Chinese Aviation Industry

Known as the "Helicopter King of China," Shenzong Cheng has been quietly building a small empire in aviation manufacturing. Now, the Chinese industrialist is making an ambitious play to acquire Kansas aircraft-maker Hawker Beechcraft's civilian aircraft operations.

As details of the US$1.79 billion deal with Beijing-based Superior Aviation Beijing Co. Ltd. begin to emerge in bankruptcy filings, so too does the dizzying maze of companies leading back to Cheng in Beijing. Superior is 60 percent owned by Beijing Superior Aviation Technology Corp. Ltd. - a private entity entirely owned by Cheng and his wife, Qin Wang, according to a letter outlining the proposal.

Hawker Beechcraft, which filed for bankruptcy protection in May, said it was premature to comment on Cheng's role in the acquisition.

Superior CEO Tim Archer told The Associated Press in a written statement Thursday that Superior Aviation looks forward to a strategic partnership with Hawker Beechcraft's civilian aircraft division. He said Superior intends to strengthen Hawker Beechcraft's position as a global leader by "re-igniting" its research and development programs.

"We will aggressively work to keep jobs in the United States by continued production of the Hawker and Beechcraft product lines and expanding the production, design, and servicing of civilian aircraft at all locations including Kansas, Arkansas and Texas, and many other states across America," Archer wrote.

An assistant for Cheng in China, Qian Chunyuan, said that Cheng was too busy to give interviews.

In a report published this week in a Chinese newspaper, 21st Century Business Herald, Chunyuan was quoted saying Hawker Beechcraft is "a company whose brand value is very high, with many bidders." He also told the newspaper that Cheng is pursuing another potential acquisition, an Australian aircraft distributor, which would be used to sell the company's products.

Cheng is chairman of Qingdao Haili Helicopter Co. Ltd., a helicopter manufacturer in the eastern coastal city of Qingdao that makes B-2B light helicopters as well as unmanned helicopters. The newspaper Oriental Morning Post in Shanghai reported Qingdao Haili has suspended helicopter production due to poor export orders.

Cheng also is chairman of Weifang Tianxiang Aviation Technology Co. Ltd. In 2009, Weifang Tianxiang and an American helicopter manufacturer, Brantly International Ltd., of Coppell, Texas, set up a joint venture, Weifang Tianxiang Aerospace Industry Co. Ltd., and received approval to invest US$20 million to set up a production line, according to the website of the Commerce Department of Shandong province, where Qingdao is located.

The engineering and administrative offices of Brantly International were relocated to Superior's facilities in Coppell, Texas, where their operations have apparently merged. Brantly, which once built the B-2B helicopters at its Texas plant, says all its manufacturing is done at its parent facility in Qingdao, China. Today, the company's parts and service department remains in business, but its website says no new helicopters are currently available for sale.

The Brantly Group paid US$7 million in 2009 to acquire U.S. aircraft parts supplier Superior Air Parts Co., which at the time was in bankruptcy proceedings, according to court filings.

In a letter sent to Hawker Beechcraft outlining Superior's proposal to acquire the Kansas plane-maker, Cheng touted his company's experience in the United States.

"Superior has acquired an aviation business in the U.S. in 2009 out of bankruptcy and has turned the target into a profitable business within less than two ... years under the ownership of Superior, so the management of Superior is very familiar with the bankruptcy acquisition process and acquiring and managing an aviation business in the U.S.," Cheng wrote.

Hawker Beechcraft employs about 7,400 people, with roughly 4,700 working at its Wichita, Kan., facility. It also has factories in Little Rock, Ark., the U.K. and Mexico, as well as more than 100 service centers worldwide.

Analysts say it is unlikely Superior would move Hawker Beechcraft's entire aircraft production lines to China because doing so would mean the loss of its FAA production certificate, although some work could be farmed out.

In his letter to Hawker Beechcraft, Cheng wrote that Superior had no plans to relocate or terminate any manufacturing facilities or product lines. But Cheng also noted that Superior has worked closely with the Beijing municipal government to build a strong aviation industry in Beijing.

The remaining 40 percent ownership interest in Superior is held by Beijing E-Town International Investment & Development Corp. Ltd., an investment company controlled by the Beijing municipal government. E-Town owns stakes in 23 foreign investment projects with total assets of US$1 billion, according to information publicized by the company in advertising for job applicants.

E-Town was set up in 2009 by the Beijing city government's Economic and Technology Development Committee.

It is intended to support development in the Yizhuang district on the southern edge of the Chinese capital.

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Even though China's economic growth in the second quarter slowed from 9.6% in 2011 to 7.6% in 2012, Chinese carriers are maintaining an optimistic to bullish growth forecast as they take, like many companies and government initiatives in China, a long-term view of their potential. That outlook calls for growth in the short-term to raise brand awareness, especially internationally, and increase travel propensity, which has economic flow-on affects. When economic times are right, and the carriers are sophisticated enough to do so, there will be a sizeable market to profit from.

The implications of that in the short-term are the recent warnings by Air China, China Eastern and China Southern, the country's three biggest carriers, of 1H2012 profits declining by over 50%. In a positive outlook, Jun-2012 profits are up following a decrease in fuel prices. Both carriers recently announced plans to collectively take 30 widebody Boeing 777-300ER aircraft and, amongst other Chinese carriers, are pursuing short- and long-haul international expansion. Already in 1H2012 Chinese carriers transported 8.7% more passengers than in 1H2011.

Total passenger traffic in 1H2012 was 151 million, according to CAAC, with growth strongest in the midwest (cities like Chengdu and Chongqing) and northeast (Dalian, Shenyang). 89 new aircraft were introduced to the civil fleet, which rose to 3,089...

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China's aerospace buying spree just got a little closer to Boeing with the July 20 purchase of Arlington-based Glasair Aviation by Fang Tieji, chairman of Jilin Hanxing Group Co. Ltd.

Fang intends to keep the company in Arlington and retain its staff of about 35, said Glasair Operations Manager Scott Taylor.

Jilin Hanxing Group pursues a variety of endeavors, including running a hotel, managing property, manufacturing construction materials and the automobile business, according to the company website.

The purchase price was not revealed. Glasair is tiny but well known in the general aviation industry, producing kits from which buyers can build a low-wing Glasair sports plane or a high-wing Sportsman, which looks like an old Piper Cub.

"We've been very successful, that's why the acquisition took place," Taylor said. "We were recognized in the industry as bringing something to the table, and therefore desirable to acquire."

Fang's first priority is to fully certify the Sportsman so production can shift to complete aircraft rather than the kits that are now sold, Taylor said.

Kit aircraft are in the FAA's "amateur-built" category and are not allowed to carry paying passengers.

Friday's purchase, while closest to Boeing country, is only the latest in a series of purchases in the general aviation category by Chinese companies.

Earlier in July, Hawker Beechcraft of Wichita, Kan., agreed to be purchased for US$1.79 billion by Superior Aviation, Beijing.

And in 2001, Duluth, Minn.-based Cirrus Aircraft Corp. was purchased by China Aviation Industry General Aircraft.

All three general aviation companies were damaged by the recession and have struggled to survive...

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China will further relax its ban on low-altitude airspace for private use, China's top economic planning body announced Friday.

China would also boost the number of cities and facilities available for general aviation, said Huang Min, director-general of the Department of Basic Industries at the National Development and Reform Commission, at a press conference Friday, with the commission coordinating with government bureaus to achieve airspace reform.

One of the two categories of civil aviation, general aviation refers to all flights other than military and scheduled airline passenger and cargo flights. Most of the world's air traffic falls into this category.

Military control of airspace below 1,000 meters has for decades stifled the general aviation market of China, slowing down development of the civil industry, experts explained.

China had 286 airports and temporary landing strips available by 2011, far fewer than the 15,000 in the US, according to the Civil Aviation Administration of China.

"Led by market demand, technology and management have been developing in recent years to provide better access to low-altitude airspace," Zou Jianjun, director of the Institute of Air Transport Services, told the Global Times.

But airport, landing and traffic facilities and regulations need to be improved for general aviation, he suggested.

Starting January this year, six cities including Tangshan, Qingdao, Hangzhou, Ningbo, Kunming and Xi'an, as well as areas of northeastern, central and southern China have been experimenting with pilot schemes for the opening up of low-altitude airspace.

China aims at 19 percent annual growth in general aviation air traffic from 502,700 flying hours last year to 2 million by 2020, according to guidance for aviation sector development released by the State Council on July 12.

"The massive general aviation market in China will benefit aircraft manufacturers and companies along the industrial chain such as ground service providers and training," Zou said.

Specialist civil pilot training classes have also taken off in China: Civil Aviation Flight University of China, China's only full-time regular institution of higher education for civil pilots, began offering its first private helicopter license class at Xinjin Flight College in March, with 13 students graduating in July.

The 200,000 yuan, 50-hour class is popular, Liao Lunjin, a researcher and engineer at the college, told the Global Times, already attracting a fresh intake of 20 students that includes rich helicopter owners and people wanting to work as commercial pilots.

His college had six helicopters now, Liao said, and would rent five more for the first half of 2013 to meet rapidly growing demand.

The top priority in opening up low-altitude airspace to private aircraft was to "ensure its safety," said Huang of the commission.

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Responding to a recent Forbes article which claims that 82 planned Chinese airports would be an unnecessary waste of resources, the General Administration of Civil Aviation of China (CAAC) refutes the allegation, saying the airports stand as practical planning and they look forward to accommodating the country's growing air-travel needs, Global Times reports.

The CAAC announced last week that China plans to build 82 new airports and expand 101 existing ones during the 12th five-year plan, from 2011 to 2015. Citing a 2 billion yuan (US$313 million) loss from 130 existing airports in 2011, the report in the biweekly magazine cast doubts on the usefulness of new airports.

Accepting the financial loss as a fact, CAAC Director-General Li Jiaxiang, however, says the financial losses for those airports is not because there are too many of them, which would cause overcapacity and price wars among airports, but it was the shortage of them that makes running the airports exceptionally costly and air tickets so expensive that many travelers opt out of flying.

Li cited an example of success to drive his point home. He said Yunnan province boasts 12 financially successful local airports. Therefore, an airport network is crucial for them to make a profit once the needs are there and the passenger flow is guaranteed, Li added.

But passenger flow seems to be the prime concern. The Forbes report says as China is entering an era of economic slowdown and most Chinese people are surviving on fairly low incomes, and the grandiose upscale construction of airports would turn out to be "white elephants."

In particular, the report cast doubts on Beijing's plan to build a second airport, saying the twin airports in New York -- JFK (Kennedy) and LGA (LaGuardia) -- and Shanghai's Hongqiao and Pudong airports are lessons enough for Beijing not to follow.

Li dismisses the claim that the construction of new airports is outpacing the country's real needs. He said civil aviation is of strategic importance to China's further development. Airports are a basic form of infrastructure, Li said, and crucial to the country's long-term development goals.

Li also mentioned that whereas the United States has 19,000 airports, China only has 182 for civic use and overall, has no more than 300, which is only less than half of what countries such as Brazil and South Africa have.

The disadvantage was keenly noted last year when China found that almost every Japanese county as well as some small townships have an airport to deal with emergencies such as the Fukushima tsunami.

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Mainland airlines are hoping that when Beijing's second airport is finally opened, they will not be forced to schedule flights from two airfields in the city, which they say will add to their costs and curb flexibility.

The final proposal for a second airport in the capital is expected to be handed to the State Council by the end of this year and to come into operation by 2017. The delayed timetable for the stop-start project, originally slated to come into operation by 2015, means the overloaded Beijing Capital International Airport will have to cope with growth in passenger traffic to 110 million before the new airport is opened - one-third above its designed capacity.

The existing airport handled 82 million passengers last year and is poised to surpass Hartsfield-Jackson Atlanta International Airport as the world's biggest airport in terms of passenger traffic.

"A two-airport configuration is very challenging for airlines, especially to the base carrier in the city," said Shan Chuanbo, senior vice-president alliance for Shanghai-based China Eastern Airlines. "We know just how challenging it is because we have been operating for years under this situation."

China Eastern has operated out of dual bases at Hongqiao International Airport and Pudong International Airport since 1999. Operating from two hubs in a city means an airline must duplicate ground staff and ground-handling facilities, as well as keep planes on standby at two airports. For China Eastern, the extra cost added up to hundreds of millions of yuan a year, Shan said.

In the event of technical problems with an aircraft, it could not simply put another jet into service to complete the scheduled flight as it was too costly to fly an empty jet from one airport to another. Onward flight connections were also compromised by operating out of two airports, he said.

China Eastern, for example, flies twice daily from Pudong to Wenzhou, and three times a day from Wenzhou to Hongqiao. Pudong caters for passengers from Wenzhou who need to transit to Europe or the United States, while Hongqiao is for point-to-point passengers. Were it to operate from a single airport, China Eastern could better co-ordinate its flights and reduce costs, Shan said.

But the Shanghai municipal government had decided that Pudong should serve mainly international routes and Hongqiao should largely serve domestic routes, requiring mainland carriers to operate out of both airports. China Eastern lobbied for one airline focusing on one airport, but this was turned down by the Shanghai government.

"Shanghai airport operations have proved to be a failed design that compromises airlines' daily operations," said an executive from the Guangzhou-based China Southern Airlines. "I hope that Beijing will learn a lesson."

China Southern wants to beef up its market share in Beijing by tripling its fleet to 100 jets based in the city in the next five years - from fewer than 30 at present. The new airport could relieve shortage of the landing slots at the Beijing airport, it says.

It has endorsed the China Eastern proposal that one airline and its members in the same alliance operate from one airport, rather than duplicate their services and support networks. One of the options, it says, is to allow China Southern, China Eastern and other Skyteam member airlines to operate from the new airport. Air China and Star Alliance members would stay in the old one.

The new airport, to be built on the southwestern border between Beijing and Hebei province, will be located at least 50 kilometres from the current airport, which is nearly twice the distance between Hong Kong International Airport and Shenzhen Baoan International Airport. That distance will hinder the free and easy flow of passengers needing to transfer between the airports, critics say.

Twin-airport or multiple-airport operations are common in international air hubs, including London, New York, Tokyo and Seoul. But all have had difficulties in collaborating, critics say. "Generally speaking, connectivity and costs are optimised when a city consolidates traffic at one main airport," a British Airways spokesman said. The London-based carrier operates out of three airports in London, including Heathrow, Gatwick and London City Airport.

BA said a two-airport configuration could work if authorities took the time to consult the industry to ensure airline operations were either consolidated at one airport or strategically split between the two. Infrastructure and transport connection between the airports was also crucial.

A paper commissioned by Cathay Pacific Airways and researched by Strategic Access in 2010 found both airlines and passengers preferred to use the old airport as its connections were better than the new one.

A review of 12 cities worldwide served by two or more airports found that synergies were nearly non-existent and airport users, including passengers and airlines, were either unaware of the potential benefits that might be achieved by twin airports, or indifferent to the possibilities of improved services.

Tony Tyler, director general of the International Air Transport Association, said Beijing should have expanded its existing airport rather than build a new one to ensure maximum connectivity of airlines. "The best solution would be expansion on the same geographic site ... but if it is decided that a second location is necessary, then we will need a transparent and clear system for allocating operations between the two airports," Tyler said at the China Civil Aviation Development Forum in Beijing in May.

Shu Yong, company secretary of Beijing Capital Airport, said that in theory, the advantage of operating from a single airport was that transit passengers need only move from one boarding gate to another in the same location. But some 90 percent of traffic in Beijing is point-to-point passengers, who must go through security checks and luggage claims as well as downtown transport connections.

If Beijing's airport were to continue on its current growth trajectory, the strain on its facilities, especially on transport links from the terminals, would become too great, Shu said.

Beijing needed to build a second airport because the current airport no longer had room for further expansion. "Neighbouring farmlands have turned into residential projects and the relocation costs would be staggeringly high if room were to be created for further expansion of the airport," Shu said.

Tyler said he was strongly opposed to the practice of separating international and domestic traffic between the airports.

"We should be mindful that there are many examples of lost opportunities when international and domestic traffic are artificially separated. Montreal and Tokyo come to mind," he said.

Tokyo's Haneda Airport has reopened to international traffic after being restricted to domestic flights for many years.

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Embraer China expects its joint venture with state-owned Aviation Industry Corporation of China (AVIC) to initially produce six business jets per year, with plans to have capacity for 20.

Embraer China made the disclosure in an email to Flightglobal following its June 2012 agreement with AVIC to manufacture the Legacy 650 in the country.

The joint venture, Harbin Embraer Aircraft Industry (HEAI), will convert its assembly line in Harbin, where it assembled the ERJ145 regional jet from 2002 to 2011, into a Legacy 650 facility by 2013.

“At the beginning stage, the annual production rate would be approximately six aircraft per year and obviously the rate will be based on market demand. Eventually, the maximum capacity would be 20 aircraft per year,” says Embraer China’s president Guan Dongyuan.

He says the factory will produce jets mainly for the China market, but he also foresees producing aircraft for export.

Guan believes that HEAI’s business will not be impacted by AVIC’s partnership with American airframer Cessna to develop and produce mid-sized business jets.

“We don’t see direct competition between the Legacy 650 and what Cessna will produce in China, because they fall in different size categories,” he says. “The product Cessna will produce in China will be in the medium-size category, whereas Harbin Embraer will produce the large-sized Legacy 650, which is the most favoured size category in the China market.”

The Legacy 650 aircraft can fly up to 3,900nm (7,223km) on routes such as Dubai to London, São Paulo to Miami and Beijing to Moscow.

In March, Cessna signed an agreement with AVIC to develop and produce medium- and large-cabin business jets in China. Two months later in May, the pair formed a joint venture to perform final assembly, sales and customer support in China for the Caravan single-engined turboprop.

Cessna and AVIC have yet to detail their plans for medium and large cabin jets

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