July 1, 2008 From www.china5e.com
(July 1)--China's previously buoyant airline industry faces a grim outlook because of ever-rising oil prices and slowing market demand.
The record-shattering oil prices are eating into Chinese airlines' profits and are likely to swing some into the red this year as aviation fuel accounts for over 40 percent of their total costs.
The situation is exacerbated by a weakening market demand due to a slowing global economy, rising inflation and natural disasters such as the recent earthquake.
The National Development and Reform Commission (NDRC) recently raised domestic jet fuel prices by 1,500 yuan per ton, or 25 percent.
The price rise would result in a 25.2 percent drop in Air China's earnings per share (EPS) and a 45 percent fall in China Southern Airlines' EPS, while China Eastern would swing into loss, said Ma Xiaoli, an analyst with CITIC Securities.
The NDRC said it will allow Chinese airlines to raise fuel surcharges on domestic flights by as much as 50 percent from July 1.
The levy on journeys of more than 800 km will climb from 100 yuan to 150 yuan. That on shorter flights will rise from 60 yuan to 80 yuan.
"The rise in jet fuel surcharge would help airlines offset the rising oil prices. But it could also dampen an already weakening market demand. Any dramatic improvement in the airline industry in the second half of this year will be hard," said Song Weiya, an analyst with Great Wall Securities. The Shenzhen-based brokerage reiterated its "neutral" ratings for the airline industry.
A CITIC Securities report showed passenger volume of Chinese airlines in May dropped 1.1 percent compared with the same period of last year while occupancy rate dropped 2.8 percent year-on-year, rare in the country's fast-growing aviation industry.
China Eastern's passenger numbers dropped 8.11 percent in May from a year earlier and were down 10.2 percent compared with April. Its chairman Li Fenghua yesterday said the airline should face no major problems achieving a net profit in the first half of this year, but full-year profit would be hard to estimate at present.
Air China's traffic on domestic and international routes decreased 8.8 percent and 3 percent respectively in May compared with the same period of last year. The carrier attributed the drop to the slowing economic development combined with the negative impact of the recent earthquake.
China Southern Chairman Liu Shaoyong last week said 2008 and the first six months of next year would be the most difficult period for the airline industry. "The thawing season would probably start in the middle of next year," Liu said.
Positive news such as the opening of direct flights between the mainland and Taiwan may not have a significant impact on airlines' earnings in the near term, according to a Citigroup report.
Cross-Straits weekend chartered flights will start this week. Six mainland carriers will operate the services. Taiwan will allow an average of 3,000 mainland tourists a day. That number is small compared with the big three airlines' annual passenger numbers of about 130 million, the report said.
(Editor: Haijing Qu)
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