The ownership of the company has also plagued the airlines since its inception. East Star Airlines is jointly owned by a travel agency, a tourism investment company and a real estate firm, all of which belong to East Star Group, but none having previous experience in the aviation market.

A standing joke remains among the staff of East Star Airlines from the air carrier's first few months. While preparing to negotiate with General Electric's aircraft leasing arm, GE Commercial Aviation Services, the negotiation team led by the airlines' senior managers was composed of all managers from the East Star Group's tourist company. Since the tourist managers had no experience with aircraft or air transportation, the negotiations could not continue and the airlines had to seek help from Hong Kong lawyers.

"The bankruptcy of East Star Airlines reflects many problems. First is the funding and managing capability of private airlines. Without strong economic capability and professional background and just with a license and the attitude of one-off deal, it will be hard to operate private airlines sustainably," Zhang said.

Private problems

The reasons that led to the bankruptcy of East Star Airlines, including a shortage of cash, also exist in other private airlines.

In 2005, China issued the Provisions on Domestic Investments in the Civil Aviation Industry, encouraging private investors to enter the aviation industry for the first time. Many private airlines took to the air after that. Within two years, more than 10 private and joint venture airlines were established on the Chinese mainland, including the comparatively large Okay Airways, United Eagle Airlines, East Star Airlines and Spring Airlines.

But now, East Star Airlines has gone bankrupt, United Eagle Airlines has been acquired by state-owned Sichuan Airlines, and most of the other private airlines are trying hard to remain in the sky. Okay Airways was ordered to suspend flights in December 2008 by the government. Although it resumed operations later, the company was deeply drained of resources, with some people worrying that it may follow the fate of East Star Airlines.

Zhou Minliang, a research fellow with the Institute of Industrial Economics of the Chinese Academy of Social Sciences, said that in a general view of China's private airlines, squeezed by the country's three major state-owned carriers, namely Air China, China Southern Airlines and China Eastern Airlines, most of the private airlines are flying secondary air routes and to remote cities. As a result, the source of passengers is unstable, leading to difficulties in their development.

Also facing inadequate cash flow, state-owned airlines can get huge capital injection from the government, while private airlines have no other options than to go bankrupt. In the past year, affected by the global financial crisis, state-owned airlines suffered serious losses, but they received government assistance exceeding 12 billion yuan ($1.76 billion). Private airlines were not so fortunate.

In a fully monopolized market, Zhou said, it is easy to understand that state-owned enterprises should receive government subsidies or capital injections. But on a market with multiple participants, the market functions properly only when the participants are in fair competition. "Under present circumstances, what are the grounds for the government to inject investment to state-owned airlines? Did such investment injection hurt the right to fair competition by other companies on the market? Why did the government not inject investment to private airlines?" Zhou said.

The differential treatment extends further than just subsidies and government financial assistance, as private and state-owned air carriers face different payment options in refueling and airport-related affairs. With the back-up of government credit, state-owned airlines are allowed to delay related payments by aviation oil companies and airports, but private airlines are not privileged to such treatment.

Solutions

Xie Li, professor at the Department of Economic Management of the Civil Aviation Management Institute of China, said that compared to state-owned airlines, private airlines have their advantages. Flexible mechanisms and fast responses to the market, in addition to their ability to establish different flight routes on new markets, allow private airlines to adapt quickly to the changing economic situation. With many branches and subsidiaries, state-owned airlines require many proceedings to make a decision. When the decision is finally made, the market may have already changed.

The financial crisis has left private airlines looking for opportunities to remain in flight. Xie thinks that the air carriers should first properly position themselves on the market. Since private airlines are small in scale, it is impossible for them to directly compete with large state-owned carriers. They should avoid the strong points of large state-owned airlines and find the markets that are often neglected by large airlines.

According to Xie, the civil aviation industry is flying against the jet stream. The government should focus more on formulating policies to support the survival and development of private airlines, while continuing to create a market environment for fair competition and eliminating discrimination against private airlines in aspects such as resource allocation.

To the private airlines' relief, the Chinese Government has been aware of the present difficulties facing private companies. Li Rongrong, Chairman of the State-Owned Assets Supervision and Administration Commission under the State Council, said on September 5 that in the future, state-owned enterprises will gradually cease operations in competitive sectors, allowing private companies to have more space for development. Moreover, the State Council is deliberating the 20 Measures to Encourage Private Investment to support the development of private companies, including efforts to improve financial service to private companies and relieve the tax burden of private companies, in which private airlines are incorporated.