Recovery of carriers fragile amid price war and overcapacity
Mainland airlines returned to the black in the first quarter, a reversal from the hefty losses of last year, but their underlying profit was still battered by price wars and overcapacity and failed to demonstrate any real recovery.
Air China was the first to report a turnaround, posting net profit of 981.21 million yuan (HK$1.11 billion), 5.68 per cent below the same period last year. China Southern Airlines and China Eastern Airlines Corp also reported profits, but the 80.98 per cent dive at China Eastern and the 71.32 per cent drop at China Southern compared with the first quarter of last year cast doubt on the recovery of the mainland airline industry.
The substantial drop in the revenues for all three indicated profitability was still at risk.
Revenue at Air China, the best performer among the three, fell 11.82 per cent in the first quarter, implying that passenger yields fell about 15 per cent year on year. Passenger yield refers to the average fare paid per mile per passenger, which reflects fare changes and gauges the profitability of an airline.
'The elimination of domestic fuel surcharges, overcapacity in the domestic market and the challenging global economic environment lead us to expect a similar decline for the full year,' a UBS report said.
Sales at China Eastern declined 15.6 per cent year on year in the first quarter, while China Southern's revenue dropped 9.4 per cent - both resulting in lower passenger yields.
The decline in passenger yield, combined with a substantial decrease in exchange gains, led to 850.36 million yuan in operating losses at China Eastern, compared with a 139.9 million yuan operating profit a year earlier. China Southern also recorded 692 million yuan in operating losses, as opposed to an 843 million yuan profit.
As part of the mainland's stimulus plan, airlines have been given a rebate from the infrastructure development fund into which they normally pay. The refund by the Civil Aviation Administration of China is considered a remedy in the absence of exchange gains for the carriers.
As a result, China Eastern and China Southern remained profitable in the quarter. In the first quarter, China Southern received a 1.1 billion yuan refund, while China Eastern got 877.2 million yuan.
Air China, which managed to post a 255.5 million operating profit in the quarter, also received 676.3 million yuan in government grants. In addition, it also posted a net gain of 44.5 million yuan when a 992.3 million yuan write-back on fuel hedging exceeded 947.8 million yuan in losses from the fuel contracts.
After being badly hit by the Sichuan earthquake, traffic restrictions before the Olympics and substantial losses in its oil hedging contracts amid high oil prices last year, Air China was set to regain its position as the most profitable carrier, a recent Nomura report said.
Sales dive
The Big Three carriers saw their revenues fall in the first quarter
Air China was the best performer, even though its turnover dropped: 11.8%
