Aviation

Okay deal

Joy Air plans expansion, as investor China Eastern heads for the exit

Joyair w

Goodbye and good luck

The Flying Tigers was the nickname bestowed upon the First American Volunteer Group of the Chinese Air Force. Its purpose: to defend the Chinese against Japanese incursions following America’s entry into the Second World War.

In 1943, a patriotic film in the US popularised the exploits of the air brigade, introducing the term “on a wing and a prayer” to the canon of English idioms (it was a reference to a gallant aircraft that returned safely after sustaining substantial damage in battle).

The same idiom might now be a potential means of describing Joy Air’s business strategy, as it seeks to expand its operations despite ongoing losses.

Joy Air is one of China’s regional flight operators and has been in business for seven years. Last year it made a loss of Rmb152 million ($24 million), with its assets outweighed by debt on its balance sheet. Spurred by the bleak data, one of Joy Air’s founding investors, China Eastern Airlines, has made plain it wishes to sell its remaining 5% stake.

China Eastern Airlines established Joy Air with Aviation Industry Corporation of China (AVIC) in 2008, splitting their investment 40/60. Shortly thereafter, China Eastern sold 35% of the company to AVIC.

China Eastern recently told Reuters “We only have a 5% symbolic stake in Joy Air now, and the carrier is not a good match for us in terms of market position or business model.”

Indeed Joy Air’s market position is unenviable, with an industry insider informing Time Weekly that its financial troubles stem from questionable safety standards, a failure to expand its routes, and increased competition from high-speed train travel (see WiC213).

Joy Air currently has a fleet of nine Xi’an MA60 aircraft, which are produced by AVIC. In 2014, a fault with the model’s undercarriage resulted in a series of non-fatal crashes, prompting the temporary grounding of all MA60 aircraft. Despite this Joy Air signed a deal to purchase 60 more MA60 planes.

In addition to this purchase, a planned deal with (the brilliantly named) carrier Okay Airways looks set to expand Joy Air’s MA60 fleet by 13. Okay Airways was the first company to fly the Xi’an MA60 in 2005, and it will now transfer its flight operations to Joy Air.

The airline’s state-owned majority shareholder AVIC is the obvious connection to the airline’s persistent use of the MA60 model, with another unnamed insider saying there is a “political obligation to support the development of the regional airline industry” regardless of how unprofitable the business can become. The source contends that Joy Air is more of a testing ground for China’s domestic aviation firms so that the country’s manufacturers can improve their product offering and increase the share of domestic flights taken in China-made planes.

Regional flights directly connect cities like Xi’an and Wuhan – one of Joy Air’s routes – and avoid further congesting China’s hub aiports in Bejing, Shanghai and Guangzhou. But a report in China Business Journal shows that regional traffic accounts for less than 8% of the civilian flights taken in China, far below the global average of 38%.

In addition to propping up a flagging airline, AVIC’s vice-chief engineer Tang Changhong has suggested a more holistic approach to supporting the struggling regional airline industry, recommending that the sector be supported by subsidies, tax breaks, and a more favourable allocation of flight paths.

Tang’s hopes may be realised sooner than he thought. This week, the country’s anti-graft body announced that several senior officials within the Civil Aviation Administration had taken bribes from the country’s larger airlines in return for preferential choices on flight paths and schedules.

The outing of this institutional corruption might help smaller regional airlines to get access to more profitable schedules. But while safety concerns persist over the MA60, passengers may be reluctant to boost Joy Air’s load factors with their patronage.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.