02-Nov-2005 9:21 AM
China's Hainan Airlines 'CC' affirmed, negative outlook - Xinhua Far East
In a statement, Xinhua Far East said the rating reflects the airline's operating efficiency, leading brand image, and support from Hainan's municipal government.
But it added that the rating also factors in the company's vulnerability to financial and liquidity risks because of its reliance on short-term debt.
The rating affirmation comes after the carrier's parent, Hainan Airlines Group, obtained 25 mln usd from US-investor George Soros, who holds an indirect stake in the airline, and 1.5 bln yuan from Hainan Development Holdings Ltd.
Hainan Airlines and three other airlines are expected to be realigned under a new brand, Great Xinhua Airlines Group, which will pursue an overseas initial public offering (IPO).
"This is a positive development at the company's parent level," Xinhua Far East said.
"However, there are lots of uncertainties whether the re-organization will shortly lead to material improvement of Hainan Airlines' credit profile to warrant a rating upgrade," it added.
The injection of new funds may help mitigate Hainan Airlines' liquidity risks in the short-term, but the company's aggressive debt-financed fleet expansion plan will add pressure in the medium to long-term, the ratings agency said.
There are also uncertainties over the group's restructuring, including sources of new capital injection, the attitude of the government, and the positioning of Hainan Airlines if it goes public in Hong Kong, Xinhua Far East said.
Intensifying competition in China's aviation market, soaring jet fuel prices and high interest expenses have all eroded the profitability of Hainan Airlines and generated very limited surplus cash flow to reduce debt, Xinhua Far East added.
But the investment from Soros will benefit Hainan Airlines in its planned private placement and IPO, it said.
Hainan Airlines is China's fourth largest airline in terms of passenger volume, number of routes and size of fleet -- 108 aircraft at the end of October.
Xinhua Far East China is part of the credit ratings division of Xinhua Finance, which owns the Xinhua Financial Newswire.
(1 usd = 8.1 yuan)