China Eastern Airlines Co. Ltd. History

Company Perspectives:

China Eastern Air Co. Ltd. is a domestic large backbone airline with a passenger and cargo fleet of MD-11, A340, A300-600R, MD-82 and FK-100 etc., serving more than 100 routes to the USA, Belgium, Spain, Germany, Japan, South Korea, Thailand, Singapore, Australia, Hong Kong area and some 50 domestic points. Besides, it has a good number of representative offices both at home and abroad scattered in Europe, America, Australia, South East Asia, Hong Kong area and major Chinese cities.

Company History:

China Eastern Air Co. Ltd. is one of China's top three airlines. One of the country's first state-owned enterprises to offer shares on the New York Stock Exchange, China Eastern remains owned for the most part by Eastern Air Group Co., the government's holding company. Since its inception in 1988, CEA has invested heavily to modernize its fleet and train its personnel to Western standards. Passenger traffic accounts for 80 percent of total revenues. The carrier operates 68 aircraft on 120 routes, from domestic flights to intercontinental voyages.

Origins

The China Civil Aviation Administration (CCAC) was formed on November 2, 1949, about a month after the creation of the People's Republic of China. CCAC was started with the scattered band of personnel and aircraft left as airlines sponsored by Chinese and American interests fled to Taiwan to escape the Communists.

CCAC was assigned responsibility for air travel in the south of China, while the Sino-Soviet Joint Stock Company (Ren Ming Hong Kong Kun Sze in Chinese or Sovietsko-Kitaysko Aktsioneren Obschestvo Grazhdanskoi Aviatsii in Russian), commonly known as SKOAGA, was responsible for northern routes. These were merged in 1954 to form the Zhongua Ming Hong Jui (also transliterated as Minhaiduy) or Chinese Civil Aviation Bureau, which had six main regional divisions based at Peking, Shanghai, Guangzhou, Shenyang, Si'an, and Wuhan. The Civil Aviation Bureau became the Civil Aviation Administration of China (CAAC) in April 1962.

At first, the CAAC was dependent on Soviet support. It operated, for the most part, Soviet-designed aircraft during the Cold War, except for a few leftover American designs and a few modern turboprops and jets bought from Great Britain in 1961. It bought more Western aircraft in the 1970s, including some British Trident jets in 1971 and ten Boeing 707s in 1972. (A few supersonic Concordes also were ordered that year but never delivered.) CAAC also bought a few smaller Australian aircraft.

By the time it was disassembled in 1984, CAAC at least had pretensions of providing Western levels of service, that is, concerning the types of aircraft used on international routes. The carrier even had bought a few Boeing 747 widebody jets, which were placed in service to Paris, San Francisco, and New York. After 25 years without a reported accident, a string of fatal crashes in the late 1970s gave impetus to modernizing the airline's operations.

In late 1984, CAAC was divided into one international carrier (Air China) and four regional airlines--Southern, Southwestern, Northwestern, and Eastern, based in Shanghai. Three others also were soon created in an atmosphere of explosive growth in air traffic. The result was unprecedented freedom of choice among passengers and unprecedented fiscal responsibility among the carriers.

Autonomous in 1988

Two of the regionals, China Southern and China Eastern, were allowed to fly abroad because of the commercial importance of their home bases, Guangzhou and Shanghai. Both soon developed into major airlines in their own right. They did not become officially autonomous until July 1, 1988, although they remained under the ownership of CAAC, which had authority over aircraft purchases and setting up new routes. At the time, new freedoms were sweeping the country, and small independent airlines continued to spring up until the Tiananmen Square Massacre in June 1989, which emptied Chinese airliners of foreign tourists and threatened trade with American aircraft manufacturers.

The Tiananmen crisis notwithstanding, CEA's planes usually flew full, averaging load factors of 80 percent. Its diverse fleet included Airbus Industrie A300 widebody aircraft, McDonnell Douglas MD-82s, and British Aerospace BAe 146 regional jets, which were soon sold off. CEA ordered five MD-11 tri-jet widebody transports to handle the new long-haul international routes critical to bringing in hard currency. In 1991, China Eastern carried up to 8,000 passengers a day on a total of 70 routes, including flights to several Japanese destinations and Seattle and Los Angeles in the United States. CEA employed 3,600 people at the time. Pilots and engineering personnel would remain particularly scarce for the rest of the decade.

One of the MD-11s operated as a freighter between Shanghai and Chicago. A Seattle stop was soon added and frequency increased to two flights a week. Flights to the United States ran 80 percent full and carried apparel for the most part, according to the Journal of Commerce. Return flights only ran at 30 percent capacity and carried items such as high-tech machinery for forwarders like Airborne Express. The beginning of passenger service on the Chicago route was delayed by late aircraft deliveries.

Annual revenues rose about 20 percent in 1992. CEA bought ten Fokker 100 regional turboprops and ordered five Airbus A340s worth $555 million. In June, CEA launched its first European route with service from Brussels, originating in Shanghai with stops in Beijing and Bahrain. A route to Madrid followed the next spring. As the world's most profitable airline, British Airways (BA) was rumored to be considering an investment in CEA. BA was building a network of global alliance partners at the time.

The China Eastern Air Group, a collection of 30 companies with operations in tourism, foodstuffs, real estate, finance, and marketing, was organized in 1993. It created the largest air transportation company in China and competed directly with the CAAC and the airlines (Air China, China Southern) still under CAAC's control. Yet another round of expansion followed the reorganization, with new McDonnell Douglas aircraft on the way and new destinations planned in Malaysia and Vietnam.

China Eastern, along with four other Chinese airlines, contracted Northwest Airlines to train its pilots in 1994. Safety concerns continued as several CEA aircraft were involved in incidents in the mid-1990s. Hijackings, disastrous crashes, and in-flight mishaps among various Chinese carriers including CEA contributed to dwindling interest in the airline's planned flotation on the New York Stock Exchange. CEA aimed to raise hard currency in the offering to finance its purchases of new Airbus and McDonnell-Douglas airliners. The new capacity was needed to keep up with China's air traffic, which grew at a rate of 25 percent per year in the mid-1990s. These planes, however, would experience low rates of utilization (about seven hours per day) and lowering load factors (about 70 percent)--representing somewhat of an excess of capacity.

CEA invested Y100 million in a new maintenance hangar and entered into a Shanghai-based wheel and brake overhaul joint venture with AlliedSignal in 1994. It also announced plans to build a second hub outside its home province (in Qingdao, the province of Shandong), the first Chinese carrier to do so. It began flying to Seoul, in the Republic of Korea, late in the year. CEA posted a profit of $76 million on revenues of $790 million in 1995. It operated 41 aircraft at the time.

1997 Public Offering

Revenues for 1996 rose ten percent to $797 million (Y7.3 billion), though after-tax profits fell about seven percent to $71.2 million (Y591 million). CEA earned more than half of its passenger revenues on international routes, although its most profitable ones, those to Hong Kong, were reclassified as domestic routes when the territory was returned to China. Cargo revenues were lagging, however. CEA operated only one dedicated freighter (Boeing, which took over McDonnell Douglas, was scheduled to convert two of CEA's MD-11 passenger airliners into freighters in 1999).

CEA hoped to raise $250 million in exchange for 35 percent of its share capital (the maximum foreign ownership allowed by Chinese law) in simultaneous offerings on the New York and Hong Kong stock exchanges in February 1997. The listing received a lackluster response, but raised $246 million nonetheless. CEA also borrowed $130 from the China Industry and Commerce Bank to help finance its new aircraft purchases, worth about $1 billion. A round of government-administered consolidation among China's other carriers was expected.

In September 1998, CEA became the first carrier from the People's Republic of China to enter a code share agreement with a U.S. airline. CEA's cooperation with American Airlines had been in the works since April 1997. A code share with a Japanese carrier, All Nippon Airways, soon followed--another first. A bilateral air services agreement between the United Kingdom and China in November 1998 raised expectations regarding the entry of British airlines into the Shanghai market. Both Virgin Atlantic Airways and British Airways expressed interest.

1984:Civil Aviation Administration of China is divided into four regional airlines and one international one.

1988:China Eastern Airlines becomes officially autonomous.

1997:Thirty-five percent of equity is offered on New York and Hong Kong stock exchanges.

1998:Code share agreement with American Airlines is the first of its kind between China and the United States.

Countering the positive developments, CEA experienced serious losses resulting from the Asian economic crisis. It posted a loss of Y481 million ($58 million) for 1998 although passenger and cargo traffic were up. Revenues were Y7.79 billion. Lowered domestic airport fees and the sale of 13 MD-82s offered some hope for financial recovery. CEA traded in the jets as part of its deal to lease ten Airbus A320s from General Electric Capital Aviation Services, which had helped the carrier dispose of its Fokker 100s earlier.

CEA installed quick access recorders in its cockpits in an attempt to nip bad flying habits in the bud. After a safety audit, CEA signed a new code share agreement with Qantas, which was expected, ultimately, to increase passenger traffic 30 percent between China and Australia. Qantas was a member of the OneWorld global alliance that also included British Airways and American Airlines. CEA continued to seek out such partnerships.

CEA was showing a profit again by the first half of 1999. Selling planes helped, as did favorable currency markets. CEA also trimmed domestic service heavily. It anticipated completion of the new $1.6 billion Pudong International Airport near Shanghai, the largest city in the world's fastest-growing aviation market.

Principal Subsidiaries: Anhui Branch; Shandong Branch; Jianxi Branch; China Easter Jiangsu Aviation Co. Ltd.

Principal Competitors: CAAC; Cathay Pacific; Evergreen International.

Further Reading:

• Armbruster, William, 'Delays at McDonnell Hamper China Eastern,' Journal of Commerce, May 18, 1992, p. 2B.
• Bangsberg, P.T., 'China Eastern Targets Cargo,' Journal of Commerce, May 1, 1997, p. 7B.
• Betts, Paul, 'BA Seeks To Enter China Air Ventures,' Financial Times, June 8, 1994, World Trade News Sec., p. 9.
• Chau, Beverly, 'Beijing To Bend Tax Rules for Airlines,' South China Morning Post, June 19, 1994, Money Sec., p. 1.
• ------, 'Crashes Dent Airlines' Foreign Fund-Raising Effort,' South China Morning Post, June 12, 1994, Money Sec., p. 3.
• Davies, R.E.G., Airlines of Asia Since 1920, London: Putnam, 1997.
• Dobson, Chris, 'US Official Thought He Was Going To Die as Both Engines Ran Short of Fuel,' South China Morning Post, May 29, 1994, p. 3.
• Grindrod, Barry, 'Speculation Mounts Over BA Link-Up with Chinese Partner,' South China Morning Post, February 6, 1993, p. 4.
• Harding, James, and John Ridding, 'China Eastern Goes Traveling,' Financial Times, Companies and Finance: Asia-Pacific, January 23, 1997, p. 25.
• Hodgson, Liz, 'Turbulence Drama Claims Second Victim,' South China Morning Post, April 11, 1993, p. 5.
• Ionides, Nicholas, 'China Eastern Reports Dollars 58m 1998 Loss,' Air Transport Intelligence, April 28, 1999.
• ------, 'GECAS Deal To Help China Eastern Reduce Debt,' Air Transport Intelligence, April 13, 1999.
• ------, 'New Shanghai Airport Set To Ramp Up Operations,' Air Transport Intelligence, October 6, 1999.
• ------, 'Virgin, China Eastern To Hold Formal Code-Share Talks,' Air Transport Intelligence, November 20, 1998.
• ------, 'Virgin's Branson Meets China Eastern Boss Over Tie-Up,' Air Transport Intelligence, November 19, 1998.
• Jones, Dominic, 'Dragon To Get Bit in the Year of the Tiger,' Airfinance Journal, February 1998, pp. 28--30.
• ------, 'The Next Step for China's Big Two,' Airfinance Journal, February 1998, pp. 24--27.
• Kang, William, 'Airline Hinges Growth on Pilot Quality,' South China Morning Post, September 10, 1994, Business Sec., p. 1.
• Kelly, Emma, 'Safety Audit Seals China Eastern/Qantas Deal,' Flight International, May 12, 1999, p. 11.
• Lewis, Paul, 'China Eastern To Go Public,' Flight International, September 4, 1996.
• 'Listing Abroad May Backfire,' South China Morning Post, April 17, 1994, p. 4.
• Proctor, Paul, 'Upcoming Service to U.S. Fuels China Eastern Upgrade,' Aviation Week and Space Technology, June 10, 1991, pp. 34--37.
• Westlake, Michael, 'Flying Starts: New Chinese Carriers Replace State Monopoly,' Far Eastern Economic Review, February 18, 1993, pp. 54--55.

Source: International Directory of Company Histories, Vol. 31. St. James Press, 2000.

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