Carriers fear higher surcharges will further dampen demand

PUBLISHED : Saturday, 21 June, 2008, 12:00am
UPDATED : Saturday, 21 June, 2008, 12:00am

The drastic increase in domestic jet fuel prices has put mainland airlines in a dilemma - they are requesting to raise fuel surcharges but fear this will dampen weak travel demand.

The 25 per cent jet fuel increase or 1,500 yuan (HK$1,702) per tonne means a jump of about 2.3 billion yuan in China Southern Airlines' bill annually and as much as 1.2 billion yuan for China Eastern Airlines. The impact on Air China, which buys only 50 per cent of its jet fuel domestically, will be less. China Southern buys 80 per cent of its fuel on the mainland, while China Eastern sources 70 per cent locally.

When Beijing raised jet fuel prices to about 7,450 yuan per tonne - fuel accounts for more than 40 per cent of airline costs - it did not subsequently adjust the fuel surcharge airlines can charge customers. Transport analysts think Beijing will increase the surcharges so that airlines can cover 70 per cent to 80 per cent of the cost increase, but some airlines are starting to have second thoughts about the surcharges.

'[The fuel surcharge] is a double-edged sword,' said Luo Zhuping, director of China Eastern. It will help cover higher costs but also 'it will suppress travel demand'.

Mr Luo's worry is valid at a time when mainland air traffic growth is softening. Last month, passenger traffic on China Eastern dropped more than 8 per cent year on year, while its bigger rival, Air China, flew almost 11 per cent fewer passengers.

China Southern, the only carrier of the big three to have the same passenger numbers last month, saw a 1 percentage point drop in the percentage of seats sold. To cut costs, China Eastern said it would trim service.

'We will decrease international routes on a daily basis since long-haul routes are hit hard by oil prices,' Mr Luo said. China Southern also said last week that it would cut some international service as it was starting to drain cash.

Meanwhile, the airlines are seeking an increase in fuel surcharges. They were preparing a joint letter to Beijing, said China Southern company secretary Su Liang yesterday, though the amount was not specified. China Southern tumbled 6.3 per cent to HK$3.44 yesterday while Air China fell 5.1 per cent to HK$4.49.

China Eastern rebounded 1.1 per cent to HK$2.64. It has dropped 66 per cent this year. After the adjustment, domestic jet fuel prices still lag behind international prices by about 700 yuan per tonne.