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  • Apr 17, 2014
  • Updated: 11:31am

Big three fly into headwinds

PUBLISHED : Friday, 13 July, 2012, 12:00am
UPDATED : Friday, 13 July, 2012, 12:00am
 

All three big mainland airlines had to brace for headwinds in the first half - from high oil prices, yuan depreciation and slowing traffic.

But there are also hopeful signs for the rest of the year, with domestic passenger numbers starting to pick up towards the end of last month.

Air China and China Eastern Airlines were set to announce profit warnings of more than 50 per cent for the first half, following a similar warning by China Southern Airlines on Tuesday, analysts said.

Oil prices have hit mainland carriers harder because they are exposed to higher jet fuel prices even when prices are going down elsewhere. In the first half, domestic jet fuel prices increased 12.4 per cent year on year while they rose 1.1 per cent on the international market, according to a Citigroup report on Tuesday.

Fuel costs are the biggest operating-cost component for airlines, accounting for nearly 40 per cent of the total. Unlike in Singapore and other international markets, mainland jet fuel prices are controlled by the government and only adjusted on a monthly basis, meaning prices there lag a month behind the international level. This leads to higher costs when prices elsewhere go down.

The yuan depreciation in the first half will also mean exchange losses for the 'big three', compared with the exchange gain in the same period last year. The yuan depreciated 0.9 per cent in the first half against the US dollar compared with an appreciation of 1.9 per cent the same time last year. UBS transport analyst Eric Lin said China Southern was seen to be the worst-hit by yuan depreciation as its debt ratio was the highest of the three. To make matters worse, Lin said, the Guangzhou-based carrier was dollar-short at the operating level as most of its operating costs were denominated in the US dollar while most of its revenue was in yuan.

The mainland's air traffic growth softened in the first half. Domestic passenger growth slowed to 4.7 per cent in May from 5.8 per cent a month earlier while overall passenger growth slid to 5.5 per cent from 6.9 per cent in April.

'The transition period marking the once-in-a-decade change in leadership in Beijing also has a ripple effect on all state-owned companies, which are curbing official trips,' Lin said. 'Traffic in the second half will improve when the transition is complete.'

For the full year, he expects the traffic to grow at 10 per cent, 'given Beijing's aim to achieve economic growth of over 7.5 per cent this year'.

Citigroup also anticipates a gradual recovery in domestic traffic and forecasts it to return to high single-digit growth in the third quarter in light of the uptick in the economy. But the percentage of seats sold, or 'load factor', for domestic traffic is likely to record a slight year-on-year decline due to a high base last year. International traffic growth would remain strong while the load factor would continue to improve, the report said.

Lin, however, takes a conservative view of the international market for the year, given that corporate traffic, the source of business and first-class passengers, has declined amid the European debt crisis.

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