China’s airlines hit turbulence

As oil prices rise, making money is no longer the name of the game in the aviation sector; rather the race is to see who can lose the least.
That could probably be the case for the Chinese mainland’s three largest carriers, who are set to post their first-half results in August.

According to six Hong Kong-based analysts surveyed by China Daily, China Southern Airlines and China Eastern Airlines are not likely to go into the black. The median prediction is that they would post HK$1 billion (US$128.6 million) and HK$502 million in losses for the first half of the year. The figures represent a 3.6 per cent and 6.7 per cent increase year-on-year, respectively.

The mainland’s largest carrier by market value, Air China (SEHK:0753), would be the only survivor, with its many international routes helping offset part of the fuel cost and make profit.

Analysts put its first-half net profit estimate at HK$630 million, down 2.6 per cent from a year ago.

And one analyst said Air China would have a “tendency” to fall into the red if it didn’t trim its cost efficiently, although that possibility remained very slight.


“With the oil price hovering at a high level, they have little room to manoeuvre,” said an aviation analyst at Hong Kong’s Tai Fook Securities, who spoke on condition of anonymity.

International oil prices experienced two major hikes in the first half of the year and reached a peak of US$78 a barrel this month.

Oil accounts for one-third of airlines’ total operating costs, and mainland airlines find it difficult to pass the cost on to passengers due to fierce competition.

Moreover, the three airlines’ aggressive purchases of new planes would also tighten their bottom line, said Andes Cheng, associate director at South China Brokerage Ltd in Hong Kong.

Air China spent about 5.24 billion yuan (US$657 million) buying 10 Boeing 737s and Boeing 800s in February. China Southern Airlines in June announced it would purchase 50 Airbus A320s for 26.5 billion yuan.

“Their gearing ratio has already been high, the buying spree might hurt their cash flow,” Cheng said.

He doubted the necessity of the deals, saying the expansion of fleets seems overdone compared with the annual passenger traffic growth of 16.5 per cent from 1990 to 2004.

The three airlines had 753 aircraft in operation at the end of March.

Given the large purchases and high oil prices, the airlines’ balance sheets depend on whether they have successfully trimmed operating costs in other areas, according to the Tai Fook Securities analyst.

China Southern and China Eastern, for example, count on the synergy from their restructuring of assets acquired in the past two years.

China Eastern acquired China Xi Bei Airlines and Yunan Airlines in 2005, while China Southern got Xinjiang Airlines from its parent company in 2004.

Air China’s performance will largely depend on its profit from long-haul flights, which are more fuel cost-efficient than domestic routes. It now flies to nearly 40 overseas destinations.

For the remainder of the year, life could be even harder for the trio. Apart from oil prices, increased competition is also expected to be a factor.