China Aerospace Briefing

The Regulations on Foreign Investment in Civil Aviation were issued by the Civil Aviation Administration of China, the Ministry of Foreign Trade and Economic Co-operation and the State Development Planning Commission, after approval from the State Council, on June 21, 2002. Depending on the investment envisaged, approvals may be required from all these branches of government as well as other ministries and local governments.

Effective 1st August 2002, the Regulations repeal the Notice on Policies Relevant to Foreign Investment in Civil Aviation (Min Hang Zong Ju Han [1994] No. 448) issued by the Civil Aviation Administration of China and the Ministry of Foreign Trade and Economic Co-operation on May 6, 1994 and the Notice on Explanations of Several Issues Concerning the Issue of the "Notice on Policies Relevant to Foreign Investment in Civil Aviation" (Min Hang Zong Ju Fa [1994] No. 271) issued by the Civil Aviation Administration of China and the Ministry of Foreign Trade and Economic Co-operation on October 2, 1994.

The basic legal framework for foreign investment in China is set out in the Regulations on Guiding the Direction of Foreign Investment and the List for Guidance on Foreign Investment in Industries. These classify foreign-investment projects into four groups: encouraged, permitted, restricted and prohibited. For aviation matters "Encouraged" projects include the construction and operation of civil airports and air transport companies. "Restricted" projects include general-purpose aviation companies for such things as photography, mineral exploration and industrial purposes. "Prohibited" projects include air traffic control. The classifications are important since they determine what approval requirements are needed and whether any preferential policies, such as tax incentives, will apply to the project.

The new Regulations were formulated to expand the opening up of civil aviation in China to foreign parties, to promote reform and development of civil aviation and to protect the lawful rights and interests of investors. They also provide greater detail on China’s policies.

The Regulations apply equally to individual as well as to corporate investment and are also to be used in reference to investments by companies and individuals from Hong Kong, Macao or Taiwan. The Regulations allow foreign investment in a number of forms: equity joint ventures and co-operative joint ventures; the purchase of shares (including shares issued outside of China) and listed foreign investment shares issued in China as well as other approved forms of investment.

Generally speaking, foreign-invested joint ventures may not be for a term exceeding 30 years. There are further complications. When a foreign investor uses a co-operative joint venture form to invest in public air transport or in a general-purpose aviation enterprises that engages in business flights or aerial sightseeing, the joint venture must have Chinese legal status.

When foreign investors invest in public air transport enterprises or civil airports preferential consideration will be given to foreign enterprises of the same type that have international management and experience.

The Regulations set out various investment caps. Chinese interests are to have controlling stakes in civil airports, public air transport enterprises, aviation oil and aircraft maintenance projects. No single foreign investor may own more than 25% of a public air transport enterprise, although collectively foreign investors may own 49%. Investments in aircraft maintenance carry with them an obligation to undertake business in the international maintenance market. However, Chinese interests need not have the controlling stake for projects such as cargo storage, land services, food for air travel and car parks. Here the proportion of foreign investment is to be decided by the parties.

The Regulations also include detailed provisions regarding compliance with various State and Federal pricing policies, land use rights; and the approval process which is quite complex.

On 15 April an Air China Boeing 767-200 carrying 166 people crashed onto a mountain in poor weather, as it was preparing to land at Kimhae Airport in South Korea after a flight from Beijing. Those on board included 11 crew and 135 Koreans, 19 Chinese and one Uzbek passengers. The accident was Air China’s first accident since 1949 and China’s first fatal aviation accident involving an aircraft on its nationality register since June 2000. On 13th May, a China Northern Airlines MacDonnell Douglas MD-82 crashed into the sea near Dalian in North East China with 103 passengers and nine crew aboard. Press reports have speculated that a bomb may have caused the loss.

Then on the 25th May, a China Airlines Boeing 747-200 crashed into the Taiwan Straits with 206 passengers and 19 crew on board. The aircraft was 40 minutes into a flight from Taipei to Hong Kong when it broke up. Possible evidence of fatigue cracking has been discovered in the rear fuselage. It has also emerged that the aircraft suffered structural damage during a tailscrape incident on landing in February 1980 and was subsequently repaired; and cracks have been found in the vicinity of this repair.

Three Chinese life insurers have commented that flight insurance sales have risen more from 15% since the China Northern accident.

The CAAC has reported that it has set aside an unspecified fund to modify security arrangements on 500 domestic aircraft, Air China announced in June that it would spend 270 million yuan (US$32.5 million) on a major safety upgrade; and China Airlines is retiring its remaining 747-200s.

The Civil Aviation Law of 1995 (effective 1996) draws a distinction between international carriage and domestic carriage for the purposes of compensation. In the former case, provisions of the Warsaw Convention and Hague Protocol apply. Article 129 of the Aviation Law limits an air carrier’s liability to 16,600 SDRs per passenger injury or death, 332 SDRs per passenger for cabin baggage; and 17 SDRs per kilo of checked baggage or cargo. However, domestic limits of liability are governed by provisional regulations formulated by the CAAC and put in force after approval by the State Council. The Provisional Regulations on Compensation to Passengers Killed or Injured in Domestic Air Transport (that entered into force in January 1994) provides that an air carrier’s liability for passengers is limited to Rmb70,000 (about US$8,400). The Domestic Transport of Passengers and Baggage by China Civil Aviation Rules of 1996, prescribes a limit of Rmb50 (US$6) per kilo for registered baggage, and a limit of Rmb2,000 (US$240) per passenger for cabin luggage.

Although few details have been released on the compensation given to passengers and families of deceased passengers, press reports suggest that China Northern Airlines and their insurers are offering compensation in excess of applicable domestic limits of liability. Jiang Lianging, General Manager of China Northern, has been reported as saying that China Northern Airlines will pay each family between US$22,000 – US$23,400 in compensation under Chinese Civil Aviation law and that these payments do not include payments made in respect of housing and funeral expenses.

Taiwan’s Civil Aeronautics Administration has suspended the licences of the three pilots of a China Airlines Airbus A340 which took off from a taxiway at Anchorage airport on 25 January 2002. The aircraft, with 252 people on board, took off from the taxiway, which was only 2,075m (6,800ft) long, instead of the 3,260m-long runway 32. The A340’s main gear hit a snow bank at the end of the taxiway shortly after the aircraft became airborne. The crew of the Singapore Airlines (SIA) Boeing 747-400 that crashed at Taipei Airport in October 2000 appear to have avoided prosecution by the civil aviation authority in Taiwan. The prosecutors have, however, banned the crew from flying into Taiwan for a year. The 747 crashed when it was cleared for departure from Taipei’s runway 05L but used parallel runway 05R which was closed for construction work, and the aircraft hit heavy machinery.

Airlines

China has raised the limit of foreign ownership in mainland airlines to 49 percent from 35 percent.

Citic Pacific Ltd., the Hong Kong arm of China’s biggest investment company, is considering the purchase of 25 percent of Air China as part of its plan to expand into mainland aviation. It has secured a US$242 million loan to help finance the acquisition.

China Eastern Airlines Corp. expects to complete its purchase of the assets of Yunnan Airlines Co. and China Northwest Airlines co. from their parents, which will increase its fleet by two-thirds, within 18 months. It has also secured a 12 billion yuan credit line and US$200 million loan from the Bank of China which will be used to enlarge its fleet. Separately, China Eastern has taken a 40% shareholding in Wuhan Airlines.

China Southern Airlines Co., Shanghai Airlines Co. and Shandong Airlines Co. have become new shareholders in Sichuan Airlines Co., with China Southern taking a 39 percent stake and the other two holding 1 percent each. Separately, China Southern has paid 150 million yuan ($18 million) for a 49 percent stake in China Postal Airlines. Beijing-based Postal Airlines is owned by the government’s Postal Bureau, which will retain 51 percent ownership. The small carrier has a monopoly on air postal services in China. China Southern Airlines has taken delivery two Boeing 747-400 Freighters in the last six months.

China Southern Airlines is planning a 4-5 billion yuan share offer.

In July, the CAAC approved plans to offer 200 million A-shares in an initial public offering of Shanghai Airlines on the Shanghai Stock Exchange. The IPO offer is over-subscribed. Founded in 1985, Shanghai Airlines serves more than 100 destinations. It has recently taken delivery of a Raytheon Hawker – 800XP business jet and the airline is reported to have made US$484,000 in its first six months of business jet operations. Other airlines listed on the domestic stock market include China Eastern Airlines, Hainan Airlines and Shandong Airlines.

Cathay Pacific Airways Ltd. has applied to the CAAC for permission to resume flights to mainland China after a 12-year hiatus, stepping up competition with Hong Kong-based Dragonair. This follows Dragonair’s entry in July on to Cathay’s busiest passenger route, Hong Kong-Taipei, and its earlier launch of competing long-haul cargo services. Local press reports say Dragonair plans to apply for rights to other Asian capitals served by Cathay including Bangkok, Manila, Tokyo, Soeul and Sydney. In a formal objection to ATLA, Dragonair has said that the mainland destinations have more than sufficient capacity on the routes and to allow Cathay’s application would result in uneconomical overlapping of services. Although Cathay and its parent Swire Pacific still own 25.5% of Dragonair, mainland-controlled China National Aviation (CNAC) became Dragonair’s biggest shareholder in 1996.

Air Hong Kong has acquired its first Airbus A300 Freighter. Leased from Express Net Airlines it will operate regional services. Earlier this year, Air Hong Kong became a wholly owned subsidiary of Cathay Pacific Airways. In July, Air Hong Kong stopped serving Brussels, Dubai and Manchester and replaced these sectors with Osaka and Seoul. Cathay Pacific is in talks to acquire an additional five to ten A300 Fs for Air Hong Kong.

The CAAC has ordered China Southern Airlines Co. and other carriers based in Shanghai, Guangzhou and Beijing to drop flights to six major Chinese cities (Shenyang, Urumqi, Xian, Chengdu, Kunming and Wuhan). The move which is designed to reduce over capacity follows government approval earlier this year for a plan to stop Chinese carriers based outside Shanghai, Beijing and Guangzhou from flying to these three cities.

Boullioun Aviation Services has leased an Airbus A320 powered by IAE V2527-A5 Engines to Dragonair.

It has been reported that Dragonair intends to invest US$150 million in five regional aircraft to be used to service cities in China which are too small for its fleet of Airbus A320/21s and A330s. Dragonair is due to take delivery of one more passenger aircraft this year and a third Boeing 747-300 freighter.

China Eastern Airlines has placed an order for five Airbus A340-600 long range aircraft which will replace its fleet of McDonnell Douglas MD11 aircraft. China Eastern has also said that it intends to purchase twenty Airbus A320s in a deal worth US$800m.

China Northwest Airlines has secured CAAC approval to acquire ten A320s to replace its ageing BAE Systems BAE146 fleet. China Southwest Airlines has also signed a Letter of Intent to acquire twelve Airbus A319s.

Embraer expects to receive the all clear to sell 25 ERJ planes to China Southern Airlines and Wuhan Airlines.

Bombardier Inc has signed a contract to sell two 70-seat jetliners to Shandong Airlines.

Xian Aircraft Corporation has reported a 33.2% fall in net profits to 45.7 million yuan on sales of 919.6 million yuan.

The Shanghai Aircraft Manufacturing Factory has delivered its 200th Boeing B737 horizontal tail structure and is set to boost the production rate from 10 to 14 sets per month.

China’s Commission of Science, Technology and Industry for National Defence and Russia’s Aircraft and Space Agency have agreed to develop a new generation of civil aircraft but no specific details have been released.

China Aviation Industry Corp II, one of the country’s two main military and civil aviation groups, is planning to list on the Hong Kong stock market, aiming to become the first of the 10 large state-owned military conglomerates to launch an IPO. The company will list all its major civilian business units, but will retain control over core military operations. AVIC II has 81 subsidiaries including 56 manufacturing units and employs 210,000 people. Its civilian operations span auto parts manufacturing, aircraft manufacturing, motorcycles and industrial gas turbines. Meanwhile, AVIC I has set up a dedicated company to develop the proposed ARJ 21, 79 to 99 set regional jet family.

Airbus is considering the relocation of its A320 wing manufacturing assembly plant from the UK to China.

Sikorsky Aircraft and Chinese Shanghai Little Eagle Science and Technology (SLEC) are close to securing Chinese government approval for the launch of a light helicopter manufacturing joint venture. Shanghai Sikorsky Aircraft will be 49% owned by Sikorsky, and will licence-produce the Schweizer 300 three-seat helicopter for the Chinese market.

Harbin Aircraft Industry has obtained Chinese certification for a re-engined version of its Z-9 light twin-turboshaft multi purpose helicopter amid a wrangle with Eurocopter over production rights, Eurocopter having objected to Harbin’s decision to continue producing the Z-9 despite the expiry of the licence-production agreement.

There are fewer than 100 general-purpose helicopters in China, although numbers are expected to grow in the country as helicopter use is gaining momentum. BLG Aerospace acts for a number of helicopter manufacturers and operators in Europe, North America and Asia.

Embraer plans to set up a final assembly factory in Harbin for its 50-seat ERJ145 regional aircraft and its President and Chief Executive Maurice Botelho, has gone on public record to say he expects an agreement for a joint venture with AVIC to be concluded this year.

The Taiwanese government is reconsidering plans to privatise the Aerospace Industrial Development Corporation (AIDC) due to declining confidence by potential investors. AIDC is involved in aero-engine manufacturing, education and training and IT systems and is currently involved in a number of risk sharing ventures including cockpits for Sikorsky S-92 helicopters and empennages for the Bombadier Challenger 300 business jet.

In April the CAAC implemented new procedures to try and eradicate what it regards as illegal discounting of domestic airfares by travel agents. It and 22 domestic airlines signed a no discount agreement covering 113 routes. The CAAC is co-operating with the Ministry of Public Security, the State Administration of Taxation, the State Administration for Industry and Commerce, and the State Development Planning Commission in cracking down on illegal discounting. However, cheap tickets continue to be sold.

China’s travel agencies must provide several new kinds of guarantees for Chinese citizens travelling abroad, under new rules – Management Measures for Chinese Travelling Abroad – introduced in July 2002. They include: providing reliable information about when it is unsafe to travel in certain countries and informing customers of the destination country’s culture, customs and laws; not quoting prices below cost price; not forcing customers to make purchases; and not changing itineraries without permission. Travel agencies must also sign a written contract with customers and sign another contract with any participating overseas travel agency. The law also provides that travel agencies must guarantee the safety of travellers and their luggage.

Boeing is to establish a maintenance facility at Pudong International Airport in partnership with Shanghai Airlines and the Shanghai Airport Group.

Eva Airways of Taiwan is seeking permission to provide maintenance services to mainland carriers.

Air France Industries has opened its second office in China. Based in Beijing and Shanghai, AFI overhauls CFM S6- SC and SF6-80C2 engines for China Eastern and Air China.

Rolls-Royce has signed a 10 year fleet hour agreement with China Eastern covering Trent 500 engines that power the airlines new fleet of five Airbus A340-600s.

On June 18 MTU Zhuhai completed an agreement with IAE International Aero Engines for the repair, modification and testing of IAE V2500 Propulsion Systems, Engines and Modules in China. MTU Zhuhai is a 50/50 joint venture between MTU Aero Engines of Germany and China Southern Airlines and will begin maintenance and repair work on V2500 aircraft engines when its new repair & overhaul shop opens in late 2002.

GAMECO has signed an agreement to retrofit winglets on Boeing aircraft.

SIA Engineering Company has announced plans to purchase 25% of GAMECO. If the deal is approved by both the governments of China and Singapore, SIAEC will own a share in two MRO providers in China as SIAEC currently owns 10% of Taikoo Aircraft Engineering Co.

Snecma Moteurs, the French aerospace engine manufacturer, and Xian Aero Engine (Group) Ltd. (AVIC I) have together celebrated the machining of the 1000th CFM56 engine low pressure turbine disk. Snecma Moteurs has also established close subcontracting ties with 4 other plants over the past twelve years: Shenyang Liming Engine Manufacturing Corporation, Guizhou Xinyi Machinery Factory, Guizhou Liyang Aero-engine Corporation and Beijing Aero-Lever Plant.

SR Technics has said that it will invest in China’s Aircraft Maintenance, Repair and Overhaul industry in the near future.

Shannon Engine Support (SES) has signed a ten year agreement with China Southern Airlines for comprehensive CFM56-7 spares engine support for its Boeing 737-800 fleet. The companies have also signed a five year extension to their original agreement for CFM56-3 Spares Support.

HAECO has reported a 37% rise in net profits to HK$240 million in the first half of this year.

China Postal Airlines and Hainan Airlines plan to acquire used Boeing 737 quick change aircraft to take advantage of the boom in domestic cargo shipments.

China’s economic growth of over 7% over the last ten years and its demographics present an enormous potential for "global integrators". However, as reported in previous editions there are a number of regulatory hurdles, not least access to the small shipments or parcels market which is currently restricted to China Post. In September 2002, the dispute between China Post and foreign firms escalated with China’s Ministry of Information Industry, the Ministry of Foreign Trade and Economic Co-operation and the State Post Bureau giving foreign operators until 4th November to register for an "entrustment" operating licence, or risk losing operating rights. These regulations include prohibiting integrators from carrying personal letters, government and military documents. A detailed clarification of the applicable rules and regulations is long overdue.

Air China is in discussions to sell its Freighter operation to a joint venture owned by CITIC Pacific and Beijing Capital International Airport. The Carrier operates four Boeing 747-200 freighters.

DHL has agreed to purchase 30% of Cathay Pacific Airways’ Air Hong Kong. The companies will invest HK$400 million in the joint venture including HK$100 million on five new freighters. The announcement follows the Hong Kong Airport Authorities decision to grant DHL a franchise to build and operate Asia’s largest express cargo centre. Under a 15 year contract DHL will invest HK$780 million in the project.

According to Press reports Dragonair is considering flying freighters to New York, Chicago, Los Angeles and San Francisco.

Shandong Airlines commenced dedicated freighter operations with two leased Boeing B737-300Fs in May. The company is to open a new logistics facility at Qingdao Airport later this year.

Total logistics (Shenzhen) Co. Ltd. has acquired a 10% shareholding in Shenzhen Airlines for 34.3 million yuan.

Space

China’s new launch vehicle, the Kaituozhe 1 (KT-1) failed on its maiden flight, the second stage having blown up. It is believed that it was carrying an uninsured HSTL 1 satellite.

China is expected to launch a constellation of oceanic satellites to form its own stereoscopic observation system by 2010 to monitor the ocean’s environment. Following the successful launch of the US$24 million dollar HY-1, the first in the series of satellites to monitor the ocean’s colour in mid-May, China plans to place another remote sensing satellite into space in 2004.

On 10th July, a hijacker was sentenced by a court in Shenyang to 15 years imprisonment after he hijacked a China Northern Airlines aircraft on 17th April.

Consumer rights advocates are calling for more judicial support to make the law protecting consumers more effective. The Consumer Protection Law, which was endorsed in October 1993 and took effect in January 1994, offers guidelines, and local regulations supporting the law have provided specific details on how to protect consumers.

Normal court proceedings are considered too lengthy and complicated for ordinary consumers who usually have small claims. China’s Consumer Association would prefer to see consumers’ rights heard under summary proceedings. They are also pressing for courts to accept group actions. China’s Civil Procedure Law has a stipulation on representative action, but it is rarely used in cases involving consumers’ rights. The Association would also like a product recall system to be introduced.

On 25th May, the State Council issued new regulations requiring employers to improve working conditions and compensation for employees for occupational injuries and illnesses.

On 18th June the Supreme People’s Court issued: The Reply of the Supreme People’s Court on the Issues of Whether or Not Judicial Documents for Service on Foreign Companies May Be Served on Representative Offices in China and the Applicability of Service by Leaving the Documents at the Location. The Reply concludes that if the party to be served has established a representative office in China, people’s courts may serve litigation documents on the representative office in China pursuant to the provisions of subparagraph (5) of article 247 of the Civil Procedure Law. They need not effect service abroad pursuant to the Hague Convention on Service of Legal Process.

On 4th July the Supreme People’s Court issued: The Official Reply of the Supreme People’s Court on Whether or Not the Injured Parties in a Product Tort Case Can Make the Product’s Trademark Holder a Defendant in Civil Litigation. The Reply answers a query from the Beijing Municipal Higher People’s Court concerning whether or not trademark holders could be joined as defendants in a product liability action. The case involved a motor vehicle accident where General Motors Corporation, the General Motors Overseas Corporation and the General Motors do Brasil Ltda. were joined as defendants. The court held that any enterprise or individual that puts its or his name, trademark or other distinguishing mark on a product indicating that it or he is the manufacturer of the product is a "manufacturer of the product" as defined in Article 122 of the General Principles of Civil Law of the People’s Republic of China and a "producer" as defined in the Law of the People’s Republic of China on Product Quality and, consequently, all three General Motor companies were valid defendants in the action.