Blue skies at home fuel China's airlines

Strong domestic demand helped China's carriers weather turbulence from the global financial turmoil better than their regional peers.

China Southern Airlines, which sees 80 per cent of its revenues generated on domestic routes, yesterday posted a 33.3 per cent increase in first-half net profit to 2.76 billion yuan (HK$3.37 billion).

Sales rose 22 per cent to 42.4 billion yuan, of which 92 per cent was from its passenger division. Passenger yield, which measures profitability per passenger per kilometre flown, rose 10 per cent year on year to 0.66 yuan. Passenger numbers rose 6.1 per cent year on year to 38.4 million.

Cargo revenue, which accounted for 6.7 per cent of total sales, increased 13 per cent to 2.8 billion yuan. Cargo yield, however, dropped 8.4 per cent year on year, reflecting softening demand caused by financial market turmoil. China Southern moved 536,340 tonnes of cargo in the first half, up 4.8 per cent.

Shares in the carrier rose 3.7 per cent to HK$5.37 yesterday.

The mainland's largest carrier projected that international air traffic would continue to grow, but more slowly than the domestic market.

'The uncertainties in the global economy are looming, though the market outlook for the domestic market still remains pleasant,' the company said.

Beijing-based carrier Air China said net profit fell 12 per cent to 4.06 billion yuan. The decline was partially due to the lack of a huge one-off gain from fuel hedging.

Chinese carriers outperformed most of their peers in the region because of the country's economic growth, which topped 9.5 per cent year on year in the second quarter, following 9.7 per cent growth in the first quarter.

Passenger numbers at Air China rose 7.4 per cent year on year to 23.7 million in the first half, with domestic travellers growing 8.5 per cent. International passenger growth was stalled by the tsunami and nuclear crisis in Japan in March. The number of international passengers only inched up by 0.1 per cent, to 3.1 million in the first six months of the year.

Demand for international air cargo was undermined by the potential double-dip recession in the US and looming sovereign debt problems in Europe.

The demand for time-sensitive cargo, ranging from mobile and electronic gadgets to high fashion, slowed significantly from the second quarter, paring the growth in the first half.

Air China carried 570,438 tonnes of cargo in the first half, up by 4.8 per cent.

'The demand on domestic routes will continue to be strong based on the economic power of the mainland,' said Kelvin Lau, transport and infrastructure analyst at Daiwa Capital Markets.

A fleet growth plan for the year, in addition to the double-digit growth in traffic demand, would provide solid support to airlines, Lau said.

Shares in Air China rose 2.63 per cent to HK$7.78 yesterday.

33%

The increase in first-half profit at China Southern Airlines

- Some 80 per cent of its revenue comes from domestic routes