Flight curbs in China could hurt airlines, drive airfares up, analysts say

Mainland airlines expected to be hit hard by traffic controls that may cut services by 25 per cent over three weeks

PUBLISHED : Wednesday, 23 July, 2014, 1:48pm
UPDATED : Thursday, 24 July, 2014, 4:53am

Investors are demanding clarity on potentially sweeping air traffic restrictions on the mainland that could cut flights to major airports in the east by a quarter for up to three weeks.

Aviation industry experts believe airfare rises of as much as 10 per cent could be needed to compensate for the lost income, a sufficiently large bite to trigger disclosure statements to stock exchanges.

No such statement has been issued so far, despite heavy cancellations - which the media say have been caused by major military exercises - that have cut about 10 per cent of flights to and from Shanghai since Monday.

Investors were first rattled by a microblog post from China Central Television's finance channel that 12 airports, including two in Shanghai, would be subject to air traffic control for 26 days that would require airlines to reduce relevant flights by 25 per cent.

The post was deleted within hours but not before it had been widely reported by other state media, which triggered market speculation that a massive military exercise was the source of flight disruption.

We expect the overall earnings impact [on the airlines] to be neutral

"It is unprecedented for mainland authorities to announce in advance an air traffic restriction and for so long, if it is until August 15," Kelvin Lau, the head of transport and industrial research at Daiwa Securities, told the South China Morning Post.

A reduction of 25 per cent in flights to eastern China for three weeks in the busy summer holiday season would erode airlines' revenues, Lau said.

Mainland airlines have been hit hard by the biggest fall in the yuan for a six-month period since the peg to the US dollar was broken in 2005.

The Big Three state-owned airlines - Air China, China Southern Airlines and China Eastern Airlines - have all issued profit warnings before their interim results due next month.

Air China is expecting first-half profit to shrink by as much as 65 per cent from last year's 1.1 billion yuan (HK$1.37 million), while China Southern is expecting a net loss of 900 million to 1.1 billion yuan for the same period. China Eastern said its profit would be less than 50 million yuan.

Patrick Xu, an analyst at Barclays, estimated that a 10 per cent increase in ticket prices would be needed to compensate for the reduction in flights. "We expect the overall earnings impact to be neutral, as an increase in yield will offset, at least partially, the capacity cut," he said.

It remains unclear whether the restrictions will be in place from July 20 to August 15, or just from July 27 to August 2.

A message circulating on social media websites cited a plan at a Civil Aviation Administration of China meeting on Monday to order the flight reductions at airports including Shanghai Hongqiao, Shanghai Pudong; Lianyungang, Nanjing and Wuxi in Jiangsu province; Hangzhou and Ningbo in Zhejiang province; Hefei in Anhui; Jinan and Qingdao in Shandong; Zhengzhou in Henan; and Wuhan in Hubei - but only for the week to August 2.

The state-run Global Times newspaper ran a commentary yesterday praising the authorities for the advance warning.

A CAAC spokeswoman contacted by the Post denied any such orders had been issued.

Air traffic restrictions are frequent on the mainland, where only 20 per cent of airspace is open for civil aviation. The rest is tightly controlled by the military. Shanghai airspace falls under the jurisdiction of the Nanjing Military Command.

A total of 299 flights at Shanghai's two airports were cancelled on Monday and Tuesday, according to the Post's calculations of flight status announcements on the website for both airports.

Hong Kong's Airport Authority and Cathay Pacific Airways said they had received no notices of upcoming air traffic restrictions.

Hong Kong Airlines, which posted on its Weibo account on Tuesday afternoon that it expects all its flights to Shanghai to be "affected by air traffic restrictions … from now until further notice", said yesterday it had no plans to cut flights.

China Eastern could not be reached for comment.