Domestic

East Star Airlines may have found a white knight

By Wang Ying (China Daily)
Updated: 2009-06-24 08:08

An East Star plane readies for takeoff at Tianhe airport in Wuhan, Hubei province. Shanghai Yujie Industry Co is planning to invest 500 million yuan to restructure the cash-strapped airline. [CFP]

With the bankruptcy deadline of July 3 fast approaching, cash strapped East Star Airlines filed a restructuring application in a local court at Wuhan on Monday, to stave off its forced liquidation. Sources said a little-known aviation material wholesaler Shanghai Yujie Industry Co may become its new strategic investor.

A financial official from Yujie said the company would inject more than 500 million yuan ($73.15 million) into East Star in two phases, and conduct the restructuring along with other major creditors.

"The former shareholders of East Star have agreed to a debt-to-equity swap plan, and after the restructuring, they will hold no more than 15 percent of the carrier," said the official. East Star officials refused to comment on the matter.

"East Star has reached cooperation agreements with several strategic investors. They have agreed to provide 200 million yuan loan for this restructuring," said a note issued by East Star on Monday.

Founded in May 2006, Wuhan-based East Star is China's fourth private airliner. It is wholly owned by China East Star Group, one of the largest private enterprises in Hubei and its three listed arms hold stakes in the airline. According to the Wuhan government, East Star's debt is around 500 million yuan.

Yao Jun, analyst, China Merchants Securities, said the restructuring mirrored East Star's desperate effort to survive and wait for better days.

"A 'zero cost' acquisition request from China National Aviation Holding Co this March was rebuffed by East Star. It insisted that it had huge intangible assets like its flight route rights, sales network and pilot teams."

Currently, Air China has got approval for setting up a branch in Wuhan, and has employed about 600 former East Star employees. China's flagship carrier is no longer interested in East Star, added Yao.

An analyst, who asked not to be named, said private airlines would face more hardships during an industry-wide slowdown. "State-owned carriers are backed by government endorsement and credit lines when their debt-to-equity ratios exceed 100 percent, while private-run counterparts are in a disadvantaged position," said the analyst.

"I am not sympathizing with East Air, but a level playing field is required in the aviation industry, or else this sector can never mature to face international competition," he said.

Zhang Wu'an, spokesman with Spring Airlines, a Chinese budget airline based in Shanghai, said Spring Air hopes East Star will succeed in its restructuring bid.