Feb 2008
By Perry Flint
Winston Churchill famously described Russia as "a riddle wrapped in a mystery inside an enigma." It is a formulation that is equally applicable to the Chinese government and particularly to the fluid relationship between the government and the industries and enterprises it both owns and regulates.
Over the past few months, the aviation community got perhaps its deepest and most detailed glimpse into that world and how it is evolving as Air China and its parent China National Aviation Holding Co. used a Western-style media campaign to successfully block Singapore Airlines from taking a stake in China Eastern Airlines, at least for the present. But it is not possible to say whether this marks a new direction in aviation policy. All that is known with any certainty is that when it comes to meddling with its airlines, Beijing is not any different than other governments around the globe.
Consider the chain of events: Singapore Airlines and parent Temasek Holdings made a bid for 24% of CEA's minority shares (the government holds a controlling interest) at HK$3.50 per share. Air China and CNACwhich owned 12% of CEAsaw that bid as being too low. Arguably, they had a fiduciary responsibility to their own shareholders to drive that bid higher or try to block it. Furthermore, Air China had its own competitive reasons for opposing SIA's plans; it craves CEA's 35% share of the Shanghai market and is not eager to have SIA on its doorstep as a competitor (although both now are in Star Alliance).
So CNAC/CA countered with an offer of at least HK$5 per share. CNAC made it clear it would vote its 12% of shares against the deal and waged an aggressive media campaign that was quite a departure from the traditional behind-closed-doors politicking that usually would have occurred. At the end of the day, it was able to persuade a large number of shareholders that if they held out, they would receive a bigger payout down the road when CA bought their shares.
Confronted with this opposition, SIA declined to increase its bid and went down to defeat. Thus, one could argue, the market functioned as it should. SIA was trying to pay a below-market price and CNAC and Air China effectively prevented that from happening. All CEA shareholders will benefit from a larger payout assuming CNAC makes good on its offer. And by refusing to back either bidder, the Beijing government demonstrated its neutrality.
Except that it didn't really take a hands-off approach. There are times when being neutral is itself a policy statement, and in this case, by declining to rubber-stamp the SIA/CEA transaction, Beijing gave Air China the green light to make a counteroffer. If its signal was not clear enough, it went the extra mile by actually reaching into Air China to promote President Li Jiaxiang to the position of CAAC minister ahead of the crucial shareholder vote. Li is a proponent of domestic consolidation and his elevation to the head of the nation's airline regulator at the 11th hour signaled that the government favored a made-in-China solution.
The Chinese government's attitude toward foreign investment in its major airlines is hardly unique. The Italian government ultimately may have no choice but to accept the Air France KLM bid for Alitalia but it is not for want of trying to find a suitable local savior. And even if AF KLM succeeds, it likely will be bound to maintain the carrier's Italian character according to the terms of the privatization. Or look at Iberia, which appeared likely to be taken over by an international consortium led by TPG and British Airways until Caja Madrid, a Spanish investment bank, stepped in to effectively block the deal and keep Iberia Spanish. Then there is the US government, which maintains a strict limit on non-US investment in its airlines. About the best thing you can say about that is that everyone knows the rules of the game before they begin to play. It saves a lot of time, worry and effort.
