China Eastern set to raise domestic route revenues by unifying air fares

China Eastern Airlines (CEA), the mainland's first airline to list overseas, expects the country to unify air fares for Chinese residents and foreigners on domestic routes in July.

President Li Zhongming said fares for local Chinese were 20 per cent lower than for foreigners and he expected the ultimate fare would be set somewhere in the middle.

'If the two fares are unified, it will be beneficial to us because it will increase our revenues on domestic routes,' he said.

Last year, domestic passengers comprised 43 per cent of the airline's total passenger revenues - which contributed 81 per cent of income - followed by international passengers. Domestic routes had the highest passenger yield.

An analyst, who expected CEA's earnings to gain 3.2 per cent to 610 million yuan (about HK$566.69 million) this year, said: 'It is a very good year for CEA because China will increase the passenger fares for domestic personnels in China.' He expected a substantial net increase in fares on domestic routes as a result of the unification as China was unlikely to slash fares for foreigners because it would hit local airlines.

CEA would continue to see an increase in depreciation charges and interest costs this year due to the expansion of its fleet and a revaluation of its assets before it listed in Hong Kong and New York.

In the first quarter, CEA saw its capacity rise 17.5 per cent while traffic volume rose 10.5 per cent, leading to a 6 per cent fall in load factors to 51.4 per cent.

As the first three months were a low season, Mr Li expected traffic volume to soar in remaining months, boosted by China's Tourism Year.

He said the company's operating margin would improve because its traffic volume would begin to grow faster than traffic capacity.

Deputy chief financial officer Xia Yi said CEA would mitigate the adverse impact of a price rise in domestic fuel by capitalising on the price difference with overseas fuel.

CEA would make use of excessive capacity of its aircraft to buy the fuel in neighbouring countries.

It sources two-thirds of fuel from the mainland, which raised the price by 10 per cent in March, with the rest from overseas.

The company will spend US$890 million on four A-340 aircrafts and nine MD-900 aircrafts before 2000.

Mr Xia said CEA would rely on international financing to fund its fleet expansion in the next few years because it carried lower cost than equity funding.

CEA is also planning to issue a maximum of 500 million A shares in Shanghai after it raised $250 million in Hong Kong and New York in February.

FARE PLAY Airline to make flight prices for local Chinese, foreign visitors the same Capacity rises 17.5pc in first quarter, traffic volume up 10.5pc