Aviation: Turbulence Turns Against China’s Airlines
With revenues falling and bailout requests rising, China’s struggling aviation sector may be due for an overhaul.
Ji Minhua, Caijing 1 February 2009
After enjoying explosive growth and profits just two years ago, many of the world’s air carriers are suddenly in trouble. Sixty airlines declared bankruptcy last year, and losses were reported throughout the Asia Pacific region.
Chinese airlines, which are expected to report weak results for 2008, are not immune. And both state-run and private carriers are requesting government bailouts to survive.
Challenges for Chinese airlines started emerging in the first quarter 2008. Luo Zhuping, board secretary for China Eastern Airlines Co. (SSE: 600115), said the country’s “entire aviation industry started to decline in March 2008, in terms of both passenger and freight volume.”
The situation steadily worsened. Official statistics show that, during the January to October period, year-on-year growth rates in passenger and freight volumes topped at 3 percent – far below the 16 percent targets set at the beginning of the year. Freight volumes for the first time posted a year-on-year decline in June, and then continued to fall.
In addition to falling demand, Chinese airlines were hurt in 2008 by the after-effects of natural disasters, including winter storms and an earthquake.
Moreover, a slower appreciation of the yuan offset the carriers’ foreign exchange gains. During the first three quarters of 2008, the airlines booked a gain of 980 million yuan from foreign exchange, down 31 percent from the same period the previous year.
One of the only good pieces of news for China’s airlines was the slump in oil prices, which declined sharply after peaking at US$ 140 a barrel in mid-2008. Analysts predicted prices would hover at about US$ 50 a barrel in 2009.
But major Chinese carriers reported heavy losses from fuel hedging contracts. By the end of October, China’s flag carrier Air China (SSE: 601111) booked a 3.1 billion yuan fuel hedging loss, while China Eastern registered a loss of 1.83 billion yuan.
Local and private airlines are in even worse shape than state-run counterparts. Shanghai Airlines (SSE: 600591) had reported 98 million yuan in fuel-hedging losses by the end of October, contributing to an overall 437 million yuan loss for the first nine months in 2008. Hainan Airlines (SSE: 600221) posted a 260 million yuan loss for the same period.
Private airlines such as Okay Airways and United Eagle Airlines also suffered from capital shortages and strained operations. Okay suspended service in mid-December.
Chinese airlines reported combined losses of 4.3 billion yuan for the first 10 months of 2008, and several major carriers forecast full-year losses. By the end of September, the asset-liability ratio at China Southern (SSE: 600029) was 83.2 percent, while ratios at China Eastern and Air China were 98.4 percent and 69.6 percent, respectively.
Industry experts remain pessimistic about 2009. Even if market demand stabilizes in 2009, one expert said, “it is really doubtful that the airlines can avoid losses on their own.”
Government Bailouts
As the industry has weakened, demands for bailouts have grown louder.
“Each of the leading three state-owned airlines needs a 10 billion yuan capital injection,” said a senior manager at Air China. “The capital injection is urgently needed. Otherwise it will be too late.”
In March 2008, airlines were encouraged when the State Assets Supervision and Administration Commission (SASAC) said it would offer financial support to major state-owned enterprises. China Eastern and China Southern each received 3 billion yuan aid packages from the government December 10, and 19 days later China Eastern said it would receive another 4 billion yuan, reducing the company’s asset-liability ratio to 90.1 percent.
Local governments have tried to buoy local carriers as well. Hainan Airlines was granted 500 million yuan from the Tianjin municipal government, and Shanghai Airlines is applying for aid as well.
Regulators took additional steps designed to boost the industry, including a system for refunding or exempting carrier contributions to a 4 billion yuan aviation infrastructure fund. In addition, fuel surcharge taxes were scrapped.
Some analysts say the bailouts may not be enough. Li Shurong, of Shenyin and Wanguo Securities, told Caijing the 10 billion yuan in aid might last only a few months, and that the government may need to inject additional funds.
“Considering the current situation, the money will run out as early as the first quarter 2009,” said Li.
Some industry insiders are calling for an industry reshuffle. A source close to China Eastern suggested an efficient way to boost the carrier might be to merge China Eastern and Shanghai Airlines – a plan that stalled after first emerging in 2004 in hopes of consolidating the Shanghai carrier market.
A source said the government has considered encouraging mergers and acquisitions among state-owned enterprises in 2009 to create more competitive market players.
Li Jiaxiang, director of China Aviation Administration Commission, said in late 2008 his commission would push for an industry reshuffle to optimize the market structure. In December, a government-led management revamp was launched among the three leading state-owned airlines, raising market speculation about a possible reshuffle of the industry.
Overcapacity Threat
Another threat to China’s aviation industry is equipment overcapacity. Years of rapid growth encouraged airlines to order new aircraft, which are expected to reach an annual delivery record 180 planes in 2009.
China’s airlines had 1,290 aircraft at the end of 2008. According to a CAAC study, the industry needs a 10 percent growth rate in 2009 to absorb this new capacity. “If the industry can’t realize the growth rate in 2009, there will be a number of problems,” said a CAAC official.
The commission encouraged airlines to cancel or postpone aircraft orders, as well as sell existing equipment. However, as most orders will be due in 2009, overcapacity cannot be avoided. In 2009, China’s aircraft fleet will be increased by 180 to a total of 1470.
According to the International Air Transport Association, global passenger and freight transport volumes are expected to decline 3 percent and 5 percent in 2009, respectively, leading to losses for the global industry and a 6 percent revenue decline year-on-year.
Hu Huaqing, deputy director of the Civil Aviation Development Research Center, predicted a three-year global financial crisis would lead to a total 6 billion yuan in losses for China’s aviation industry. But the crisis exceeds three years, he said, losses may reach 12 billion yuan.
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Aviation: Turbulence Turns Against China’s Airlines
With revenues falling and bailout requests rising, China’s struggling aviation sector may be due for an overhaul.
Ji Minhua, Caijing
1 February 2009
After enjoying explosive growth and profits just two years ago, many of the world’s air carriers are suddenly in trouble. Sixty airlines declared bankruptcy last year, and losses were reported throughout the Asia Pacific region.
Chinese airlines, which are expected to report weak results for 2008, are not immune. And both state-run and private carriers are requesting government bailouts to survive.
Challenges for Chinese airlines started emerging in the first quarter 2008. Luo Zhuping, board secretary for China Eastern Airlines Co. (SSE: 600115), said the country’s “entire aviation industry started to decline in March 2008, in terms of both passenger and freight volume.”
The situation steadily worsened. Official statistics show that, during the January to October period, year-on-year growth rates in passenger and freight volumes topped at 3 percent – far below the 16 percent targets set at the beginning of the year. Freight volumes for the first time posted a year-on-year decline in June, and then continued to fall.
In addition to falling demand, Chinese airlines were hurt in 2008 by the after-effects of natural disasters, including winter storms and an earthquake.
Moreover, a slower appreciation of the yuan offset the carriers’ foreign exchange gains. During the first three quarters of 2008, the airlines booked a gain of 980 million yuan from foreign exchange, down 31 percent from the same period the previous year.
One of the only good pieces of news for China’s airlines was the slump in oil prices, which declined sharply after peaking at US$ 140 a barrel in mid-2008. Analysts predicted prices would hover at about US$ 50 a barrel in 2009.
But major Chinese carriers reported heavy losses from fuel hedging contracts. By the end of October, China’s flag carrier Air China (SSE: 601111) booked a 3.1 billion yuan fuel hedging loss, while China Eastern registered a loss of 1.83 billion yuan.
Local and private airlines are in even worse shape than state-run counterparts. Shanghai Airlines (SSE: 600591) had reported 98 million yuan in fuel-hedging losses by the end of October, contributing to an overall 437 million yuan loss for the first nine months in 2008. Hainan Airlines (SSE: 600221) posted a 260 million yuan loss for the same period.
Private airlines such as Okay Airways and United Eagle Airlines also suffered from capital shortages and strained operations. Okay suspended service in mid-December.
Chinese airlines reported combined losses of 4.3 billion yuan for the first 10 months of 2008, and several major carriers forecast full-year losses. By the end of September, the asset-liability ratio at China Southern (SSE: 600029) was 83.2 percent, while ratios at China Eastern and Air China were 98.4 percent and 69.6 percent, respectively.
Industry experts remain pessimistic about 2009. Even if market demand stabilizes in 2009, one expert said, “it is really doubtful that the airlines can avoid losses on their own.”
Government Bailouts
As the industry has weakened, demands for bailouts have grown louder.
“Each of the leading three state-owned airlines needs a 10 billion yuan capital injection,” said a senior manager at Air China. “The capital injection is urgently needed. Otherwise it will be too late.”
In March 2008, airlines were encouraged when the State Assets Supervision and Administration Commission (SASAC) said it would offer financial support to major state-owned enterprises. China Eastern and China Southern each received 3 billion yuan aid packages from the government December 10, and 19 days later China Eastern said it would receive another 4 billion yuan, reducing the company’s asset-liability ratio to 90.1 percent.
Local governments have tried to buoy local carriers as well. Hainan Airlines was granted 500 million yuan from the Tianjin municipal government, and Shanghai Airlines is applying for aid as well.
Regulators took additional steps designed to boost the industry, including a system for refunding or exempting carrier contributions to a 4 billion yuan aviation infrastructure fund. In addition, fuel surcharge taxes were scrapped.
Some analysts say the bailouts may not be enough. Li Shurong, of Shenyin and Wanguo Securities, told Caijing the 10 billion yuan in aid might last only a few months, and that the government may need to inject additional funds.
“Considering the current situation, the money will run out as early as the first quarter 2009,” said Li.
Some industry insiders are calling for an industry reshuffle. A source close to China Eastern suggested an efficient way to boost the carrier might be to merge China Eastern and Shanghai Airlines – a plan that stalled after first emerging in 2004 in hopes of consolidating the Shanghai carrier market.
A source said the government has considered encouraging mergers and acquisitions among state-owned enterprises in 2009 to create more competitive market players.
Li Jiaxiang, director of China Aviation Administration Commission, said in late 2008 his commission would push for an industry reshuffle to optimize the market structure. In December, a government-led management revamp was launched among the three leading state-owned airlines, raising market speculation about a possible reshuffle of the industry.
Overcapacity Threat
Another threat to China’s aviation industry is equipment overcapacity. Years of rapid growth encouraged airlines to order new aircraft, which are expected to reach an annual delivery record 180 planes in 2009.
China’s airlines had 1,290 aircraft at the end of 2008. According to a CAAC study, the industry needs a 10 percent growth rate in 2009 to absorb this new capacity. “If the industry can’t realize the growth rate in 2009, there will be a number of problems,” said a CAAC official.
The commission encouraged airlines to cancel or postpone aircraft orders, as well as sell existing equipment. However, as most orders will be due in 2009, overcapacity cannot be avoided. In 2009, China’s aircraft fleet will be increased by 180 to a total of 1470.
According to the International Air Transport Association, global passenger and freight transport volumes are expected to decline 3 percent and 5 percent in 2009, respectively, leading to losses for the global industry and a 6 percent revenue decline year-on-year.
Hu Huaqing, deputy director of the Civil Aviation Development Research Center, predicted a three-year global financial crisis would lead to a total 6 billion yuan in losses for China’s aviation industry. But the crisis exceeds three years, he said, losses may reach 12 billion yuan.
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