Source: Aviation Week & Space Technology Author: Bradley Perrett 07/18/2008
Subject Concerned:
Chinese airlines, increasingly important players in global demand for commercial aircraft, should return to their customary powerful rates of expansion in the coming year, despite the strange collapse in traffic growth they have suffered in the past few months.
A remarkable combination of events has waylaid industry growth, bringing it down from its usual thundering rate of around 15% a year. Passenger numbers in the first five months of the year were only 7.3% higher than a year earlier.
Industry-wide figures for June aren't available yet, but passenger numbers for the month from the three dominant Chinese carriers look disastrous: China Southern's June passenger count dropped by 3.3% from a year earlier, Air China's by 7.5% and China Eastern by an astonishing 11.6%.
Luckily for the airlines and their suppliers, the problems look like one-off occurrences, battering growth just once. And some factors are likely to unwind, so there could be a bounce in demand, temporarily lifting the pace of expansion.
"In the longer term intrinsic demand for air travel will still be pretty robust because the income level in China is still on the rise and is still way below that of the developed countries," says Edward Xu, airline analyst at Morgan Stanley in Hong Kong.
The rise in jet fuel prices has been only the first of the problems to have hit the Chinese carriers.
In fact, the price rises haven't been as tough on Chinese airlines as on carriers from other countries, because Beijing controls energy prices across the economy and has been partly protecting the aviation industry, among others, from the international market. Still, the Chinese airlines have had to play the surcharge game, too.
Fuel prices may well stay high, but other factors should go away and let the industry accelerate back toward its previous trajectory.
Among those other factors was a terrorist's attempt at bringing down an airliner in March by trying to light a gasoline fire on board. Analysts think the subsequent publicity and tightened security would have deterred some Chinese travelers, although probably not many.
More serious were the political riots in Tibet in the same month and the subsequent government crackdown. That seems to have dented inbound tourism, either because foreigners felt China was unsafe or because it seemed unfriendly. That effect should fade unless there are more riots - and there are no signs of any so far.
The massive Sichuan earthquake of May 12 flattened air transport growth as well as buildings, partly by making it impossible to fly into and out of that part of the country, the location of some popular tourist destinations. The government, determined that it should not appear extravagant amid the suffering, also responded with a clampdown on official travel - which is unlikely to last long.
Finally, the Olympics Games to be held in Beijing next month aren't proving to be anything like the boon that the air transport industry had hoped for. The government reacted to the Tibetan riots by tightening visa requirements, evidently realizing that the games were a bigger opportunity for publicity-seeking foreign demonstrators than it had imagined.
So inbound tourism has suffered another knock, starkly revealed in China Eastern's June international passenger numbers, which were down 24.6% on a year before.
"Many people thought that the Olympics would be very good for Chinese airlines, but it turned out that due to all these political issues it is not actually a very good catalyst for traveling," says Xu. Again, the Olympic factor will pass.
A background issue is the U.S. economic slowdown and its influence on China. Analysts disagree on whether weaker import demand from the U.S. is really making much difference to domestic business travel. There's a lot more to the Chinese economy than export industries, and the latest government figures show second-quarter gross domestic product up 10.1% on a year earlier, a typical growth rate for the past three decades.
Taking the airlines' litany of woes together, it's not surprising that they have been unable to meet growth expectations. And it won't be surprising if their traffic growth springs back pretty smartly.
A return to 15% growth next year is plausible, says Kelvin Lau of the Daiwa Institute of Research. "Traffic might even recover in the second half of this year," he adds.
The sudden drop in traffic growth probably explains China Southern's unusual decision to seek buyers for four 777-200s that are only around 10 years old. The medium-range aircraft - which are not -200ERs - are among the largest aircraft used domestically in the country.
But getting rid of them is contrary to a trend toward larger aircraft that Airbus says it has detected in China.
"In China we have moved quite a lot of orders up from the A319 to the A320 and from the A320 to the A321," says the company's president for China, Laurence Barron. "The three majors now all have A321s."
So Airbus is reconsidering its choice of the A319 as a model to be built with the A320 at the new Tianjin assembly line in China.
"We have looked at how much additional investment would be required to switch from the A319 to A321," Barron says.
Boeing says it hasn't noticed a similar trend.