Capital Airlines to boost Hainan

February 10, 2010 - China

Days after Hainan Province received government designation for development as an international tourist destination, another agreement between an airliner and the Beijing government is expected to give it a lift.

Hainan Airlines Group (HNA Group) and the Beijing government Sunday signed a strategic cooperation agreement, and the two parties will jointly inject capital in HNA subsidiary Deer Air and rename it "Capital Airlines."

Deer Air was the first carrier to focus on business jet service. Its fleet includes 19 Airbus A319 jetliners and covers 80 commercial flight routes, according to its website.

Hainan Airlines and the Beijing government will also conduct cooperation on tourism, media, hotels and culture. State-owned Beijing Tourism Group (BTG) will make the capital injection on behalf of the Beijing municipal government.

"This cooperation is important for Beijing to be a world-class tourism city," Beijing mayor Guo Jinlong said at the signing ceremony. Luo Baoming, provincial governor of Hainan Island, said the cooperation has a promising future due to the complementarity between Hainan and Beijing.

But the ceremony did not include a detailed plan on the investment amount and shareholding structure, and there was no timetable offered on the name change.

It is not the first time HNA has developed a subsidiary airline with a local government.

Two of its subsidiaries, Lucky Air and Grand China Express, received 290 million yuan ($42.48 million )and 200 million yuan ($29.30 million) from Yunnan Province and the city of Tianjin respectively last year. Those governments hold 34 and 15.38 percent shares of the airliners, respectively. Grand China Express was renamed Tianjin Airlines.

Last year, HNA Group also signed a cooperation agreement with the Dalian Free Trade Zone to establish Dalian Airlines.

"It is a win-win for the governments and the airlines," said Yao Jun, an industry analyst from China Merchants Securities. Aviation companies can provide good publicity for local governments, while local governments can benefit carriers in terms of taxes and land, Yao said.

However, experts said a small regional aviation company won't be able to have too much of an impact on the Beijing market.

"A small aviation company will not impact the market, especially when it is dominated by the main carriers," Li Lei, an industry analyst from China Securities, was quoted as saying by the Beijing Times. He said in Beijing, Air China holds 45 percent of the market, China Eastern 13 percent and China Southern 10 percent.

Ning Zhiqun, general manager of Deer Air, said the company has only three planes flying from Beijing to Lijiang, Yunnan Province, Jixi, Heilongjiang Province and Urumqi, capital city of the Xinjiang Uyghur Autonomous Region, although the fleet is expanding.

"We do hope we can have more traffic rights and time schedules, and with the help of the Beijing government, the cooperation will be good for our business, but the Civil Aviation Administration of China has the final say," Ning was quoted as saying by the Beijing Times. Zhang Wu'an, spokesman of Spring Airlines, the nation's first low-cost airliner, said Tuesday that it is good to see Hainan Airlines find a local government partner.

"The carrier should find a differentiated way to expand its market share when facing more competitive convergence, although the Chinese aviation market is huge," Zhang said.

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