Privatization Crash for a High-Flying Airline

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(Caixin Online) Five years ago, a little-known businessman named Li Zeyuan burst into the major airline business by outbidding China's flag carrier for a 65 percent stake in Shenzhen Airlines Co. Ltd.

Air China had offered a respectable 1.8 billion yuan for the stake being sold by Guangdong Development Bank. But Li's Shenzhen Huirun Investment Co. trounced the nation's flagship carrier with a winning bid of 2.7 billion yuan.

The deal, with money Li borrowed from New China Life Insurance,  set a new record for a privatization of state-owned assets.

Li catapulted to fame. But the private takeover tormented state-owned Air China, Shenzhen Airlines' No. 2 stakeholder with a 25 percent share. No less disappointed was the main government shareholder, the Shenzhen Municipality.

Since November, though, the tables have turned. Li as well as former Shenzhen Airlines President Li Kun have been jailed on suspicion of financial fraud. In addition, Li's friend and former head of New China Life, Guan Guoliang, has stood trial.

And the once red-faced Air China has taken over the cockpit after agreeing to inject 682 million yuan into Shenzhen Airlines and raising its stake to a controlling 51 percent.

Air China announced the takeover March 21 following talks with the Shenzhen government and remaining officers at Huirun who, following the arrests, accepted a share dilution plan cutting the private investor's stake to 24 percent. City officials, meanwhile, agreed that city-controlled Total Logistics (Shenzhen) Co. would inject 348 million yuan to boost its stake to 25 percent from 10 percent.

As the dust settles, Air China is finally getting what it sought before Li got in the way: A better grip on a lucrative airline market in rapidly growing southeastern China.

Fast Takeoff

Li oversaw a rapid expansion at Shenzhen Airlines, which is now China's fifth-largest carrier and flies more than 200 domestic and international routes. After the privatization, company assets climbed to 24 billion yuan from 4.4 billion yuan, and the fleet grew to 134 aircraft from a mere 27.

Shenzhen Airlines also went on a hiring spree under Li, raising employment to more than 14,000 today from just 4,000 in 2006.

The expansion started immediately after Li outbid Air China with his ambitious "Plan 369," which called for building the fleet to 100 aircraft and linking 10 hubs in six years. The goal was to build Shenzhen Airlines into a first-class, international carrier by 2015.