Airlines cleared to raise fuel levy by up to 50pc

PUBLISHED : Tuesday, 01 July, 2008, 12:00am
UPDATED : Tuesday, 01 July, 2008, 12:00am

Mainland airlines have won regulatory approval to raise fuel surcharges by as much as 50 per cent, the first adjustment of the levy on domestic flights this year, after Beijing announced the biggest increase in jet fuel prices 10 days ago.

Fuel surcharges would be raised from today by 50 yuan (HK$57) to 150 yuan on flights longer than 800km while that on shorter flights would be increased by 20 yuan to 80 yuan, China News said, citing a joint document by the Civil Aviation Administration of China and the National Development Reform Commission.

The surcharges could only cover about 66 per cent of the increase in fuel cost for mainland airlines, said Kelvin Lau, a transport analyst for Daiwa Institute of Research.

Mr Lau maintained his earnings forecasts for Air China, China Southern Airlines and China Eastern Airlines Corp.

Beijing has been wary of raising jet fuel prices and adding surcharges on air fares because of rising inflation.

But record oil prices, which have hurt earnings at refiners, forced the government to raise the tightly controlled fuel prices last month, which in turn will hurt the struggling airline industry.

To ease the burden on airlines, the surcharge on international routes was raised by 33 per cent.

'The rises in surcharge were a result of negotiations between the regulators and the Big Three airlines,' said China Eastern Airlines director Lou Zhu-ping yesterday.

Although the increase could help offset rising fuel costs, it would also dampen demand, Mr Lou said.

China Eastern's passenger volume dropped more than 8 per cent in May from a year ago, while its bigger rival, Air China, flew almost 11 per cent fewer passengers. China Southern saw a 1 per cent drop in seats sold.

Even after the surcharge adjustment, domestic jet fuel prices are still 700 yuan per tonne lower than international prices, suggesting there is room for further increases.

Airlines around the world have been struggling in the first half amid rising fuel costs, which account for more than 40 per cent of total expenses, and softening demand. More than 24 airlines have folded over the past six months.

The air transport industry has forecast a loss of US$2.3 billion this year from a US$5.6 billion profit last year if the crude oil price averages US$107 a barrel.

Oil prices rose to about US$143 a barrel yesterday.

Mr Lau said that as mainland airlines benefited from the yuan's appreciation, which means a lower value in their US dollar debts, the Big Three carriers could remain profitable this year.

The yuan has appreciated more than 6 per cent against the dollar this year after gaining more than 4 per cent for the whole of last year.