Source: Financial Times Author: Justine Lau 07/16/2009
Subject Concerned: Opinion Airlines Aviation Fuel
After a turbulent first half, it seems that China's aviation industry is flying into clearer skies.
On July 14, Air China, the country's flag carrier, said profit for the first six months of 2009 jumped more than 50 per cent from the same period last year, due to strong domestic traffic, fuel hedging gains, stringent cost control and state support.
The news came on the heels of a long-awaited announcement by China Eastern to buy smaller rival Shanghai Airlines for US$1.3 billion. The takeover is likely to help the carrier return to profitability this year following the end of a fierce price war between the two Shanghai-based airlines.
But there are other issues. In June, China raised domestic jet fuel prices for the second time this year by 26 per cent. The price rise is likely to put pressure on the sector until the airlines win approval to impose fuel surcharges.
A rebound in domestic traffic has also come at the expense of yield, which fell more than 10 per cent for the "big three" carriers in the first half of this year, according to Kelvin Lau, analyst at Daiwa Institute of Research in Hong Kong.
"Travel demand in China is very price-elastic. People's desire to fly may fall if prices stop going down," said Mr Lau.
Whether the sector has really come out of the gloom is perhaps too early to say.