For mainland carriers bleeding red ink, small savings can add up

PUBLISHED : Friday, 19 May, 2006, 12:00am
UPDATED : Friday, 19 May, 2006, 12:00am

The balance sheets of China's main airlines have not been a pretty sight recently, particularly outside Beijing where Air China is headquartered.

China Eastern Airlines and China Southern Airlines combined to lose 1.62 billion yuan in the first three months of operations this year - an average of 18 million yuan a day - adding to debt ratios that are among the highest in the industry.

They lost money on just about every seat they sold.

Granted they may have front-loaded some of their anticipated asset depreciations this year to get the worst over with but with gearings for the Hong Kong-listed entities at 639 per cent and 457 per cent, respectively, their shareholders must cringe at the prospect of further capital expenditure, even in the pursuit of growth.

The market has certainly punished their performances. The value of shares in China Eastern has fallen 5.74 per cent and China Southern 4.6 per cent so far this year while the H-share index to which they belong has risen 31.51 per cent.

And there is little relief in sight. You have to wonder at which markets China Southern will point its five 550-seat A380s when they start arriving in 2008. With the mainland airlines' directional imbalances on international routes, it may take a long time for that investment to come good.

Some capital outlays, however, promise quicker returns.

China has been slower than its regional rivals to adopt global e-commerce initiatives as the aviation industry looks to shed US$6.8 billion in annual operating costs before the end of the decade, according to the International Air Transport Association (Iata). But there are signs they are beginning to embrace the value that is wrapped up in a transition to a paperless environment.

March data released by Iata, which is globally co-ordinating the transition, indicated 49 per cent of the world's air travel tickets were issued electronically, while in North Asia 'e-tickets' had reached 27 per cent of the market and just 24 per cent in China. A year ago just 4.5 per cent of airline tickets in China were issued electronically. The goal is for 70 per cent global penetration by the end of the year.

'The latest statistics may show that North Asia is still comparatively behind but the acceleration upwards is faster than any other region,' said Brian Wilson, project director for Iata's e-ticketing initiative, told Hong Kong delegates this week. 'I have absolutely no doubt that it will probably overtake the rest of the Asia-Pacific region in the next two to three months.'

Iata says a full conversion to paperless tickets will save US$3 billion a year. The Asia-Pacific region was already 42 per cent compliant in March, whereas the Americas were 66 per cent paperless and Europe 63 per cent. The association hopes the rate at which China's airlines and service providers adopt the paperless ticket will be enhanced by the virtual monopoly on ticket distribution on the mainland.

With the exception of China Southern, all mainland carriers use the state-owned TravelSky to issue and distribute their tickets.

The carriers are reluctant to disclose how much they will spend to become paperless: Iata also has four other ecommerce initiatives on the go, ranging from self-serve check-in kiosks to paperless cargo processes.

But estimates for the e-ticketing outlay range from 'several tens of thousands of US dollars to several million', depending in part on whether the individual carrier has its own ticket distribution system or relies on a third-party provider such as TravelSky.

In other words, the transition will be more expensive for China Southern than for China Eastern.

But there are at least two very strong incentives for even the most indebted China carrier to embrace e-ticketing. Iata says paper tickets on average cost US$10 each to process; their electronic equivalent costs US$1. Moreover, the number of Chinese travelling to international destinations alone is expected to roughly quintuple to 100 million by 2020.

'The upgrade cost technologically for Chinese airlines should be pretty low. As a result, I would expect a pretty fast return,' Mr Wilson said. 'I would expect [the investment] will be paying back in under a year, which I am sure their shareholders would be very happy with.'

It may be the most profitable investment they have made for some time.