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Steer Clear of This Chinese Industry

So this month China Southern said it would get a 2 billion yuan ($314.7 million) injection of capital from the Chinese government in form of equities. Its debt grew last year to 75.8 billion yuan despite capital raising forays in 2008 and 2010. Earlier this month China Eastern announced plans to sell as much as 8.8 billion yuan in bonds to buy aircraft and repay loans. Its debt came to 92.9 billion yuan as of the end of 2011. Air China, with debts of about 124 billion yuan, said in April it would issue 1.05 billion yuan in shares to its controlling state-run shareholder for debt relief and more capital. Debt-to-equity ratios have generally run higher for Chinese airlines compared to the rest of Asia.

Still, the number of commercial aircraft will double from last year to about 4,000 by 2015, the Chinese civil aviation authority said this month. "Capacity has kept very well with demand," notes Paul Yong, equities research vice president with DBS in Singapore. "Of course (China) comes from a past where these airlines don't have strong balance sheets."

And new aircraft, of course, runs up a bill, while foreign competitors have essentially the same planes. No, they have more. Airlines in Southeast Asia, for example, easily outdo China's in-flight service.

Last I checked, most flight attendants on Chinese airlines could barely speak English. They would know whether you wanted fish or chicken, if you could stomach either, but couldn't field a question about in-flight movies, if there were any. Compare that to the slick service of Thai Airways, the exquisite professionalism of Singapore Air and the games on board Cebu Pacific Air.

Tens of millions of people depart China every year, usually by air. That figure should reach 82 billion passengers by 2014, a growing slice of 1.26 billion people headed abroad by air worldwide that year, the International Air Transport Association predicts. Someone stands to make money on their business.

Because of high fuel costs, mainstream-versus-budget airline competition and the global economic slump of mid-2008 followed by late 2011, airline equities in most any country are considered a risky investment. But that could change for carriers with strong reputations and equally robust fundamentals. Some have already cleaned up.
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