July 16, 2001, p. 4.

Rise of the Phoenix, Ground Handling International, July 1999, p. 55.

Ten Chinese Airlines Prepare for Takeoff of Mergers, Alliances, China Online, January 11, 2001.

Vandyk, Anthony, Air China: New Name, New Heights, Air Transport World, February 1991, p. 54.

Frederick C. Ingram

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