Soros-Backed Chinese Airline Hangs Tough

These are certainly not the best times for an upstart Chinese airline to be spreading its wings worldwide. With the price of oil pushing $140 a barrel, carriers around the globe are cutting back on the frequency of some flights, cutting others altogether, and imposing new fees on passengers (BusinessWeek, 5/29/08).

Until recently, Chinese carriers enjoyed some protection from oil's dizzying rise, thanks to government subsidies for fuel oil. But on June 19, Beijing's National Development & Reform Commission announced it was curtailing support, resulting in a sudden 8% increase in fuel costs for airlines.

It's not just oil that's causing headaches for Chinese airlines. While many carriers have been hoping this would be a boom year because of the Beijing Olympics in August, so far 2008 has been one to forget. The bad news started with some of the worst winter weather in decades, followed by the unrest in Tibet in March. The May 12 Sichuan earthquake killed tens of thousands and sent the whole country into mourning. More recently, floods have hit southern China. These catastrophes have led to depressed air travel.

Continental Drift

And with the global economy weakening, traffic numbers for China's airlines are declining. The number of domestic air travelers shrank 3.3% last month, the first such drop since the SARS epidemic in 2003, according to the Sydney-based Center for Asia-Pacific Aviation. While airlines hope for a lift thanks to the opening of direct charter flights (BusinessWeek, 6/23/08) between the mainland and Taiwan for the whole year, traffic is likely to grow just 10%, compared with a 16% increase in 2007.

Still, Hainan Airlines is pushing ahead with expansion plans. The fourth-largest carrier in China, Hainan is named after the island province in the South China Sea near Vietnam that is China's answer to Hawaii. Outside the country, Hainan Airlines is best known as George Soros' favorite carrier. The billionaire investor paid $25 million for a 15% stake in the airline in 1995 and invested another $25 million in 2005. But the airline stuck largely to China, with just a few international flights in Asia.

Now Hainan is branching out. Last month it launched its first route to the U.S., a nonstop service from Beijing to Seattle. The company has also expanded to Europe, flying to Brussels, St. Petersburg, and Budapest; a Berlin flight will begin in September. A Hainan executive says the airline isn't going to be deterred by the inauspicious moment. "We have a long-term strategy," says Joel Chusid, general manager for North America. "It's like a train going on the tracks."

The Cathay Pacific Challenge

Hainan is making moves closer to home as well. The company owns 45% of Hong Kong Express Airways (HKE), a six-aircraft airline controlled by Macao casino tycoon Stanley Ho's family. (They also control a sister carrier, Hong Kong Airlines.)

The Hong Kong market is dominated by Cathay Pacific and its affiliate, Hong Kong Dragon Airlines, but through HKE, the Ho family and Hainan are hoping to win passengers looking for an alternative way of flying to China's commercial hubs of Beijing and Shanghai. HKE has recently started flying the Hong Kong-Beijing route and on June 11 launched service between Hong Kong and Shanghai.

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