Business outlook for domestic carriers remain distressed despite fuel price cuts.
Zhou Lingling, Caijing 22 December 2008
The Chinese government announced it will cut fuel surcharges on domestic flights following its recent decision to lower jet fuel prices.
According to a statement jointly issued by the National Development and Reform Commission (NDRC) and the Civil Aviation Administration of China, starting on December 25, the fuel charge on flight routes of more than 800 kilometers will decline to 40 yuan from 150 yuan per passenger. The surcharge for shorter routes will fall to 20 yuan from 80 yuan per passenger.
The new surcharges are as low as they were in August 2005. Tao Wei, analyst from China International Capital Co. (CICC), said that 70 percent of China's domestic flight routes are shorter than 800 kilometers, so the surcharge of the average flight is cut by 74 percent.
The cut follows the NDRC's decision to lower the factory price of jet fuel by 2,400 yuan per ton to 5,050 yuan per ton, starting from December 19.
That 32 percent fuel price cut was expected to alleviate airlines’ pressures from increasing costs. Ma Xiaoli, analyst from CITIC Securities, forecasted that the latest fuel price cut will enable Air China, China Southern and China Eastern to save fuel costs by 3.4 billion yuan, 4.9 billion yuan and 3.2 billion yuan in 2009, respectively.
Likewise, Ma expects the carriers’ profit next year to increase by 2.6 billion yuan, 3.9 billion yuan and 2.6 billion yuan.
In the first three quarters this year, Air China and China Southern posted losses of 660 million yuan and 2.3 billion yuan, while China Eastern reported a slight profit of 20 million yuan, due to rising fuel costs and weakening demand.
However, industry analysts still hold a distressed outlook for the carriers’ business next year due to the economic downturn. "Although the fuel price cut will reduce airlines operation pressures, it is still not enough to offset the declining revenue," said Tao.
The financial crisis has shriveled demand for aviation since the beginning of this year. During the first ten months of 2008, the industry reported a 2.9 percent year on year rise of demand, compared to 11.2 percent growth over the same ten months of 2009, according to Tao.
However, the air fuel surcharge cut will partly offset carriers’ benefits from lower fuel prices. According to Tao Wei, because different carriers have different routes, the surcharge cut will offset 90 percent of China Southern's savings from the fuel price cut, and 50 percent of the savings of Air China and China Eastern.
Meanwhile, the International Air Transport Association on December 9 forecast that the global aviation industry will witness further losses next year due to the economic decline.
Tao Wei expects the slump in demand to force Chinese airlines to cut ticket prices next year in order to lure more passengers.
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China Cuts Air Fuel Surcharges
Business outlook for domestic carriers remain distressed despite fuel price cuts.
Zhou Lingling, Caijing
22 December 2008
The Chinese government announced it will cut fuel surcharges on domestic flights following its recent decision to lower jet fuel prices.
According to a statement jointly issued by the National Development and Reform Commission (NDRC) and the Civil Aviation Administration of China, starting on December 25, the fuel charge on flight routes of more than 800 kilometers will decline to 40 yuan from 150 yuan per passenger. The surcharge for shorter routes will fall to 20 yuan from 80 yuan per passenger.
The new surcharges are as low as they were in August 2005. Tao Wei, analyst from China International Capital Co. (CICC), said that 70 percent of China's domestic flight routes are shorter than 800 kilometers, so the surcharge of the average flight is cut by 74 percent.
The cut follows the NDRC's decision to lower the factory price of jet fuel by 2,400 yuan per ton to 5,050 yuan per ton, starting from December 19.
That 32 percent fuel price cut was expected to alleviate airlines’ pressures from increasing costs. Ma Xiaoli, analyst from CITIC Securities, forecasted that the latest fuel price cut will enable Air China, China Southern and China Eastern to save fuel costs by 3.4 billion yuan, 4.9 billion yuan and 3.2 billion yuan in 2009, respectively.
Likewise, Ma expects the carriers’ profit next year to increase by 2.6 billion yuan, 3.9 billion yuan and 2.6 billion yuan.
In the first three quarters this year, Air China and China Southern posted losses of 660 million yuan and 2.3 billion yuan, while China Eastern reported a slight profit of 20 million yuan, due to rising fuel costs and weakening demand.
However, industry analysts still hold a distressed outlook for the carriers’ business next year due to the economic downturn. "Although the fuel price cut will reduce airlines operation pressures, it is still not enough to offset the declining revenue," said Tao.
The financial crisis has shriveled demand for aviation since the beginning of this year. During the first ten months of 2008, the industry reported a 2.9 percent year on year rise of demand, compared to 11.2 percent growth over the same ten months of 2009, according to Tao.
However, the air fuel surcharge cut will partly offset carriers’ benefits from lower fuel prices. According to Tao Wei, because different carriers have different routes, the surcharge cut will offset 90 percent of China Southern's savings from the fuel price cut, and 50 percent of the savings of Air China and China Eastern.
Meanwhile, the International Air Transport Association on December 9 forecast that the global aviation industry will witness further losses next year due to the economic decline.
Tao Wei expects the slump in demand to force Chinese airlines to cut ticket prices next year in order to lure more passengers.
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