Chinese Carriers See Profits Tumble

June 12, 2012

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Lower oil prices this month have lessened the pain for struggling Chinese carriers, but a slowing domestic economy and a darkening outlook for consumers worried about Europe's debt crisis pose risks outside their control, industry executives said this week.

Company leaders attending the International Air Transport Association (IATA) meeting in Beijing said they have renewed concerns about the outlook for the country's biggest carriers, all of which were bringing in hefty profits only two years ago.

"The drop-back of oil prices may help, but it may be offset by further weakness in terms of consumer confidence," said Andrew Herdman, director general of the Association of Asia Pacific Airlines. "We learnt in the global financial crisis (that) when headlines look very bad, even if it's a story in America or Europe, people become more cautious."

Crude oil prices have fallen more than USD$20 per barrel in May, but cautious consumer behaviour led to a steady drop in the annual growth rates of air passenger volumes in China, from 15.8 percent in 2010 to 9.2 percent in 2011 and 6.9 percent in April this year, according to official data.

All top three Chinese carriers - China Eastern, Air China and China Southern - reported a more than 70 percent slump in their latest quarterly earnings.

Air China's January-March net income plunged 85.7 percent from a year ago to CNY239.1 million yuan (USD$37.5 million). China Southern and China Eastern were down 74.2 percent and 73.7 percent, respectively.

Passenger volume is projected to be much higher in the second half of 2012 when leisure travel rises in the summer, and a week long national holiday in October, industry observers say. But slumping cargo throughput, which swung to an annual 6.9 percent decline in April, is unlikely to turn positive in the near term.

"We will still make some profit this year, but it would definitely be a year-on-year decline in terms of growth rate," said Liu Shaoyong, chairman of China Eastern, adding that the carrier's cargo business has been losing money, largely as a result of weak global trade.


Other Asian carriers are also under pressure.

Japan Airlines chairman Masaru Onishi said the airline's Europe-bound cargo volume from Japan and the rest of Asia was down about 5 percent from a year ago, continuing a sluggish trend that began in April.

Cathay Pacific Airways' cargo business fell more than 10 percent in the first four months year-on-year, according to its chief executive, John Slosar.

The Chinese government, which bailed out its money-losing state carriers during the global financial crisis in 2008, is again ready to rescue them, even though the top three airlines are not burdened by billions of dollars losses as they were four years ago.

China Southern and Air China are set to receive a combined CNY3.05 billion yuan (USD$478.85 million) from the government, while aid is also on the way to China Eastern, according to its chairman Liu.

Airline cash injections are part of Beijing's economic policy package, which includes its first interest rate cut in almost four years, aimed at shielding its economy from the euro zone's deepening debt crisis.

"Chinese airlines are affected by a slowing global economy, especially on the cargo side, but they are definitely not in a crisis mode as they were in 2008," said Yu Nan, an industry analyst with Haitong Securities.