Air China

Weak passenger revenues could offset fuel cost savings at Big Three airlines

Lower fuel costs fail to offset higher tax and decline in travel demand at mainland airlines

PUBLISHED : Friday, 21 March, 2014, 10:47am
UPDATED : Saturday, 22 March, 2014, 12:35am

Weak passenger yields last year could weigh on earnings at the mainland's Big Three airlines, with China Southern Airlines and Air China expected to report a drop in net profit despite benefiting from lower prices of jet fuel.

Together with China Eastern Airlines, they are scheduled to report their final results next week.

Lower fuel costs failed to offset the drop in revenue per passenger mile, which stemmed from a tax reform last summer and a decline in demand for seats in the front end of the cabin.

The shift to a higher value-added tax from the general sales tax trimmed airlines' top line.

Mainland officials also cut their travel budgets to comply with the anti-extravagance campaign launched by Beijing more than a year ago, hurting demand for first- and business-class tickets.

Net profit at Beijing-based Air China, which will announce its results on Tuesday, could slip 3 per cent to 4.47 billion yuan (HK$5.6 billion), while Guangzhou-based China Southern could report a 36 per cent slump to 2.35 billion yuan on Friday, according to the consensus of analysts polled by Bloomberg.

However, Shanghai-based China Eastern is expected to post on Wednesday a 5 per cent increase in net earnings to 2.94 billion yuan.

China Eastern likely outperformed its rivals because of an improvement in demand for travel between China and Japan last year, analysts said.

Traffic on those routes slumped more than 40 per cent in 2012 owing to a conflict between the two countries over disputed islands in the East China Sea.

Still, the drop in fuel prices helped cut the operating costs of the airlines. Domestic jet fuel prices fell to an average of 7,465 yuan per tonne in December from 7,812 yuan in January 2013, Air China said.

Fuel is the single largest cost for the carriers and accounts for more than 40 per cent of their operating costs.

Growth in passenger numbers at the Big Three slowed to single-digit percentages last year. China Southern flew 91.8 million passengers, a 6.1 per cent increase, while Air China's passenger volume rose 7.3 per cent to 77.6 million.

Looking ahead, the widening of the trading band for the yuan against the US dollar could threaten the airlines' earnings for this year as the yuan is expected to be allowed to fall more steeply in the near term.

The Big Three all have US dollar-denominated loans and could incur exchange losses from a weakening yuan.

Analysts said the worsening smog on the mainland could also affect their business in the near term.