China Eastern inflight service

Loss-making China Eastern airlines could be sounding a warning most of the rest of the world does not want to hear.

It had operating losses of close to $US1 million ($1.15 million) a day in the first half of 2008.

In a statement, the Shanghai-based airline said it faced an ‘extremely complicated operating environment’ in the second half, with ‘increasing uncertainties in the global economy, while the Chinese economy will probably experience a slowdown under the macroeconomic adjustment policy’.

One could excuse China Eastern for being gloomy about the outlook. After all, it narrowly missed out on securing a white-knight investor in Singapore Airlines (SIA) earlier this year, only to be battered by snow storms, earthquakes and Olympics security clampdowns which, by July, had slashed its international passenger traffic by almost a third.

China Eastern concludes that air travel demand is ‘likely to experience a downturn, while pressure from ever-increasing costs is likely to pose a threat to the development of the air transport industry’.

This is the first official indication by a Chinese airline that the much-hoped-for post-Olympics recovery may not materialise. For China Eastern, the next steps could involve a government bailout, domestic consolidation or both. More on this HERE.
Source: The Australian

Chinese airlines' problems

Shares in airlines, once the darling of the market, have plunged dramatically.

Mutual funds sold RMB12.7 billion  ($1.85 billion) worth of airlines shares in the first quarter of this year and dumped another RMB7.3 billion  of shares in the second quarter.

Shares in China Southern Airlines accounted for about 40% and Air China accounted for 48%.

Ma Xiaoli, an analyst with CITIC Securities, said, ‘A weak economy, tightened visa regulations during the Olympic Games and the devastating earthquake in Sichuan Province all dampened demand for air travel, more than we expected/’

Air China handled 2.98 million passengers last month, dropping 6.8% from a year earlier, with the load factor decreasing 8.1% to 73.3%.
China Southern’s passenger volume dropped 2.3% and the load factor slid 1.4% to 75.1%.

Ma Xiaoli said, ‘The third quarter will still be an off-season for the aviation industry, but we expect that the market will recover in the fourth quarter and grow faster next year since some negative effects were one-off.’
Source: Shanghai Daily

Cathay Pacific’s interim result does not make for encouraging reading. Operating profit margin dropped into negative territory in the first half of 2008, compared to a double-digit margin in the full year of 2007.

Cathay’s earnings report stated the big change in the company’s financial performance ‘was entirely due to the relentless rise in the cost of jet fuel in recent months’. Cathay’s non-fuel unit costs also rose 2.4%.

Overall, the airline’s cost base, including fuel, ballooned by a third, against a 22.6% revenue increase.

Cathay’s total fuel bill rose 94% in the first half year-on-year, due to reduced hedging benefits and the airline’s double-digit capacity increases.

Fuel now accounts for 45.3% of total costs.

Chairman Christopher Pratt said, ‘It is inevitable that fares for passengers and shippers will have to rise to reflect the new cost of operation.’
He added that ‘it is difficult to forecast with any degree of accuracy the extent to which these higher fares will reduce demand, but thus far it has remained robust.’
Source: Centre for Pacific Education

Air China and China Eastern Airlines carried fewer passengers in June than a year earlier. The decline in traffic at two of China’s three major airlines extended a drop in May.

Air China, the country’s flag carrier, flew 2.67 million passengers in June, down 7.5% year-on-year.
Volume on international routes down 15.5% while domestic traffic fell 5.3%.
Air China reported a 4.9% slip in cargo volume in June to 74,509 tonnes
China Eastern’s passenger volume fell 11.6% to 2.75 million in June.
China Eastern’s freight volume fell 5.9% to 69,400 tonnes.
International service was down 24.6% and domestic service 9.7%.

The declining volume has compounded headaches from higher fuel prices, which boosted operating costs, and marks a rare reversal for an industry that has been buoyed in recent years by China’s strong economic growth.

China Southern Airlines, China’s largest carrier by fleet size, and Shanghai Airlines have yet to release June figures. Both also reported a slip in passenger numbers in May.

Chinese airlines have also raised domestic jet fuel surcharges as much as 50% to offset pressure from high oil prices and further increases are possible.
Source: Reuters

Chinese airlines said the current increase in jet fuel surcharges was not expected to bring much benefit for them.

CAAC has allowed Chinese airlines to increase surcharges to:

RMB80 (about $11.66) from RMB60 for domestic flights of 800 km or less.
RMB150 (about $22) for domestic flights longer than 800 km.

This was the fourth time that the Chinese aviation regulator has raised surcharges since August, 2005, and the second time within eight months.

Luo Zhuping, a director of China Eastern, one of the country’s major carriers, was quoted by the Guangzhou Daily as saying, ‘There is not sufficient air traffic demand now. Despite the rise in fuel surcharges, airlines will have to make more discounts in order to compete for passengers.’

Wen Shuang, of a tourism company based in South China’s Guangdong Province, said the increase in jet fuel surcharges was not expected to cause notable fluctuations to air ticket prices for tourists. He said, ‘The fuel surcharges rise, but air tickets are declining.‘

Liu Shaoyong, chairman of China Southern Airlines, noted that jet fuel costs account for more than 40% of China Southern’s total cost.

The airlines’ operation cost increased by RMB15 billion a year because of oil price rises.
Source: China View