The Strategy of Capital Operations
The Strategy of Capital Operations
Most successful companies have experienced three business phases: product, brand, and capital processes. The primary phase begins with the process of building up certain types of products. But if a company is content with a simple product operation and has no desire to develop a brand for itself, it will remain in a narrow corner, and will never embark on the road to expansion. Brand operation is commonly referred to as brand building.
The basis of brand operation is product operation. Products that are excellent in quality and reasonable in price are the root of a corporate brand. On top of this root, the brand is the fame of a company, developed through the qualities of that company, such as creditability, innovation, service, and responsibility. Products of a company serve as the carriers that bring this kind of fame to consumers, cultivating public trust, admiration, and reputation. Only then can the brand operation be counted as successful. A successful corporate brand equips thecompany with stronger profit-earning capability and wide development room, therefore promising a high investment value. Capital operation introduces the high investment value of a company into the capital market at an appropriate time, realizes the potential value added contained in its brand, and turns corporate value, which is formed through years of investment and brand building, into real profit through price premium.
The logic is simple. For a first-rate company, it will take a very long time for it to expand its scale of business through capital accumulation if it were only to make money from its products. Returns on assets of a company are always limited. Suppose the return on assets is 20 percent. Then every RMB 100 invested will only earn RMB 20 in profits each year. It will be years before the corporate scale is doubled. If 20 percent of the rights are diluted for financing, RMB 80 could be financed at one time with a P/E ratio of 1:20 in the capital market. Altogether, RMB 100 is made, plus the original profit of RMB 20. In this way, the purpose of doubling the scale can be achieved in the same year.
However, for Air China, financing is not the only goal in its IPO. Stock listing also means that Air China should change its original system and mechanism in accordance with the requirements of a modern corporate governance framework. This was particularly important for the new Air China, which had just been through reorganization. Air China saw a complete revamp of the new Air China and also an excellent test on the results of Chinese civil aviation industrial reform. As China has become increasingly more economically globalized, accelerating the fostering of big companies with international competitiveness has been a key element in the sustained, sound development of state-owned enterprises, and even for the whole national economy. As China’s wings, Air China also shoulders this historic mission. We hope that through stock listing, Air China can change its operational system as soon as possible, so as to establish a modern corporategovernance framework that fits the requirements of a market economy. At the same time, we also hope that Air China can build its own core competitiveness, with the help of the capital market.
That little math problem above will touch the heart of every entrepreneur dreaming to enlarge his enterprise. For the civil aviation industry, which is capital-intensive, the capital market is very appealing. Air China’s leaders once worked on the math: in 1997, two of the three largest aviation companies, China Eastern Airlines and China Southern Airlines, were listed, raising respectively RMB 2.8 billion and HK$6.5 billion, reducing their asset-liability ratios to about 75 percent, while the same ratio of Air China at that time was as high as 95 percent. In the year 2000 alone, Air China paid as much as over RMB 2 billion for financial items such as interest. Under the dual pressure of a heavy historical burden and high liability, upon the founding of China National Aviation Holding Company in the year 2002, the debt ratio was more than 90 percent, and aircraft was responsible for the bulk of that debt. It was hard to transfer this liability to the group company during reorganization. To avoid the operational risks brought on by high liability and perfect the company’s financial structure, Air China needed to take advantage of the reorganization of the Chinese civil aviation industry in 2002 to accelerate its entry into the capital market and advance its operations.
Just as you need a ticket to get into any classy place, the capital market is not free for anyone to enter. The most basic condition for entry is three years in a row of profit-making operations. In both 2001 and 2002, when the former Air China, China National Aviation Company, and China Southwest Airlines were integrated, the financial statements indicated profit making, which meant 2003 was a crucial year. However, the SARS outbreak almost destroyed Air China’s dream of stock listing. Due to the impact of SARS, Air China lost about RMB 1.9 billion in the first half of 2003. If the epidemic had lasted into the second half of the year, Air China would have had to wait another three years before it could have listed its shares. Fortunately, by June 2003, SARS was gradually contained. Thereafter, Air China actively took a lead in the market, earning more than RMB 2 billion in profits in the second half of 2003, which offset the losses in the first half of the year, and guaranteed profit earning in three consecutive years. Subsequently, the IPO plan that was centered on the new Air China got underway, with the help of an underwriting team composed of two famous investment banks from China and overseas.
How could Air China promote its listing as well as skillfully make itself acceptable to the capital market? The managers of Air China had been thinking about this question since the founding of the listing work group. As the reorganization of three large aviation companies had attracted much attention from home and abroad, Air China should first accelerate its pace of reorganization so as to make investors feel confident. It should then use its performance to prove to investors that it was a modern company centered on the cultivation of a profit-earning capability, in order to dispel market prejudices towards state-owned enterprises. Last but not least, Air China should find out its own unique characteristic so as to secure a premium price.
After the reorganization, the brand-new Air China operations system made its first appearance on the world stage on January 1, 2003. Through forceful integration, Air China not only took the lead in the market, but also demonstrated its unique characteristics.
On September 30, 2004, with the approval of the State-owned Assets Supervision and Administration Commission of the State Council, Air China Limited was officially founded in Beijing, a substantial step toward Air China’s IPO. Air China had a registered capital of RMB 6.5 billion and total assets worth about RMB 57 billion. Through various forms of reorganization and divestiture, Air China expected to reduce its asset-liability ratio to 73 percent in 2004. Measured by passenger-kilometer earnings, Air China’s international passenger traffic in 2003 accounted for 51 percent of China’s total international passenger traffic. Moreover, Air China also became the only official aviation passenger transportation partner of the 2008 Beijing Olympic Games. It is fair to say that the asset quality of the company has been greatly improved.
To further flesh out the overall image of Air China, upon listing, Air China founded the China International Cargo Transportation Aviation Company (Air China Cargo) and Air China Business Jet. On December 12, 2003, Air China Cargo, co-invested by Air China, Citic Pacific, and Beijing Capital Airport Group Company, was officially established. Back then, Air China Cargo owned five Boeing 747 cargo airplanes, eight Boeing 747-400 mixed cargo and passenger airplanes, and the belly compartments of 115 passenger airplanes. It also owned the operational rights of international cargo routes departing from Beijing and Shanghai to major cities in Europe and the United States, four operating bases in Beijing, Tianjin, Chengdu, and Hangzhou, and the largest cargo depot in China at that time. All these factors made it the biggest domestic cargo transportation aviation company. Air China held 51 percent of its shares.
On December 15, 2003, Air China’s Gulf Stream IV model business jet took off from Beijing Capital International Airport, and began its first flight to Hong Kong with the famous Hong Kong movie star Jackie Chan on board. This meant that Air China had officially begun to operate business flights. Air China Business Jet owned the most luxurious business jet model in China, a top-notch pilot team, and an excellent operations system. Its founding was recognized as a sign of Air China’s official march into the international high-end business flight market.
As Air China was getting excited about the smooth advance of its IPO, a piece of bad news suddenly changed everything. At that time, the global aviation industry was undergoing a general depression. After the 9/11 Incident, the aviation industry in Europe and the United States plunged into misery. As aviation giants such as United Airlines, Delta Airlines, and Northwest Airlines applied for bankruptcy protection one after another, the capital market became extremely cautious about the industry. Under these circumstances, an agency responsible for Air China’s legal affairs related to the IPO chose to leave. People were thinking about whether Air China could successfully be listed on the market.
Only when you have confidence in yourself can others have confidence in you. Air China’s leaders never succumbed to great pressure. Instead, through various ways, they passed on their belief to employees that after years of development, Air China’s profit-earning capability, service quality, and corporate brand would finally be recognized by the capital market!
There are many elements in Air China’s operational strategy that are worthy of study. But they can all be summarized into one principle: foster corporate profit-earning capabilities at any cost. Be committed to optimizing and strengthening the organization instead of just enlarging it. Master the core business instead of branching out into new fields.
It was exactly because of these strategies that Air China managed to make impressive progress despite the industry wide depression. In 2001, Air China walked out of the morass of long-term losses. In 2002, notwithstanding the crushing impact of the 4/15 incident1, Air China still managed to make profits and successfully completed its merger with Southwest Airlines and CNAC Zhejiang Airlines in the same year. In 2003, after it had lost RMB 1.9 billion in the first half of the year, Air China successfully withheld the impact brought about by SARS, and bounced back to an annual net profit of RMB 96 million, becoming the only large domestic aviation company that made a profit in that year. In 2004, global oil prices experienced a lasting fever, which hurt many aviation companies, while Air China’s profits skyrocketed to RMB 2.39 billion, accounting for 57.6 percent of the total profit of domestic aviation transportation companies. Air China’s outstanding performance attracted wide attention. Aviation companies in Latin America even began research into Air China’s profit-earning example.
In essence, operating a company is like growing crops. If you plant the crops in accordance with the rules of crop growth, fertilizing, weeding, and watering at the appropriate times, you will have a good harvest. After a series of integration initiatives, Air China accumulated effective, superior assets, and fully optimized its personnel, fleet, and routes, as well as management structure and related business structures. Air China located its profit-earning points and went on to construct profit-earning surfaces before building a profit-earning body. It is fair to say that Air China has largely mastered the rules of profit growth in the aviation industry. As the profit-earning channels have been opened, employees in Air China are filled with confidence about the future of the company.
“There is no terrible industry, only terrible companies.” Under the general depression of the global aviation industry, the outstanding performance of Air China became enormously impressive to the overseas capital market. As the engine had been fired, the time for Air China to make its appearance in the capital market had finally come!
It never occurred to me that the battle had begun as Air China planned its IPO. At the end of 2004, the overseas IPO of Air China entered its countdown phase. On the basis of the average P/E ratio of aviation companies in the global markets, the agency constructed a primary evaluation model for Air China, predicting that Air China, with net assets worth less than RMB 5 billion, would be able to raise up to about RMB 7 billion by issuing 3 billion shares in the market.
This pricing already realized the goal of preserving and increasing the value of our state-owned assets. However, I didn’t believe that this truly reflected Air China’s value. I proposed revisions time after time, and rejected the issuing proposal three times.
“Mr. Li, you don’t know much about stock listing. You haven’t sold shares before.” A kind friend of mine was worried for me. He went on, “if the pricing is too high and the subscription inadequate, the issuing will be a failure and Air China will get hurt!”
“You’re right. I never have sold shares before. But I have sold cucumbers.”
He was amazed by my reply. “You must be kidding. Selling shares and selling cucumbers are two very different things!”
“As long as you are selling something, there is a parallel. The parallel is to focus on the selling point and sell stuff at a good price. Do you know the selling points of cucumbers?”
“There are two—fresh and tender. These points can be seen by the flower on the top and the green thorns all over. Cucumbers without these features can’t be sold at a good price. Apart from its profit earning for three years in a row and good financial data, do you know the biggest selling point for Air China?”
My friend was dumbfounded.
“China is the fastest-growing economy in the world today. So is its civil aviation market. As the political, economic, and cultural center of China, Beijing will always be the busiest aviation port in China, and the best transfer station for domestic as well as international routes. Air China, with its base in Beijing, will accelerate its development by leveraging on China’s entrance into the WTO and the 2008 Beijing Olympic Games. This will be the biggest selling point for Air China! The evaluation of Air China should not be just based on terms, models, and P/E ratio indexes. Instead, we must highlight the real selling point, which is Air China’s current profit-earning capability and future development prospects. Mature investors attach more importance to the future of a company.”
In the end, my opinion was accepted, and the issuing proposal was revised accordingly.
In fact, it is normal to see a company to be listed and its agency divided over certain aspects, due to a different understanding of the company and divergent interests. It is true that the agency can receive more commission if it sets the price high and raises more capital, but the underwriter will shoulder the risk of comprehensive acquisition if it encounters difficulties in issuing at a certain price. Therefore, underwriters usually set conservative prices to avoid the risk of comprehensive acquisition and the risk of the price falling after acquisition, even though it may receive less commission. Fortunately, during the process of Air China’s IPO, Air China maintained smooth communications with all its agencies, creating an environment of harmonious cooperation. After Air China was listed, we even became good friends.
The fragrance of flowers on one side of the wall can be smelled on the other side. Air China’s superior condition won the recognition of our fellow international colleagues. Lufthansa German Airlines, Citic Pacific, All Nippon Airways, and Temasek Holdings all extended olive branches, hoping to become shareholders of Air China, as strategic investors. The recognition by capital and industrial giants boosted international capital’s investment in Air China.
For the sake of long-term cooperation, Air China finally chose the Hong Kong-based Cathay Pacific Airways as its first strategic investor to help with the overseas share issuing. On October 20, 2004, Air China signed a memorandum of understanding (MOU) with Cathay Pacific Airways, with the latter intending to subscribe 9.9 percent of the shares during Air China’s IPO in Hong Kong. Cathay Pacific Airways would pay the same price as other IPO investors.
The same MOU also laid out a framework of cooperation between Air China and Cathay Pacific Airways in aviation and other related businesses in Chinese Hong Kong and the Chinese mainland. The cooperation covered co-launching marketing and sales activities to increase their respective business volumes in the cities included in their networks, coordinating their operation schedules so as to maximize the volume of passenger and cargo transfer in between, and cooperating in terms of engineering maintenance and repair, cargo transportation services, information technology, purchasing, catering, safety, and security. The share subscription by Cathay Pacific Airways had thus become more meaningful, paving the way for their subsequent alliance.
A road show is a face-to-face dialogue with potential investors after a listing company has released a prospectus and before the official listing. The goal is to publicize the company itself, attract as many powerful investors as possible, and answer their questions in a forceful and effective manner.
In late October 2004, after thorough preparation, two road show teams began their journey. One team headed for Northern Europe and North America, while the other left for Southeast Asia and Western Europe. I led one team. China Aviation Oil (Singapore) Corporation (CAO) used to be involved in oil index options speculation over the counter in Singapore, which led to a loss of US$ 550 million (about RMB 4.5 billion at that time). This is a typical case of losing control of corporate risk management. As a result, overseas investors, one after another, began to doubt Chinese companies’ risk management capability. Air China stated in its prospectus that it had been involved in oil hedging since 2001, and this became the first focal point of potential investors.
Air China’s oil hedging business looks outwardly similar to the options trading of CAO, but they are totally different in nature. While the latter is highly speculative and therefore highly risky, Air China’s oil hedging business aims at cost lock-ins and is based on futures trading. Through selling or buying the “two ends,” trade risks such as those faced by CAO were avoided.
Options refer to the right to implement or not implement certain trade granted to options buyers in the period from contract signing until a certain time period in the future, on the basis of currently confirmed prices and amounts. The options holder, on the basis of the buyer’s decision on whether to implement or not implement the trade, acquires the options price paid by the buyer when he purchases the options. To put it in simple words, the buyer pays the seller, and agrees that he is entitled to buy from or sell to the seller a certain product within a specified time, and with the price and amount pre-agreed. In this period of time, if I decide to buy, you have to sell the product to me, and if I decide to sell, you have to buy the product from me. But I also have the right to cancel the trade, and then you will own the money I pay to you now.
Options include call options and put options. There are two roles for each of these types of options: buyer and seller. Therefore, to enter options trading, four different choices exist: to buy a call option, to sell a call option, to buy a put option, and to sell a put option. CAO predicted a fall in oil price, and so chose to sell call options. CAO could also buy another equally well-valued put option at the same time, when it conducted spot trading. When the oil price goes up, the storage earns profit as the price goes up. Even if the purchase of put options suffers a loss, the two investments balance out, and the portfolio value remains stable. When the oil price goes down, the storage suffers a loss as the price goes down, but the purchase of call options earns profit through their appreciation, and the portfolio value also remains stable. Air China’s oil hedge actually adopts the measure of buying “two ends” or selling “two ends” to achieve an oil price lock-in. Through this method, Air China took a fair advantage of financial derivative instruments to effectively control, and even lock in, its own operational risks.
According to related reports at that time, CAO sold its call options. However, since the way in which it had entered the options market had been tracked by its competitors, who had a much better capacity for capital allocation so as to make the oil price rocket, CAO suffered such a severe loss that it finally collapsed. After I made the situation clear, potential investors cast aside their doubts on the operational risks of Air China’s oil hedge. At the same time, they highly admired Air China’s techniques for risk evasion on this problem.
On the road show, another problem that bothered potential investors was the impact of China’s emerging private budget airlines on big companies like Air China. In answering such a question, we first explained that Air China’s seat per kilometer cost was a mere 51 cents in the U.S. dollar, which is not only the lowest in China but also the lowest in the world. In this sense, Air China was also a budget airline. In terms of bulk costs, such as airplane purchasing, payment of landing fees, aviation oil, and aviation materials, all aviation companies in China weighed in about the same. In terms of talent recruitment, newly founded companies had to offer higher salaries in order to lure talent from other aviation companies, resulting in higher costs. Thus, in present-day China, it was still hard for budget airlines to expand. This conclusion was based on my long-term observation and contemplation. In contrast to developed countries in Europe and North America, China faced an unbalanced economic development, and it was hard for budget airlines to bring their advantages into full play. Budget airlines usually depend on feeder air routes. In developed countries where economic development is relatively even, aviation companies can make money, wherever they fly. In contrast, due to the unbalanced economic development, China’s aviation companies could hardly make any money on some feeder regions, especially western China, whereas the routes and flights in developed regions had already become saturated. Newly founded aviation companies could hardly acquire resources in these regions. Even if they made their way into these regions, they just couldn’t compete with the big aviation companies. The rationale is similar to that in the old China: where the economic development was unbalanced, it was possible to wage revolution by way of armed independent regimes, whereas this Chinese form of revolution was impossible in Europe or America where the economy was developed. In today’s Chinese aviation industry, budget airlines can barely pose a threat to current aviation companies. What happened in the Chinese aviation industry over the last three years has fully proved my point. Potential investors were all amazed by our in-depth analysis.
Our road show team also gave persuasive answers to other problems that the potential investors raised, such as high oil prices and the development perspective of the Chinese civil aviation industry. The successful road show publicized both Air China and the country itself. At the same time, it also demonstrated the quality of the Air China management team.
The road show was more successful than expected. International investors began to open their wallets. Institutional subscription was 22 times the prescribed volume, while the retail bidders’ investment amount was 85 times the authorized figure. In view of this, institutional investors canceled the previous price limit, and announced their willingness to subscribe at the final price determined by Air China.
On December 8, 2004, Air China’s two road show teams and all related agencies gathered in Los Angeles to determine Air China’s final listing share price. The previous Air China prospectus stated that Air China’s listing share price span was between HK$2.45–3.10. Faced with such a high subscription rate, and with the positive attitude of institutional investors, the agencies all felt at ease. There was no risk for them. They were just waiting for the official conference to determine an appropriate listing price with Air China.
However, two different opinions emerged inside Air China. Some believed that in such a positive market, we should set the price as high as possible because Air China could raise another HK$30 million for every cent elevated. However, in this way, the profit-earning gap for the secondary market would be reduced, and it would be hard for the stock market to maintain an upward trend. In special circumstances, the share price may start high but continue to fall, causing a negative effect on the image of the stock. Others believed that we should set the price at a lower level to reduce the future operational pressures and create a positive condition for maintaining the company’s stock image in the long run.
In the end, taking into consideration all situations and the majority’s opinions, Air China set the price at HK$2.98. This is a medium-level price, which not only ensured the amount of Air China’s capital raising, but also left a profit-earning gap as great as over HK$300 million for the secondary market. At the price-fixing conference, all agencies fully agreed to Air China’s decision. As a result, the conference, which usually causes a whole night of argument, lasted less than half an hour.
On December 15, 2004, Air China Limited was finally listed in Hong Kong and London at the same time. After the opening of the market, Air China’s share price continued to rise, and closed at HK$3.225, witnessing an 8.2 percent growth that day. In this overseas IPO, Air China sold 3.2 billion shares globally, raising about RMB 10.2 billion, which was RMB 3 billion more than the original issuing proposal.
Air China’s successful entrance into the overseas capital market made four records at that time. Air China became China’s state-owned enterprise listed overseas with the largest multiples of subscription by institutional investors. Air China’s stock boasts the highest price premium among all listed Chinese aviation stocks. Before listing, the net asset per share of Air China was RMB 1.39, the issuing price of H-share was HK$2.98 (about RMB 3.17), which was a 129 percent price premium compared to the net asset per share before listing. Air China became the enterprise supervised by the State-owned Assets Supervision and Administration Commission of the State Council with the highest overseas listing price premium. Air China has also raised more capital than any other aviation company across the world in the past 20 years, financing RMB 10.2 billion.
The capital market, which seems to be unmerciful but is actually friendly, finally proves the argument that gold will glitter, sooner or later. Employees of Air China, who have long been expecting this news, were all excited. We experienced the pride and passion of being able to “glorify the Chinese people and fly high for the Chinese nation.”
Two years went by, and Air China was still afloat in the overseas capital market. In February 2006, Air China released an announcement simultaneously in Hong Kong and London that it planned to go back to the Chinese capital market, issuing 2.7 billion A-shares and listing itself on the Shanghai Stock Exchange.
After two years of overseas journeys, Air China, this beautiful phoenix, had been recognized by the international capital market. World-famous investment institutions, such as Citibank and Temasek Holdings, had been holding firmly on to Air China’s shares while sharing Air China’s rising performance. Since 2004, international aviation oil prices experienced a lasting growth. Despite this negative impact, Air China still managed to gain positive profit based on its definite development strategy as well as its wide yet balanced route network. For 2004–2005, Air China posted a net profit of RMB 2.56 billion and RMB 1.71 billion, respectively, with returns on net assets reaching 15.1 percent and 8.6 percent respectively, which turned Air China into the aviation company with the strongest profit-earning capability in China. It was listed in Forbes Global 2000, because of its profit-earning capability that ranked 12th in 2004 and ninth in 2005, of more than 250 aviation companies in the world.
With confidence, we hoped to share Air China’s superior performance with domestic investors, which was the primary purpose of Air China’s returning to A-shares. As a service company directly facing consumers, Air China also hoped to take this opportunity to list its A-shares, so as to further demonstrate its spirit and image to the Chinese people and fully establish Air China’s brand image as the most recognized by mainstream passengers, the most valued in China, with the strongest profit earning capability and the greatest global competitive edge.
The management at Air China was acutely aware that the Chinese capital market, which had been through equity-separation reform and the building of other basic systems, faced an opportunity for historic development. Air China, which had been moving steadily along the right path, needed a strong capital boost in order to obtain an authoritative position in the future open global aviation market.
In its A-share financing proposal, Air China planned to spend the capital raised on the purchase of 20 Airbus A330-200 airplanes, 15 Boeing 787, and ten Boeing 737-800 aside from the Air China expansion project in connection with the Phase III expansion of Beijing Capital International Airport. At that time, Air China’s market share in the Beijing hub had increased from less than 30 percent five years before to 44.6 percent. At the same time, the aviation network, comprising eastern China, southwestern China, the Shanghai base, and the Chengdu hub, formed a strategic triangular framework of north, west, and east, linking the most developed economic belts together. Air China planned to further strengthen this strategic plan through its A-share listing.
However, a series of blows, such as the rocketing price of oil and a number of losses through the industry froze the international aviation industry again. Air China’s A-share did not come at the best time. Just before Air China released its A-share prospectus, a series of negative messages broke out one after the other. Israel declared war on Lebanon’s Hezbollah Party in the Middle East, international oil prices went up, and the market expressed qualms over aviation companies’ overall operations, while the National Development and Reform Commission adjusted the domestic aviation oil price, resulting in a RMB 290 increase per ton. According to CAAC, the whole industry lost more than RMB 2 billion in the first half of 2006. On the macroeconomic level, the central bank elevated its deposit reserve ratio. Soaked by the rain of misery, the capital market further lowered its confidence in aviation stocks.
On July 30, 2006, Air China released its A-share prospectus, planning to issue less than 2.7 billion A-shares and raise RMB 8 billion. On August 8, based on the subscription of institutional subscribers, Air China declared that it would largely reduce its A-share capital raising scale, lowering the total issuing scale to 1.639 billion shares and the financing scale to RMB 4.589 billion. On August 18, Air China’s (601111SH) A-share was officially listed on the Shanghai Stock Exchange. On that day, the stock suffered an opening price of RMB 2.78, lower than the issuing price of RMB 2.80.
Amidst all the doubts and criticisms, I firmly believed that the domestic capital market had underestimated the value of Air China! Having gone though the test of the mature international capital market, Air China is the only aviation company in China that has kept earning profits every year since 2001. The rule—Value is the gold—is inviolable. On the listing day, I declared Air China’s confidence in the future of the market with one sentence, “Let’s wait and see.”
As the reaction toward Air China’s A-share was cold, Air China considered three proposals. The first was to halt the issuing. The second was to maintain the issuing scale of 2.7 billion shares, and transfer the inadequate off-line subscription amount to an on-line subscription. The third was to decrease the price and scale. “The first one.” Our position was certain. “A good horse should not be sold at the price of a donkey.” Our three underwriters were shocked. “This is against the rules,” they said, almost in unison. The gongs and drums had already been sounded, so the show had to go on. Moreover, supervision and administrative institutions would not agree. In the end, after careful consideration, Air China chose the proposal of diminished issuing.
It was the first time in the history of the A-share market that a listing company had reduced its issuing scale. How had Air China dared to break with tradition? The rationale behind this was simple. Since domestic investors underestimated Air China’s value, we respected the market’s choice, but we had to hold on to our principles. I reiterated that selling shares was similar to selling vegetables. If the market was not good, I sold one bucket and kept the other bucket for myself. Reduced issuing was also a normal feature of the stock market.
As long as the mountainside is still full of trees, we don’t have to worry if there is enough firewood. As long as Air China had confidence about its development prospects, it would not have to stick to targets that were beyond its capability at a given time. It should be noted that stock rights are also a valuable resource for listed companies. As a company listed in Chinese Hong Kong, London, and the Chinese Mainland, Air China had access to various financing channels. In the future, Air China might launch placements, or issue bonds overseas, and might choose another opportunity to implement secondary financing in the A-share market. Or Air China might give up stock right financing, and get the necessary capital through other measures, such as financial leasing. Air China’s asset-liability ratio was 60.2 percent, one of the lowest in the industry. This made us confident that Air China would not be influenced by a diminished financial scale in the future.
In fact, with its stocks listed in three markets at home and abroad, Air China has become a master of the capital market. In the past few years, apart from stock right financing, Air China has made use of more economical financial products, such as short term financing bonds, to widen its financial channel. In May 2005, less than half a year after listing on the overseas market, Air China successfully issued RMB 2 billion-worth of short-term financing bonds, and then issued another RMB 3 billion-worth of low interest long-term bonds in September of the following year, ensuring a sufficient capital flow for Air China’s operations and development.
Two listings—one successful and the other a failure. One question Air China’s managers could not answer was why Air China, as a leading airline with international competitiveness, was not able to win the confidence of its investors.
To answer this question, we should correctly understand the operational characteristics and value estimation of the aviation industry, which is a fundamental issue. Over the past decades of seeming prosperity in the aviation business, players in this industry have been wracking their brains for stable profit margins. From 1947–2000, the average net profit ratio in the global aviation industry remained below 1 percent, while between 1969–1994, the aviation industry in the United States, the biggest aviation transportation nation, achieved an industrial average profit ratio for only one year. History warns us that the collapse of once glorious aviation giants is nothing rare
Some investors cast their doubts on the basis of their experience. In the face of fierce price competition, how could domestic aviation companies talk about stable profit earning and core competitiveness? On the busiest domestic route of Beijing–Shanghai, there is a flight every 20 minutes. Despite this, other airlines still try to squeeze into the market. Special offers have become common. A general manager of a private airline told me that as he had long been responsible for sales in other industries, based on his experience, the seat occupation rate of Beijing–Shanghai flights was on average 80 percent, which meant that the market was not yet saturated, and there were still customers to fight for. It was this kind of blind optimism and get-rich-quick attitude that made the competition in the aviation industry so aggressive. On the Beijing–Shanghai route, which has the largest passenger flow, discount tickets were once sold at RMB 80, which was 99.2 percent off the original price!
The reservations of investors were reasonable. However, we should look at the issue from a broad perspective. For one thing, global aviation companies were being hit by repeated blows from high oil prices and fierce competition. For another, the development prospects for the aviation market in emerging regions were exciting. Experience has demonstrated that the aviation transportation industry grows faster than GDP. Forecasts show that Chinese passenger traffic will exceed 700 million person-times in 2020, approaching the current passenger traffic of the United States. Without such an understanding, it is impossible to correctly understand the historical development opportunities for Chinese aviation companies and make correct investment decisions.
As a listed company, Air China should also build its superior brand image in the capital market, just as it was important to build its brand in service. This required Air China to take the initiative to convince the capital market of the broad prospects for the Chinese civil aviation industry, as well as the unique position and nature of Air China. Only in this way could it win back the support of the market and investors.
To achieve this, Air China had first to move investors with stable performance and attractive returns. In the capital market, money does not grow on trees. Listed companies must be committed to rewarding the investors with superior performance.
Half a month after the issuing of its A-shares, Air China released a report on its performance in the first half of 2006 in Hong Kong, London, and Shanghai. By international accounting standards, Air China realized a net profit of RMB 458 million, which was not only outstanding in the general climate of loss making in the industry, but also completely dispelled investors’ worries about the profit-earning prospects of Air China. Shortly after the release of the mid-term performance report, analysts at Citibank rated Air China’s stocks as “Buy,” adding that Air China had the strongest profit-earning capability among all domestic aviation companies, and was worthy of market reevaluation.
Fluctuations in the capital market implied many a speculative or irrational factor. Instead of focusing on the fluctuating share prices to meet the psychological demands of investors, listed companies should guide them with correct operational principles and information. After the issuing of the A-shares, the boss of a fund company wanted to buy Air China’s shares, but requested a visit to Air China first. I asked him, “Why bother to visit? You should, first, look at our operational principles. The operational principles are at the very root of corporate operations, or the soul, if you like.”
Since Air China was listed overseas two years ago, the capital advantage thus accumulated has enabled it to accelerate the development of its key business and form a competitive edge that takes it far beyond other airlines. This period saw Air China’s best performance in its history. Air China has already made Beijing Capital International Airport into an aviation hub with strong competitive advantages. In 2005, Air China’s share in the passenger transportation market in Beijing Capital International Airport reached 44.4 percent, while its cargo transportation market share exceeded 50 percent. Moreover, Air China owned a complementary domestic and international route network and an advantageous fleet, snatching the largest market share in the busiest 20 domestic routes, while occupying more than 50 percent of the market share in international routes. Air China’s focus on business passengers became more pronounced as its percentage of business passengers reached 72 percent, ranking first among the three largest domestic airline companies. In terms of cost reduction, Air China also went far beyond its competitors. In 2005, Air China’s unit capacity cost was the lowest among the three largest airlines.
It was Air China’s solid foundation that finally won the recognition of the investors. Having heard my suggestions, the fund manager led a team to visit Air China, and conducted a two-day in-depth study of the company. At the end of it, the manager sounded decisive during his talk with me. “Mr. Li, based on Air China’s forward-looking operational principles, we won’t withdraw our investment.”
At the same time, the market also began to revise its inaccurate assessment of Air China. On August 18, 2007, the first anniversary of the Air China A-share issuing, share prices rose to RMB 15.80, five times the issuing price. Air China had finally got over its misery with an outstanding performance in its share price. Domestic institutional investors, such as investment funds and security companies, suddenly woke up from their previous false impression, and hurriedly started research on the real value of this flagship market stock.
The lasting growth of the share price since their listing has also largely benefited Air China. On August 18, 2007, the Air China share peaked at RMB 15.80 in the A-share market. Measured by this price, the total value of the 1.1 billion shares at a low back then was already more than RMB 14 billion less than the current total value. In other words, Air China’s decision to reduce issuing value had led to more than RMB 10 billion in profit.
My experience taught me that the Chinese capital market was not yet mature enough. Some people tended to focus on speculating rather than investing. This state of mind spread to companies through various channels, resulting in short-term actions that were disadvantageous for both investors and the whole stock market. Participation in the capital market is subject to game theory as well as to a mixture of investment and speculation principles. As a listed company, the most important thing is to identify your route, make the best of your key business, and clearly know your value. Only through this line of attack can a listed company sit calmly in the fishing boat, heedless of the stormy waves.
In the autumn of 2003, the Chinese government rolled out a series of policies aiming to perfect the socialist market economic system, clearly setting the goal of fostering big companies with international competitiveness. Later, the State-Owned Assets Supervision and Administration Commission of the State Council issued the invitation of the century to 189 enterprises directly under the central government, declaring that 30–50 large groups with international competitiveness should be fostered in order to face the challenges of economic globalization. As one of the central enterprises, Air China was soberly aware of its responsibility and the pressure to succeed. We hoped to live up to this invitation and garner outstanding achievements.
To meet the internal demands of the Chinese economic strategic adjustment in the new era, Air China had to grasp the opportunities to accelerate the building of its international competitiveness by means of capital.
Air China had already begun its capital operations to integrate key business resources, long before its issuing of H-shares overseas. In February 2004, Air China announced its acquisition of Shandong Airlines and became its biggest shareholder with 48 percent of the share options. This was a major strategic move in Air China’s optimization of its plan for the domestic aviation market, and also a preparation for its rapid entry into the capital market.
Subsequently, Air China and Cathay Pacific established a two-year capital cooperation scheme under the name Star Plan. Through this project, Air China worked out its global strategic blueprint.
Those who are good at playing Chinese chess focus on the whole game. For Air China, Beijing and Hong Kong are the “eyes” in the future strategic game of domestic and world aviation industry. Air China boasted business advantages in the Northern Hemisphere, such as Europe and North America, while Cathay Pacific took the lead in the Southern Hemisphere, such as South America, South Africa, and Southeast Asia. If the two sides joined hands, they would connect the two global networks! This strategic blueprint was very attractive to both sides.
To be honest, no aviation company in China, Air China included, was able to occupy a dominant position in the international market. In terms of international passenger transportation, foreign airlines took up 56 percent of the market. In terms of international cargo transportation, foreign airlines accounted for 82 percent of the market. Chinese airlines were in a weak position. The problem of how to reverse this situation has beleaguered every Chinese civil aviation industry player for a long time.
The strategy of Air China was to promote development through amalgamation. The A-A union of Air China and Cathay Pacific, two large regional carriers, was an excellent move toward building aviation hubs of international influence. According to our understanding, only Beijing, Hong Kong, and Shanghai were capable of becoming the globally influential aviation hub cities in China. Beijing was Air China’s operational base, where Air China controlled 44.6 percent of its market. Shanghai was Air China’s “door,” with a relatively small fleet. The Hong Kong hub, the one of vital importance, could not be developed by Air China alone, due to various reasons.
But this was not good enough. In fact, in the past few years, hub cities around Beijing, such as Tokyo, Seoul, Hong Kong, Bangkok, Singapore, and Dubai had largely diverted the passenger flow of Air China for long-range routes bound for Europe or America. These cities had already posed threats in a real sense. Data has shown that in 2005, the Tokyo and Seoul aviation hubs grabbed as much as 25 percent of Chinese passengers. Air China had to make a breakthrough in its effort to build a hub in Hong Kong. Cathay Pacific Airways, ranking 13th among the world’s airlines and the most powerful airline in Hong Kong, is without doubt Air China’s most valued partner.
Moreover, with the decline of the share for Hong Kong Airport in the Asian market year by year and the fast growth of the Chinese economy, gaining access to the mainland Chinese market had become an important strategy for Cathay Pacific’s future survival. Dragon Airlines, of which Air China held 43 percent stock rights, was a non-Chinese mainland airline that offered more than 300 flights to 23 destinations on the Chinese mainland. Dragon Airlines was exactly the prized possession that Cathay Pacific dreamed of acquiring. As the aviation business across the Taiwan Straits gradually unfroze, Dragon Airlines, mainly depending on flights in the Hong Kong and Taiwan area, suffered a gradual decline in performance. Cathay Pacific, which held 28 percent of Dragon Airlines’ stock rights, was constantly at loggerheads with Air China, the biggest stockholder in terms of Dragon Airlines’ business expansion. The two sides eventually resorted to lawsuits in some instances. An alliance was the only way to resolve their conflicts.
Based on these considerations, the two parties considered cooperation as early as December 2004 before the issuing of Air China’s A-share, resulting in an integration plan known as the Star Plan. This plan would change the pattern of the aviation industry in the Asia-Pacific region, and perhaps even the world.
However, as the curtain was raised for negotiations to begin, new difficulties emerged that were beyond belief. Several times during the intense negotiation process, representatives from both parties were on the point of storming out, and throwing the collaboration into the trash.
The hot potato that was the root cause of this furious debate was the pricing of the two companies’ respective shares for cross holding. Cathay Pacific insisted on subscribing Air China’s additional share offers at the original IPO price of HK$2.98 in the H-share market, while we insisted that Cathay Pacific should increase its stake at the price of HK$3.8. At the same time, we demanded that Cathay Pacific should lower the price of Cathay Pacific’s share options from HK$15 to HK$13 for Air China’s acquisition, as was intended by both parties. As each of the two parties would hold more than 700 million shares of the other party’ stock rights, Cathay Pacific would pay an additional RMB 2 billion to Air China because of Air China’s share price increase and Cathay Pacific’s share price decrease. Our “unreasonable demands” were unacceptable to the chairman of Cathay Pacific Airways.
A company has to be big and strong enough before it can engage in capital operations. Only when you have certain value will others be willing to cooperate with you. Otherwise, the foundation for capital operations will not be solid enough. It would be like a high-rise block built on sand that could collapse at any time. Air China’s tough attitude at the negotiation table was rooted in its superior profit earning and cost control. In 2005, Air China’s ATK (Available Ton Kilometer) operational cost was RMB 2.78, a number that few aviation companies in the world could achieve. In terms of unit seat-kilometer income, Air China was the best among domestic aviation companies.
This negotiation, the hardest in the words of the chairman of Cathay Pacific, went on for more than a dozens rounds. These two most powerful aviation companies on the Chinese Mainland and in Chinese Hong Kong finally realized capital linkage and cooperation through a complicated capital operation that involved HK$35 billion. The process can be aptly summarized by an old Chinese saying: “A good gain involves long pain.”
Specifically, the Star Plan was composed of two agreements of cooperation on stock rights and corporate operations. Through a series of complicated stock right arrangements between Air China, Cathay Pacific, the Swire Group, China National Aviation Co. Ltd., and Citic Pacific, Air China finally sold its Dragon Airlines shares to Cathay Pacific, making Dragon Airlines its wholly-owned subsidiary, while Air China and Cathay Pacific cross-held 17.45 percent of each other’s shares with a final cross-holding limit of 20 percent.
According to the operations agreement, Air China and Cathay Pacific would become each other’s sales representatives in the Greater China region, which meant that Air China would be solely responsible for Cathay Pacific’s passenger transportation sales in the Chinese Mainland, while Cathay Pacific would be solely responsible for Air China’s passenger transportation sales in Hong Kong, Macau, and Taiwan. Air China and Cathay Pacific (Dragon Airlines included) would also arrange and operate all passenger transportation services shuttling between the Chinese Mainland and Hong Kong through flight code sharing. The two parties would found a joint-venture cargo transportation company of which Air China was the controlling shareholder. Other than that, based on the principles of income and cost sharing, Air China and Cathay Pacific would hold joint route operation for all routes linking the Chinese Mainland with Hong Kong.
The leverage effect of capital was fully demonstrated through this cooperation. Through 17.5 percent of stock right cooperation, Air China and Cathay Pacific realized cooperation in 50 percent of their business. The two parties would have invested much more capital and time if they had established new aviation hubs independently. This cooperation, which achieved much more than the original investment, optimized the allocation of the two parties’ operational resources, elevated the position of the Beijing and Hong Kong international aviation hubs, and enhanced the competitiveness of the domestic airline business as a whole.
On March 30, 2007, Air China released its first annual report since the Star Plan. In 2006, Air China realized net profits worth RMB 3.191 billion, an increase of 86.71 percent from the year before. A probe into the report revealed major changes in Air China’s increased profit and assets structure. Returns on investments such as the Star Plan became an important source of Air China’s profit growth.
In May 2005, the capital market touched the hearts of Air China again. The Shenzhen Assets and Equity Exchange Center announced the auction of 65 percent of stock rights of Shenzhen Airlines on May 23, 2005. The capital market had opened a door for Air China once again.
Shenzhen Airlines was founded in November 1992. It was a joint venture of five enterprises, including Air China, Guangzhou Development Industry (Holdings) Co. Ltd., and Shenzhen Whole Course Logistic Co. Ltd. Air China held 25 percent of its stock rights. Shenzhen Airlines at that time hired more than 4,000 employees, owned 27 Boeing 737 series passenger airplanes, and operated more than 80 domestic routes. It had four aviation bases in Guangzhou, Shenzhen, Nanning, and Wuxi, with total assets of RMB 4.1 billion.
Out of strategic consideration, Air China decided to participate in the auction. After the reorganization of the three largest Chinese aviation companies, market-oriented competition mechanisms began to dominate the domestic civil aviation market. Gone were the days when “occupying one’s own territory, dividing the nation and ruling separately” was the order of the day. Before the auction of Shenzhen Airlines’ stock rights, Air China just got the approval for building a base in Guangzhou to explore the southern Chinese market. Success in the auction would enable Air China to hold 90 percent of Shenzhen Airlines’ stock rights, grasp a golden opportunity to enter the regional market, and secure a more solid standing in southern China.
This was the biggest auction of state-owned assets since the founding of the PRC in 1949. This was also the first time that a large state-owned civil aviation enterprise opened its controlling stake to foreign capital. After the news was released, all kinds of investors came running, including such large state-owned enterprises as Air China, Sinotrans, Sinopec, Ping’an Insurance, and Citic Group, as well as financial investors with foreign backgrounds, such as Citibank, New Bridge Capital, and AIG. It also attracted private capital such as the Beijing Modern Investment Group, who saw positive prospects in the civil aviation industry.
Stock transfers in the form of an auction were a rare sight in world aviation history. Clearly, the seller wanted to sell Shenzhen Airlines’ stocks at a good price. Before the auction, the prediction was that 65 percent of Shenzhen Airlines’ stock rights would be priced between RMB 1.4 billion and 1.6 billion. After several rounds of discussion, the board of Air China evaluated 65 percent of Shenzhen Airlines’ stock rights as less than RMB 2.1 billion. According to the rules and regulations of Shenzhen Airlines as well as the Company Law of the People’s Republic of China, as the second largest stockholder of Shenzhen Airlines, Air China had the right of first refusal when the largest stockholder transferred its stocks. Also, as one of the three largest aviation companies, Air China also possessed the credentials to operate the national route network. In view of these advantages, many deemed Air China’s participation in the auction as a foregone conclusion.
However, the competition at the auction venue was extremely fierce. Beyond the expectations of anyone, after 93 rounds of continuous bidding, a joint-bidder composed of two private investment companies grabbed the stock rights at the price of RMB 2.72 billion. The two investment companies had never invested in the civil aviation industry before. The result created a buzz among the participants as well as the audience.
For Air China, a result like this was unexpected but reasonable. CAAC lifted government control on private investment in public aviation transportation in January 2005. Even before this, private aviation companies such as United Eagle Airlines, Spring Airlines, and OK Air had already obtained approval from CAAC, ushering in the new era of market-oriented operation. As a result, the future Chinese civil aviation industry would become a competition ground for all kinds of investors and capitals, and Air China had to face this competition and many challenges in capital operation ahead of it.
It was a great disappointment that Air China had once again failed to acquire Shenzhen Airlines. As early as the year 2000, the market had given Air China an opportunity to acquire Shenzhen Airlines. At that time, China Travel Service (Hong Kong) Co. Ltd., one of the founders of Shenzhen Airlines, planned to transfer 40 percent of Shenzhen Airlines’ stock rights for capital due to its financial crisis. However, during 2000–2001, Air China’s operational performance was not good, and Air China had no clear forward-looking strategy for the future. That was why Air China lost that opportunity in the midst of indecision and doubts.
Opportunities come only to prepared minds. In the changing capital market, once an opportunity slips away, it might mean that a strategic opportunity has gone forever. However, it should be noted that the greatest risk in the capital market is not the inability to grasp opportunities, but grasping the wrong opportunities that will cause endless regrets.
Although Air China failed in the auction of Shenzhen Airlines’ stock rights, in accordance with Shenzhen Airlines’ profit-earning capability then, the sale price of RMB 2.72 billion was at least was equivalent to a total of ten years’ operation profit for Shenzhen Airlines. In the face of such huge uncertainty, Air China had to keep its mind clear.
Past experience has taught us that when a certain industry attracts extensive attention from capital, such as the Internet economy, companies tend to be over-valuated. Capital operations require both professional expertise and a calm mind.
There are two sides to every coin. As capable as the capital market is of providing a vigorous boost to corporate development, so it is also able to magnify risks. Companies cannot be too cautious in their decisions about capital operations. The lessons drawn from TCL Group’s merger with Thomson Color Television Business and Alcatel Mobile Phones were alarming. Behind the glory and spotlight lurked a number of setbacks. General Electric was deemed the most successful in acquisition and profit earning in more than a dozen fields, ranging from airplane engines, power generators, water processing, and security technology, to medical imaging, business and consumer financing, and media and high-tech materials. Yet it was also criticized at that time for its large-scale, high liability, and all-out expansion behavior. Since then, it has begun to exit from certain industries.
“She De” is a Chinese expression. “She” means to give up while “De” means to gain. Since one may gain nothing if he is not willing to give up anything, there is actually more to learn in giving up than in gaining. If you are unable to give up what should be given up, you may not be able to make the best of what you already possess. A company doing this is destined to pay a higher opportunity cost.
In the context of Air China, I reiterated, “Your next meal depends on the time and digestive effect of your previous meal.” After years of development and capital operations, how far has Air China gone in resource utilization? This is a question that has remained in the minds of the Air China management.
It was exactly because of this that Air China has always kept its mind clear despite its urgent desire for faster growth. After the Star Plan, two foreign aviation companies approached Air China, hoping to join Air China. However, based on the principle of mastering the business around us first, developing step by step, and acting in accordance with our actual strength, Air China declined their requests after thorough discussion.
What is Air China’s future consideration in capital operation? I can only say that we will continue to elevate Air China’s core competitiveness by means of capital. The specific blueprint is that all specialty companies under China National Aviation Holding Company should largely elevate their profit-earning capability in order to increase the group company’s economic results. On top of this, Air China is planning to realize overall listing, seeking greater benefits through its capital operations.
We remind the managers of Air China from time to time that the way they think will decide on the outcome of Air China’s future strategic development. To become an industry giant, we must keep ourselves abreast of information from all directions, planning for the future development of the company from a strategic perspective. The Star Plan, which aimed at implementing Air China’s strategic plan of extending its route network all over the world, has demonstrated Air China’s ambition to compete in the international market. Air China aimed to focus on the richest regions, the most robust economies, and the areas with the largest passenger and cargo flow in its future overseas expansion. This also explained why the managers of Air China began research on route planning in the European and American markets, which boast the densest passenger, cargo, and capital flow in the world.
In 2006, Air China opened the Beijing–New Delhi route in an effort to tap the Indian market, link Beijing to South Asia, and connect the two cities further to Europe and North America. This was an important move for Air China to implement its strategic planning for the western and eastern markets.
Air China has also begun formulating its development plan in Europe, including feasibility research on acquiring some European airlines. In the United States, Air China is speeding up its building of a sales network. If a cross-shaped pattern of south-north and east-west can be created with the help of capital in the future, then Air China will be able to participate in global competition on all fronts, bringing about a new era for the core competitiveness and corporate value of Air China.
At the same time, faced with the challenges brought to the Chinese aviation transportation industry by the liberalization of global aviation transportation, Air China should launch another round of strategic realignment and resource integration inside the company. In the process, capital will once again become the vital means.
Following its strategic planning, Air China will persistently promote and develop its key business of aviation transportation. By 2010, the key businesses of China National Aviation Holding Company will rank among the top ten in the world. China National Aviation Holding Company will thus become a large, world-competitive corporation that plays an important role in China’s national development.
This is not a simple expansion in scale, but an industry pattern featuring a relatively mature industry system that is centered on aviation passenger transportation and supported by aviation logistics, airplane repair and maintenance, ground warehousing, catering, airport management, aviation tourism, aviation media, project construction, and financial services. To this end, Air China will need first to accelerate its resource integration at home and abroad so as to establish related industry modules. Air China’s current integration principally involves three phases.
In the first phase, the China National Aviation (Group) Co. Ltd. (hereinafter referred to as China Aviation Ltd.), which is a subsidiary of the China National Aviation Holding Company, will gradually shift its investment to aviation transportation-related industries on the Chinese mainland, and integrate resource management companies under China National Aviation Holding Company and China Aviation Ltd., with a view to strengthening the management capability of China National Aviation Holding Company in transformation. China Aviation Ltd. will focus on such areas as airport investment, catering, and logistics. These will contribute significantly to Air China’s future integration of domestic aviation business resources.
For the second phase, we will pick out certain industry modules of Air China that are mature in development and relatively independent in business for integration with specialty companies, in terms of management and business resources. Currently, plans are already in place to make independent the frequent passenger business and ground service, while integrating airplane repair and maintenance. These independent business modules, once strengthened and enlarged, will become an important driver of Air China’s core competitiveness.
We will also encourage specialty companies to make business development plans for mutual benefits in the key aviation transportation business through enhanced integration and interactive development.
Air China will carry out a series of reform and rebuilding operations to tighten the link between all specialty sections within the China National Aviation Holding Company and the key business. On this basis, Air China will push further corporate reform and promote the overall listing of the China Aviation Holding Company. We have taken advantage of Air China’s shareholding reform and successful listing to incorporate 87 percent of the China Aviation Holding Company’s assets based on a modern corporate governance framework. However, the reform of the China National Aviation Holding Company is far from over. In the aspects of business coordination, resource sharing, and anti-risk capability, Air China’s shares can be introduced to achieve overall listing. By then, the specialization-oriented industry system of the China Aviation Holding Company will be brought into full play and the overall strength of the group will be largely enhanced. Moreover, the group company will be able to enter the capital market with its existing assets for maximum effect. In addition, overall listing will also streamline the management structure, improve corporate governance structure, and boost the all-round, balanced, sound, and sustained development of the group.
Clearly, the blueprint requires all specialty companies to build strong profit-earning capability so as to become the profit growth points of the listed Air China. This goal is expected to be attained in the latter part of the Eleventh Five-Year Plan period through constant and unrelenting efforts.