Loans, tax breaks for China’s aviation sector

Saturday, January 10, 2009, 17:39 by Aviation Correspondent

In order to prop up its aviation industry amidst global economic gloom, China is giving loans in a big way to the country’s main aircraft manufacturer as well as tax break to its airlines.

China Aviation Industry Corporation, China’s chief state-owned aircraft maker, has secured a pledge of up to 176 billion yuan ($25.7 billion) in domestic bank loans.

China’s struggling airlines are getting $360 million by way of tax break, the state media reported.

Official news agency Xinhua quoted Lin Zuomin, general manager of China Aviation Industry Corporation, as saying: “The credit quota shows that the financial sector has confidence in the high-tech strategic aviation industry despite the current economic crisis. The company will use the loan to finance the development of helicopters, engines, cargo planes and the building of a passenger aircraft with up to 149 seats with Canada’s Bombardier.”

In a statement on its website, China Aviation Industry Corporation said the credit – involving 10 lenders, including the Industrial and Commercial Bank of China (ICBC) – may eventually go up to 250 billion yuan.

An aviation analyst, however, was quoted as stating that the loan pledge, which was an uncommitted credit facility “is more a symbolic show of goodwill to back the government in its efforts to stimulate the economy and boost domestic demand amid slowing economic growth” and that “it is in line with the strategy to expand domestic demand, showing that the aerospace industry is ready to do its own part to contribute to economic growth.”

“The loan pledge,” the analyst added, “is more about showing that banks will support the national plan to build large aircraft. The lenders will grant the loans only if the China Aviation Industry Corporation’s projects are good.”

The loan pledged to China Aviation Industry Corporation is the latest in a series of steps that China has taken to help its aviation industry cope with the impacts of the dwindling demand for air travel caused by the global economic recession.

In a report, China’s official Shanghai Securities News said that the air carriers in the country suffered a loss of 7.07 billion yuan in the first 11 months of 2008.

The Chinese government has promised to give at least 10.5 billion yuan to the country’s airlines, including China Eastern, China Southern, and Hainan Airlines.

China Eastern Airlines, one of China’s big-three carriers, had announced a week ago that the number of passengers it carried in 2008 was 37.05 million – down by 5.4% from 2007.

The finance ministry also exempted airlines from paying fuel surcharge taxes for three years, with retrospective effect from January 1, 2008. This exemption could save the carriers 2.5 billion yuan ($360 million), the newspaper Shanghai Securities Journal reported.

However, a Hong Kong-based analyst was quoted by Shanghai Securities Journal as remarking: “The exemption from paying fuel surcharge taxes is just a “stop-gap measure that would not necessarily be enormously effective, and their fate rested more with the big economic picture. The trouble in 2009 is that demand will probably weaken quite fast. The companies are likely to suffer another year of losses (in 2009), and it depends on when the macro economy will turn around (for the carriers to return to black).”

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