Fog, Murky Ownership and a Deadly Air Crash

(Beijing) - Regional carrier Henan Airlines was relatively unknown before one of its passenger jets crashed on a foggy evening in northern China, killing 42 people and injuring 54, including a central government vice minister.

But since the August 24 disaster, in which an Embraer E-190 jet broke in two while approaching for a landing at Lindu airport in Yichun, Heilongjiang Province, Henan Airlines has become a household name in China.

One reason is the crash ended a remarkable record of safe air travel among domestic airlines, which had flown nearly six years without a major accident. No fatal incident had occurred since a China Eastern Airlines crash in November 2004 in Baotou, Inner Mongolia Autonomous Region, that killed all 53 aboard and two on the ground.

But Henan Airlines also became famous overnight because the crash immediately raised questions about recent changes in its ownership structure and several financial maneuvers – some tied to a case of high-level corruption – that may have indirectly affected operations and flight decisions.

The Zhengzhou-based carrier was called Kunpeng Airlines before changing its name in January to reflect the involvement of a new stakeholder, the Henan Province government. Another change in recent months was its takeover by Air China after two, top executives for its former majority stakeholder Shenzhen Airlines were convicted of financial fraud.

Air China acquired a majority stake in Shenzhen Airlines and its subsidiaries, including Henan Airlines, in 2009. Caixin also learned that U.S.-based Mesa Airlines held a 25 percent stake in Kunpeng when it was launched in 2006. At one time, Kunpeng hoped to become China's largest regional airline.

Shenzhen Airlines and Henan's government formed a partnership in July 2008 before moving Kunpeng's base to Xinzheng airport in Zhengzhou. The province invested 1.4 billion yuan to expand the airport in 2007 in hopes of making it a regional hub and logistics center.

This year's stakeholder shakeup for the renamed regional carrier also stems from the global financial crisis, which prompted some local governments and state-owned airlines to begin snapping up small, private carriers starting in 2008.

Moreover, Henan Airlines apparently was flying the ill-fated plane on a route between Harbin and Yichun as part of an agreement with Heilongjiang Province. The provincial government is one of many across China that arranges regional flight service through airport groups which, in turn, contract with small airlines.

Two days before the crash, at a meeting underscoring their financial relationship with an ironic portent, Air China and Shenzhen Airlines managers sat down to discuss plans for providing compensation and support for relatives of victims in the event of a crash.

Night Risks

An investigation into the exact cause of the crash has yet to be completed. It's unknown whether the Brazilian-made airliner had any mechanical or technical flaws. But weather, airport conditions and-or pilot error may have contributed to the tragedy.
 
Before the crash forced a grounding of all its planes, Henan Airlines was one of only two airlines routes to Yichun from Harbin. The other, China Southern Airlines, had decided against night flights because its pilots deemed the airport unsafe at night.

China Southern's inaugural flight took off August 27, 2009, and was piloted by Song Xiaochun. He told Caixin the airport's surrounding, hilly terrain as well as weather conditions, a short runway and other factors prompted China Southern to raise its standards for take-offs and landings at Yichun.

China Southern specified that annually after September 1, flights to Yichun could not run at night. One aviation expert said many airports in China's northeast similarly end night take-offs and landings around that date because of changing temperatures after sundown and fog that tends to build in the evening, resulting in poor visibility.

Song, who has more than a decade of flying experience, said several factors work against Yichun night flights. For example, navigation lights in the area are insufficient without an instrument landing system. Pilots can easily make visual errors, he said, judging heights and distances inaccurately.

The jet struck ground on a hill near the airport runway, broke in two and exploded into flames. Most casualties were at the rear of the cabin.

Ninety-one passengers, including five children, were aboard along with a crew of five. Passengers included several officials from the Ministry of Human Resources and Social Security -- six division chiefs and Vice Minister Sun Baoshu who, at last word, was in critical condition. Only two crew members, including the captain, survived.

Two black boxes were found in the wreckage and sent to Beijing aviation experts for decoding.

Regional Deals
 
China's big airlines often avoid regional routes, considering them unprofitable. But many local governments have shown enthusiasm for special deals with regional airlines that can pick up the slack and provide flight services key to the development of tourism and other industries.

Airport groups may pay a regional airline basic fee to help it break even on certain, low-revenue flights. If a flight becomes profitable, gains are divided among airport group members.

Heilongjiang government-connected airline operations fly routes between the provincial capital Harbin and the cities of Jiamusi, Mudanjiang, Jixi, Mohe and Yichun using Henan Airlines and E-190 aircraft.

Henan Airlines started an evening-time, Harbin-Yichun route as part of a promotion of the region by the Heilongjiang government. The route had been used only seven times before the crash.

Other Tests

Henan Airlines was under the wing of Shenzhen Airlines in 2009 when company executive Li Zeyuan was charged with embezzlement. The parent's debt-to-asset ratio soared to 87 percent in 2007, 96 percent in 2008 and 96.5 percent in 2009, above the international average of 60 percent and major Chinese airlines.

Trouble spread to its subsidiary Henan Airlines even before Air China got involved. And as of August, the Henan carrier was operating only nine aircraft and reported registered capital of 100 million yuan.

Shenzhen Airlines, with a dried up capital chain, was unable to offer help with new routes or regional expansions. And for years, it faced major competitive challenges as a private airline, one of many in China squeezed by intense competition against state-owned giants.

The Civil Aviation Authority relaxed the threshold for private carriers in 2004, opening doors at least 20 companies including startups Okay Airlines, East Star Airlines and United Eagle Airlines. But each had difficulty competing for top routes and time slots against state-owned airlines.

Additionally, private airlines have a hard time competing with state-owned counterparts in financial strength, affecting their abilities to raise cash for jet fuel payments and pay airport fees. Pilot shortages, staff training hurdles and stakeholder instability also affect private airlines.

Now that Shenzhen Airlines and Henan Airlines are controlled by state-owned Air China, the competitive pressure has largely evaporated. But new challenges in the aftermath of the Yichun crash are likely to linger for a long time.

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