BEIJING - Investors
with shares in China's domestic airlines have been
warned to fasten their seat belts. Airline share
prices are suffering from the turbulence stirred
up by soaring fuel prices, despite short-term
positive news such as increased jet-fuel
surcharges.
"Our rating for Chinese
airlines is medium, and we are advising our
clients not [to] buy stocks within the next three
to five years," said Sun Zhimin, an analyst with
Guodu Securities.
"The whole industry is
plagued by surging fuel prices, which is the
largest uncontrollable item
on any airline's balance sheet," said Sun.
The Chinese airline industry suffered an
aggregate 2.57 billion yuan (US$323 million) loss
in the first half of 2006, more than quadruple
that in the same period last year.
Record
high fuel prices triggered a 21% year-on-year rise
in airlines' costs, with the three major airlines
all releasing unsatisfactory interim reports.
China Eastern Airlines, which is listed on
both the Hong Kong and Shanghai stock exchanges,
posted the largest loss. Its net loss in the first
half of this year nearly tripled year on year to
1.7 billion yuan. The Shanghai-based airline's
fuel costs increased 86% over the same period last
year. Its fleet expansion exacerbated the hefty
fuel costs driven by rising fuel prices.
Guangzhou-based China Southern Airlines,
which is also listed in Hong Kong and Shanghai,
reported a net loss of 825 million yuan in the
first half of this year, about level with the loss
incurred a year earlier. Its fuel costs rose 27.6%
year on year.
Hong Kong-listed Air China
maintained its leading position as the most
profitable Chinese airline during the first six
months, but its net profit dropped 22.5% year on
year to 458 million yuan. China's flag carrier's
fuel costs rose 40% over the same period last
year.
Analysts said domestic airlines are
expected to benefit from the peak travel season in
the second half of the year and the increased
aviation-fuel surcharges. But those are only
short-term positive factors and can do little to
pull the airlines out of the industry's nosedive.
The government last month gave the nod to
local carriers to increase fuel surcharges on
domestic routes for the second time in a year.
Starting from last September 8, each
passenger flying less than 800 kilometers has to
pay a 60 yuan ($7.50) oil surcharge, up from 30
yuan. The rate for those traveling more than 800km
has been raised from 60 yuan to 100 yuan.
The last oil-surcharge rise came in April
this year, with the charge climbing from 20 yuan
to 30 yuan for short-distance flights, and from 40
yuan to 60 yuan for flights more than 800km.
"It is a big hike and it is almost equal
to a 5-7% rise in the current cost of an air
ticket," said Li Lei, an aviation analyst with
CITIC China Securities.
"If the ticket
prices and domestic airlines' operating costs
still maintain the current level, the whole
airline industry could possibly earn 6 billion
yuan more in revenues because of the oil-surcharge
raise," said Li.
"But remember, that will
happen only if other variables don't change," said
Li, adding that price cuts have been Chinese
airlines' favorite tactic of fighting for market
share and oil prices are still likely to hover
around record levels.
This week the three
airline groups' A shares witnessed their largest
increases in recent weeks. Li attributed the rise
to the implementation of increased oil surcharges.
"But that is just a short-term factor
creating some fluctuations in airline stocks,"
said Li. "Airline stocks are still not a good pick
for mid- and long-term investment."
Analysts said long-term decisive factors
include aviation-fuel prices and the airlines' own
corporate management and profitability.
Crude-oil prices in the international
markets have been hovering around $70 per barrel.
In response, domestic aviation-fuel prices have
been hiked five times, rising nearly 50% since
March 2005.
How to streamline acquired
businesses is another major challenge for China
Eastern and China Southern.
"The record
high oil price is the main reason for the loss,
but we also have some 'historical' problems," said
Luo Zhuping, secretary to the board of China
Eastern.
"China Eastern has been acquiring
businesses in the past several years, which have
created some burdens for the company," said Luo.
China Eastern last year acquired Air
Northwest and Air Yunnan. The airline reportedly
paid 900 million yuan for the acquisitions. China
Southern also acquired two airlines last year -
Northern Airlines and Xinjiang Airlines.
"Although the acquired companies now use
the logos of China Eastern and China Southern,
they still have a long way to go to really
consolidate their resources, their staff and their
management," Li said.
"The pace of their
consolidation is too slow," said Li, adding that
the acquisitions failed to improve the overall
profitability of the airline groups and became
burdens.
