'Drop out unless you are rich'

"Drop out unless you are rich," said United Eagle Airlines founder Li Jining when he applied for the governmental approval. Born to parents who both worked in the civil aviation system, Li Jining made the best of his family background and formed the country's first privately-owned civil aviation company.

East Star was grounded on March 14, 2009 [Xinhua]

However, the flight of the Eagle wasn't as smooth as expected, and the fledgling private airline suffered financial problems from its earliest days. Outwith its registered capital follow-up funds were always hard to find, and the financing structure and the capital providers were subject to multiple changes.

In 2006, sensational news broke that United Eagle had fired its CEO and the Vice Chairman had submitted his resignation. Soon after, the company's failure to repay a 14 million yuan (US$2.05 million) entrusted loan became a scandal. UE increased shareholders from 3 natural persons to 5 corporations in 2007, but one year later, after failing to pay Sichuan Airport's takeoff/landing fees and ground service fees, the company received its first sanction, including the suspension of access to the airport's terminal bridges. Eventually in 2009, after several rounds of talks, UE was taken over by Sichuan Airlines for a price of 200 million yuan (US$29.28 million); thereby becoming a state holding company.

United Eagle's case isn't an isolated one. Last year East Star also received a warning from Hangzhou Xiaoshan International Airport, and later became the second airline to be grounded this year. In fact, other than Spring, Juneyao, and Shenzhen airlines, none of the other private air fleets has ever achieved profitability since its founding.

The operation of a private airline requires huge financial backup. An insider with the Civil Aviation Administration of China (CAAC) says that profitable as civil aviation is, the business is also a high entry-cost and high risk one. And without a critical mass – usually 10 jets at least – the operator will find it difficult to garner profits in the short term, while leasing a passenger jet and poaching a pilot from another airline can run to tens of millions in investment.

Calculations indicate that to register a civil airline company with five 150-seat medium-sized passenger jets requires an annual investment of 330 million yuan (US$48 million), comprising plane lease, fuel, and maintenance crew.

As a result, company executives' financial worries will start as soon as their jets take to the air. They will soon discover that their 80 million yuan (US$11.7 million) registration capital is a drop in the bucket compared to their huge financial requirements. And late payment of debt naturally becomes a tactic in their operations.

"Concerning the present situation, threshold standards for civil aviation need to rise," said Zhang Qihuai, a lawyer specializing in aviation law. He points out that CAAC doesn't have a strict monitoring mechanism over new companies' funding, in that the administration requires only that the company present a certain sum of registration capital but doesn't audit ongoing capital flow and the availability of backup funds, which in practice are even more important.

The accessibility of financial assistance is another matter weighing on these civil airlines. "Bank mortgage loan, bonds, going public, we have tried all means to secure finance, but none have succeeded," OK Air's ex-President Liu Jieyin once complained to the media.

Liu also reveals that banks are reluctant to grant loans to private airlines, chiefly because these newly-established companies don't have a lengthy credit record, and the aviation industry itself is a risky business. Another insider observes that in today's competitive environment, private airlines are suffering more than state-owned companies. The situation, as he describes it, is "a matter of life and death".