China National Aviation Holding Company (CNAHC), Air China's parent company, is currently planning to set up its Wuhan Branch to facilitate the takeover of East Star Airlines, which has entered the insolvency proceedings. Two weeks ago, there was fierce conflict between the two companies on the subject of the buyout.

A senior official with Hubei regional civil aviation authorities tells the Caijing Magazine that Air China (SH: 601111; HK: 00753) has applied for a branch in Wuhan, capital city of central China's Hubei Province, and is following administrative procedures at the moment. This newly established company branch is estimated to start operation as soon as May; it will take over multiple resources from East Star.

On March 27, Vice Manager of CNAHC Cao Jianxiong met with the officials from Hubei Province, Wuhan City and Civil Aviation Administration of China (CAAC). In the meeting, they discussed East Star's bankruptcy proceedings and the takeover initiatives for East Stars' resources that include its present airlines, schedules and staff.

In the same meeting, a vice provincial governor confirmed East Star president Lan Shili was under "house arrest".

Wuhan's local court on March 30 accepted the bankruptcy appeal for East Star from its six creditors including GE Commercial Aviation Service (GECAS). According to Chinese law, the bankrupt airline's assets will be liquidated before being put up for auction, and Air China will be among the competitors for East Star so that there are still variables in Air China's takeover. However, the bankrupt company can also choose "bankruptcy restructuring" – a third party to take over the remaining asset and repay the debt.

Air China is also in contact with GEGAS discussing the matter of subletting some or all of the jets in East Star's fleet.

A senior official with Wuhan Tianhe International Airport mentions that China Southern and China Eastern both have branches in Wuhan. China Southern and Xiamen Airlines (an asset of China Southern) claims over 48 percent of the local market share, while the rest is divided by China Eastern's 18 percent, East Star's 11 percent, and Air China's meager 5 percent and so on.

This official indicates that a low market share in central Chinese market has been Air China's weakness. "This takeover will help Air China's rapid growth in the area centered around Wuhan."

East Star is based in Wuhan Airport. Since its maiden flight, East Star has established 18 domestic air routes from Wuhan to Shenzhen, Guangzhou, and Shanghai, plus 2 regional lines from Wuhan to Hong Kong and Macao. It schedules 48 flights every day.

However, since 2008 this privately-owned air company has been in financial difficulty, and has been sanctioned by airports and aviation administration because of inability to repay debts estimated to be 500 million yuan (US$73.21 million), including aircraft lease, airport services, aviation fuel and staff maintenance.

For more information, please consult the original article in Chinese:

http://www.caijing.com.cn/2009-04-02/110131983.html

(China.org.cn by Maverick Chen, April 2, 2009)